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The purpose of this research project is to explore a topic of personal interest in the field of information systems. The topic selected is Radio Frequency Identification (RFID) technology and its applications in supply chain management. RFID has been a topic of interest across many industries for quite some time. It had also triggered many controversial issues regarding information security as well as privacy issues. The focus of the report will be to provide a background understanding of the technology and how it works, the benefits that it offers, and the current issues and debates over this technology. This report will include a specific look at RFID’s application in the field of supply chain management with an example in the pharmaceutical industry. This report will conclude with a brief discussion on the potential future applications of RFID.
What is RFID?
Radio Frequency Identification is a term used to describe a system that uses radio waves to transmit information wirelessly. There are two main components to a basic RFID system; an interrogator (reader) and a transponder (tag). The simplest form of a transponder contains a microchip and an antenna, the interrogator uses radio waves to retrieve the information from the transponder’s microchip. There are typically two types of transponders; active and passive. Depending on the type of transponder, the interaction between the interrogator and transponder will differ.
Active transponders are equipped with a source of power, such as a battery, to supply to the circuitry and antenna. Active transponders can actively transmit its data, greatly increase its range as well perform other more complicated functions. Additional sensors can be included in the circuitry to monitor and log parameters such as temperature. Disadvantages of active transponders include increased costs, larger size, and the need to maintain a power source (battery). Due to these limitations, active transponders are typically fitted to large transportation containers or other cargo.
Alternatively, passive transponders are the simplest form of RFID tags, comprised only of a chip and antenna. They contain no power source and have no active transmission device. The tag uses the radio waves transmitted from the integrator to energize the circuitry to read and transmit the data. Due to its simplistic design, the size of a RFID tag has gone down considerably due to improved manufacturing techniques. The cost has also decreased to as low as 20 cents due to the large production scale. As a result, transponders can be embedded into small everyday items such as key fobs, credit cards, and even packaging material. The main disadvantage to passive tags is that they can only be read from a short distance (less than 10 meters). Another disadvantage is that the information is available until the tag is physically disposed of, a potential security risk.
Because of these differences, both Active and Passive RFID transponders have its uses in supply chain management. Passive tags are used most often with pallets and warehousing, whereas active tags are used for more advanced tracking such as in monitoring cargo during transit. In the following sections, the application of RFID in the supply chain will be discussed as well as a few industry specific examples.
IS Implications of RFID
After more than 40 years of research and development, RFID technology started to commercialize in the late 80s and early 90s. The first commercialized uses of RFID technology was the widespread adoption of electronic toll collections across the United States. The technology continually improved and its applications spread across all industries including; livestock identification, access control, sports timing, and automotive immobilization.
RFID technology itself is merely a way of storing data and retrieving it. The power of the RFID resides in the information system(s) that encompasses it. As mentioned above, RFID technology itself has been around for quite some time, but its applications were limited due to the lack of IS advanced enough to support it. The impact of RFID systems as a whole can be analyzed using the four components of the IS System (refer to Exhibit 1). RFID belongs in the technology component of the IS system but it also relies on other technology components to be effective, such as centralized data storage and computing. Advancements in data storage and computer systems allowed for broader and more powerful applications of RFID, such as in supply chain management.
Early systems of RFID were, not surprisingly, first-order changes in the IS. Using the example of livestock identification, the RFID technology was implemented to merely change the tagging of livestock and the storage of its information from a centralized system to individual RFID tags. Livestock were traditionally tagged using identification numbers, and information was stored centrally either on paper or on a computer system. RFID allows information to be stored on the animal directly, allowing for quicker identification and lower chances of mix-up. This application of technology changed the way the process of information was handled, but not the overall structure of the IS system.
An example of a RFID second order change is the PayPass™ system. The system allows users to pay for their purchases using a RFID pass linked to a pre-authorized account. This application not only changed the way the process of handling purchase transactions, but also how the people make purchases. The need of a cashier can possibility be eliminated, therefore changing the people component of the IS system.
With the development of sophisticated computer systems and data manipulation techniques, RFID applications became more advanced and tightly integrated into the design of IS. The field of supply chain management is a perfect example of a third-order change. The use of RFID in the supply chain allows for a change in the structure, people, and process of the IS. Vendors, suppliers, and customers can gain access to information that they might have not been able to prior to RFID implementation. The relationship between these players in the chain changes because of the increased flow of information.
Application of RFID in the Supply Chain
One of the biggest impacts that RFID has made for businesses is the way it has changed supply chain management. The improvements that RFID offers to supply chains can be considered as radical innovation, because it fundamentally changes the way that a supply chain operates as noted in the section above.
In a broad sense, RFID technology allows for greater visibility at all stages of the supply chain. The entire chain, from raw materials, manufacturing, warehousing, logistics, sales, to disposal can all be efficiently traced and monitored. Increased visibility can lead to a faster and more efficient logistics as well as reducing loss that add to unnecessary costs. By accurately tracking products throughout their life cycle, the entire supply chain can benefit from improved speed and accuracy of ordering, automated invoicing and payment, fewer supply shortages with lower inventory levels, and reduced product loss. More specifically, RFID technology can be implemented to improve business functions at each step of the supply chain listed below.
