RFID Technology - What is the Business Case?

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Launching RFID technology does not reinvent supply chain management. RFID technology will rather be part of an overall strategy for high-performance processes in supply chain management.

By Andreas Raab

05 Nov 2004


An RFID-Enabled Supply Chain

Radio frequency identification (RFID) technology is often touted as a path to next-generation supply chain management. Beside the promising vision, companies also have to keep an eye on costs and potential risks connected with the nascent technology. Examining the supply chain carefully, the key question is how RFID technology can leverage supply chain management. First, a clear understanding of the technology is necessary.

RFID technology is based on small chips on which information of individual items can be stored. The information on a chip can be written and read via a small antenna. The antenna together with the chip forms the so-called RFID tag, which is attached to a physical item like a box or a pallet, for example. There exist different variants of RFID tags, which differ in read range and data storage. More details can be found in the literature.

The benchmark for RFID technology is the conventional barcode technology. Comparing these technologies, the potential for and restrictions of RFID technology are mainly governed by the features of radio communication. On one hand, RFID readers and RFID tags do not need a line-of-sight. RFID chips can also carry much more information and can be used in a larger variety of environments as compared to barcodes. But on the other hand, radio communication is disturbed by any kind of material that emits or absorbs radio waves. For example, if RFID tags are put on metal items or on items containing fluids, RFID readers may hardly read the information. Another example is that a microwave oven in a cafeteria may disturb RFID communication when it is switched on.

Let us come back to the vision of an RFID-enabled supply chain. Given an environment in which RFID technology works reliably, two advantages are basically gained. First, since chips are used to store information about individual items more details about the supply chain is obtained. To take advantage of the increased information level, however, new software tools are necessary to manage the data properly. The second advantage is given by the fact that RFID readers and RFID tags do not need a line-of-sight. Goods can thus be processed easier and a higher level of automation is possible. For example, when a delivery is received in a warehouse, complete pallets can be scanned at one instance, which accelerates the goods-receipt process noticeably.

How can supply chain management benefit from these advantages, i.e. from a more automated, accelerated material flow in the supply chain and from more detailed information of the supply chain? The answer seems to be obvious. Accelerated material flow leads to a higher supply chain responsiveness and automation helps to save labor costs. However, the installation and the operation of a properly working RFID infrastructure produce extra costs, which have to be measured against the benefits. Further, more detailed information of the supply chain can generally improve supply chain management. Prerequisite is however an investment in appropriate software tools to manage the additional data efficiently.

Companies evaluating RFID technology will probably carry out the following program:

  1. Figure out areas in the supply chain where an investment in faster material flow and more automation could pay off.

  2. Determine where a higher information level could essentially improve the supply chain performance.

  3. Find out the prerequisites for properly working RFID technology.

  4. Determine software tools to manage RFID data.

The last point is especially relevant for SAP as a software vendor, which offers for this purpose the Auto-ID-infrastructure (AII) software package. With the help of SAP AII software, companies can manage RFID data efficiently and integrate RFID technology into existing business application software.

In general, using RFID technology does not mean that new processes are introduced in supply chain management but existing processes can be leveraged. Thus, RFID will probably be part of an overall strategy for high-performance supply chain management.


A more detailed overview over RFID technology can be found in The RFID-enabled Warehouse - A Thought Leadership White paper From Penn State University, which is available at the SAP Community. Information about the SAP AII software package can be found at http://www.sap.com/rfid.

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