By installing RFID tags onto equipment such as forklifts, pallets, tools, and vehicles, the facility can monitor the movement of such equipment with fixed position readers. Tracking tools and machinery allows the facility to keep track of equipment around the facility. Tracking equipment such as pallets, totes, and other containers allows the facility to track the incoming and outgoing shipments accurately. With pallet tagging, inventory locations can be identified accurately, minimizing searches of misplaced pallets.
The use of RFID can aid the tracking of production batches. RFID tags incorporated into sub assemblies can allow Work-In-Process (WIP) to be tracked. Materials and product moving through the production process can be monitors and automatically directed to the next phase via RFID identification. This is especially useful for highly customized products where the sorting of inventory and WIP is crucial.
The use of RFID in inventory control provides the biggest advantage to supply chain management. The accurate monitoring of inventory levels at all stages of the supply chain allows for better visibility and flexibility. RFID tags can be used to restrict movements of inventory around the faculty without authorization. The added security control over the inventory reduces potential losses and increases the accuracy of inventory management.
Shipping & Receiving
As mentioned previously, the tracking of product shipments can be simplified using RFID tags. All shipment information can be included on the pallets or containers. RFID tags can be standardized so that the same RFID tag can be used so all logistics facilities can make use of the same shipment information to reduce errors. Automated shipping facilities can also make use of RFID tags handle shipments automatically.
Traceability and Regulations
The handling of hazardous materials, pharmaceuticals, and other sensitive materials can be improved by using RFID tags. At each step of the process, the tags can be updated in real-time during handling. Information such as time entered facility and time exited facility can be recorded in order to improve traceability and comply with industry regulations.
There are numerous other examples where RFID technology are used to improve supply chain management, but the underlying advantage that RFID yields over traditional supply chain management is the increased flow of information. Information flow is a crucial aspect of supply chain management. The key to managing an efficient supply chain is communication between suppliers, vendors and customers. With the addition of RFID technology, supply chains have another channel in which information can be passed and traced.
Concerns with RFID in Supply Chain Management
As with all emergent technologies, the challenge of adoption always includes the costs of implementation. In 2004, Wal-Mart announced that it would require all its top 100 suppliers to be fully RFID ready within a few years. The estimated cost for larger suppliers was estimated to be at $9 million for the first year for this mandate. This cost includes hardware, such as readers and tags, as well as software and IT implementation costs. Further research suggests that cost of RFID implementation in a consumer goods manufacturer would be around $13 million to $23 million. Refer Exhibit 2 for an estimated cost breakdown. The large upfront capital costs associated with RFID adoption is a major barrier for many smaller-sized firms.
For item tracking purposes, high frequency or ultra-high frequency tags can be used. High and ultra-high frequency (UHF) systems typically run at 13.56 MHz, and 300+ MHz respectively. With the increase of frequency, range is increased as well as faster read times. UHF offers the best range and read speeds. UHF RFID is extensively used in supply chain and logistics applications due to its adoption by key industries as the standard. But there are problems with operating in the UHF band. As you increase the frequency of radio waves they start to behave more like light. They have difficulty penetrating materials as well and tend to reflect off metallic objects. Waves in the UHF band are also absorbed by water. Exhibit 3 summarized the characteristics of each type of frequency band through different materials. The challenge facing companies using UHF systems is being able to read RFID tags on cases in the center of a pallet, or on materials made of metal or water.
An initial challenge that hindered mass RFID adoption, especially for supply chain management, is the issue of standardization. In the early stages of RFID technology, there were no governing body to set the standards of RFID tags and information. This obviously posed huge challenges for firms dealing with multiple vendors and suppliers having to keep track of different standards. Since then, there have been two primary groups setting standards in supply chain RFID. The first is EPCglobal, the other is the International Standards Organization (ISO). EPCglobal created the Electronic Product Code (EPC). The EPC is designed to be a successor to the Uniform Product Code (UPC). The ISO 18000 standard is collaboration between RFID manufacturers, and is mainly concerned with the communication protocol between readers and tag more so than the data content. There is still currently a split between the users of ISO 18000and EPC standard on RFID technology and data, although the two standards have started to converge.
Privacy and Business Risk
Privacy issues are amongst one of the top concerns for consumers that carry RFID enabled credit cards, access cards, passport etc. But even in the supply chain, privacy is a legitimate concern. Two main types of privacy concerns exist for firms; tracking and inventorying. Despite encryption methods to protect the data from being read, tags broadcast a unique identifier for readers to pick up. Even when the reader does not have the valid authentication to read the data, it can use this unique identifier to physically track the tag within scanning range. In a retail setting, RFID tags on products are used to monitor stock-levels, but a competitor can also use this technology to learn about the product’s inventory turnover rates.
RFID – solution to drug counterfeiting
A unique example of RFID in the supply chain is in the Pharmaceutical Industry. Pharmaceutical companies are implementing RFID solutions to combat the serious issue of drug counterfeiting. According estimates from the World Trade Organization, 10 percent of the trade in pharmaceuticals worldwide is counterfeit. With total worldwide sales of $750 billion, the global drug counterfeiting market is expected to grow to $75 billion. This is on top of the serious safety and health-risks that millions of people could potentially fall victim to.
The Food and Drug Administration (FDA) is encouraging industry leaders to take initiative in RFID studies and pilot programs in order to increase the safety and security of the drug supply. RFID technology can replace and enhance currently required drug pedigrees, paperwork that shows the trail of ownership from the manufacturer all the way to the retailer. “The FDA considers electronic pedigrees to be a type of electronic safety net”, allowing distributors and retailers to rapidly identify and report counterfeit drugs to the FDA.
The complexity of a pharmaceutical supply chain poses a greater challenge in implementing RFID systems over products. But it is the complexity of the supply chain that allows for higher risks of drug counterfeiting. Drugs often travel in a complicated path from the manufacturer to the end user. Distributors carry up to 40,000 stocking units at a time, and inventory is often sold amongst distributors to maintain stock levels. Also, drugs are often repackaged within the supply chain, therefore maintaining records (pedigree) on these drugs can become a difficult task with current methods.
The use of RFID system in a pharmaceutical supply chain can help improve the “Track and Trace” controls currently used by the manufacturer to ensure safety and security of the drugs. RFID can allow pro-active authentication and monitoring of drugs throughout the supply chain network. Due to the low cost of the RFID tags, they can be included in pallets, boxes, even individual vials to ensure that the product can be identified and traced. At each step along the supply chain, drugs can be scanned and verified for integrity and expiry. Information can be recorded to the RFID tags at each step so that the retailer will know exactly the shipment’s history along the supply chain.
As discussed before, RFID technology is not a security device. It does not prevent counterfeit drugs from entering or leaving the supply chain. RFID technology allows for more efficient security measures to be in place at the IS level. RFID is a tool that allows the information system to effectively track, trace, and verify products along the supply chain.
Current Leaders in RFID
Despite the well understood advantages of implementing RFID in the supply chain, the adoption of RFID technology has been somewhat scattered in industry. Not all companies use it, and even within the companies that do, not all operations of the supply chain are connected. The slow growth of the RFID technology meant that limited research and resources were given to improve and standardize the technology. Like many innovative technologies, RFID had difficulties “crossing the chasm” from the early adopters to the pragmatist, refer to Exhibit 4 for the Technology Adoption Lifecycle.
RFID got a boost in November 2003 when the largest retailer in the world, Wal-Mart, announced that it would require its top 100 suppliers to be fully RFID equipped using EPC to track cases and pallets by January 2005. With Wal-Mart leading the way, the RFID industry would grow. The economies of scale for tags would further drive down costs and additional research allows more innovative applications.
Unfortunately, plans did not go smoothly for the retail giant. Wal-Mart had plans to fully equip as many as 12 of its 130 distribution centers by 2007, but progress has haltered at 5. Only large suppliers such as P&G, Unilever, and Kimberly-Clark have been supportive of the technology. Smaller suppliers simply do not have enough scale to justify the ROI. Wal-Mart has instead, shifted its focus to equipping the technology in its stores instead of distribution centers. Despite the changes in RFID strategy, Wal-Mart is still at the forefront of RFID adoption.
Similarly, the U.S. Department of Defense (DOD) issued a mandate for all its suppliers to use RFID tags by 2005. The DOD has been more successful than Wal-Mart in its phased approach. Different product types and classes have being phased in at both supplier and DOD sites. Since its start in 2004, RFID implementation in the DOD supply chain has been quite successful. More recently in 2008, the DOD issued out a contract named “RFID III” worth up to $429.4 million. This 10-year contract would include the aggregate of the RFID hardware, software and services for active 433.92 MHz RFID tags compliant with the ISO 18000-7 standard.
Despite many setbacks, the RFID industry is still showing significant growth with organizations like Wal-Mart and the U.S. Department of Defense leading the charge. It is a matter of time before all RFID technology becomes the industry standard in the supply chain industry.
Future of RFID
As RFID technology advances, the applications available are limited only to the imagination. RFID implants in humans for tracking have been the long debated topic. But more interesting uses of RFID have surfaced in the recent years. For example, Kodak invented an edible RFID chip that is designed to monitor a patient’s gastric tract. Visions of smart homes appliances may become closer to reality with RFID technology. Appliances such as refrigerators could notify then groceries are low, or if food has expired. Children’s toys can also make use of RFID to track position and time for a variety of activities and games.
Of course, the issues of privacy and security are always of upmost importance when implementing traceable technology such as RFID. With potentially all commercial and household products containing RFID tags, thieves could potentially target homes with expensive items by scanning and identifying them.
As with all new technologies, RFID opens up new opportunities as well as threats. The use of RFID technology in our everyday lives is inevitable; it is up to industry and corporations to deliver the benefits of RFID technology while minimizing the risks.
Exhibit 1: Information System Components
Exhibit 2: Estimate Cost Breakdown for Manufacturer of 50 million cases of Products Annually
Exhibit 3: Impact of Selected Materials on Radio Frequency Transmission
Exhibit 4: Technology Adoption Lifecycle
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