RFID Offers SMEs Added Value

RFID has successfully made the transformation from vision to concrete technology trend and is currently thought to have high development and market potential. The RFID market analysts from UK-based IDTechEx predict that RFID will enjoy rapidly rising growth rates up to 2015. The value of the entire RFID market, including systems and services, is set to rise from its current level of US$ 1.95 billion to US$ 26.9 billion by 2015. The UK analysts believe there will be increased demand for RFID in the future, particularly in the consumer goods, pharmaceuticals and mail order sectors. According to a forecast by market researchers at SOREON Research, the European RFID market alone will have increased sixfold by 2008, climbing from Euro 400 million (in 2004) to Euro 2.5 billion.

Lowering costs, increasing productivity

The optimistic forecasts given by market researchers are based predominantly on extensive implementation scenarios for the technology with the aim of ensuring seamless tracing/tracking of production components and batches, and optimizing inventory management and order-picking operations. A recent study carried out by market researchers at Lünendonk, TechConsult and IDC Central Europe came to the unsurprising conclusion that it is particularly companies in trade, goods logistics and industry who are among those leading the way when it comes to RFID. According to Steffen Binder, Research Director at SOREON Research, companies from these sectors in particular are currently reaping the benefits of the technology. Based on market figures from the VDEB (German Association of IT Software and IT Consultancies), 34 percent of companies investing in RFID expect to cut costs through reduced waste, loss and fewer incorrect deliveries, and 66 percent anticipate improved productivity and efficiency.
Further aspects making market observers more optimistic include legal guidelines on batch tracing in the foodstuffs sector (e.g. EU directive EU 178/2002). The directive stipulates that all foodstuffs and animal feeds have to be traceable over all stages of production, processing and distribution, and RFID technology is more reliable and faster for these tasks compared to the previous process of manual input. Small and midsize enterprises (SMEs) with their own storage management system who carry out order-picking operations for goods or materials, i.e. collecting and preparing these for subsequent dispatch, will also have a quick and transparent overview of their inventory levels and the exact location of stock in the warehouse. Many of these companies work for trading or industrial businesses. Here too, investments in RFID may sometimes be necessary because “as suppliers, these enterprises have to adapt to meet their business partners’ requirements,” says Frank Schmeiler, Manager Consultant at TechConsult.
Nonetheless, Steffen Binder is convinced that “cost pressures mean companies have to seize every opportunity to make savings.” “But,” he adds, “RFID is an extremely complex technology that will not help every company in equal measure.” Businesses considering implementing RFID should first and foremost carry out detailed cost-benefit analyses. Steffen Binder says that, in general, RFID offers SMEs three fundamental benefits. “First, they save on process costs, e.g. by dispensing with manual registration or barcode scanning. What’s more, RFID also reduces inventory shrinkage, thereby cutting material costs. Last but not least, companies can generate additional sales as empty warehouses and shelves will soon belong to the past.”

New possibilities for growing requirements

Compared to the EAN-128 barcode which came before, smart chips offer greatly improved technical possibilities for storing, reading and clearly identifying product information. The tags are also extremely resistant to external influences, e.g. during transport or container cleaning. Not only that, they offer greater flexibility than the EAN-128 barcode and data written on active RFID tags can be modified or corrected at a later stage. Moreover, the far higher storage volume helps meet growing requirements regarding the traceability of production components, medicines and foodstuffs. The six key application areas for RFID are:

  • Management of containers and unit loads: RFID tags enable every single container and unit load (e.g. pallets) to be identified.
  • Inventory management/goods issue: RFID technology supports order-picking within warehouses.
  • Supply chain/commerce: In this area, transponder technology ensures seamless traceability in the foodstuffs industry. The contents of a box or pallet can be read automatically without the need to open the packaging.
  • Production/material flow monitoring: Individual work processes are identified and monitored. Updating means companies can query at any time what stage a product is at.
  • Shipment tracking: This simplifies the process of documenting the transfer of risk between several parties in the logistics chain and helps avoid delivery errors.
  • Temperature monitoring: Transponders monitor the cold chain for foodstuffs or medicines. Examples include chilled food logistics, transport and storage of medical products and temperature-sensitive chemicals.

Efficient added-value chains, faster ROI

According to SOREON Research, RFID offers the greatest benefits for container management. This is illustrated by a case study of a company fitting transponders to its more than 5,000 containers which are used to transport components on site and rotate in an internal cycle within the plant. The SOREON analysts calculated the company would achieve a Return on Investment (ROI) of 364 percent over a period of three years. “Thanks to RFID, the processes involved in tagging and recurrent identification of the containers can be cut and optimized significantly as barcode labels no longer have to be scanned in manually,” says SOREON analyst Melanie Henke, explaining the huge savings.
A further example of the potential of RFID comes from the automotive industry. Nowadays, cars are created in complex added-value networks. The vertical range of manufacture is declining and sections of production are being increasingly outsourced to small and midsize supplers. As a result, innovation and quality pressures are increasing, e.g. on parts manufacturing companies. In this case, RFID can function as the base technology to replace manual read operations and ensure that individual components can be traced seamlessly within the added-value chain, their authenticity verified and order data or assembly instructions stored. This ensures optimum control over and documentation of material flows, thereby increasing savings potential and creating competitive advantages. There is also clear potential for savings in the after sales sector, e.g. in workshops, as SOREON Research calculated using the following example. In a sample workshop, faulty components for repair have to be identified and ordered. Even if just a small percentage of the components were tagged with RFID technology, the SME could reach the payback period in the second year and, over the three years considered, could achieve an ROI of 102 percent.

No hurry

Nonetheless, Steffen Binder is careful to warn SMEs against implementing RFID too hastily. “There’s no need to rush in as a lot of the technology is still being tested and will only start offering financial benefits in the medium term. Small and midsize enterprises should initially begin with manageable pilot projects, test series and so on,” he says. A study carried out by IDC Central Europe among more than 600 companies in Germany shows that the RFID users of the future are heeding this advice, finding that 53 percent of those surveyed who are planning to implement RFID will spend less than Euro 100,000 in 2005. A further 26 percent intended to invest between Euro 100,000 and 249,999. According to Martin Haas, Consulting Director at IDC Central Europe, these results should be “regarded as a sign that user companies are tending to begin with smaller projects.”
The implementation of an RFID system is an important step on the road to transparent supply chains. However, these will only become reality when the RFID process information supplied is also connected to and processed by backend systems, e.g. ERP or SCM systems. That’s why SAP began working on RFID early on. The next article explains what RFID packages and add-ons SAP and its partners are delivering specifically for the SME market.

For further information:

Studies: www.idtechex.com/products/en/articles/00000136.asp, www.idc.com, www.luenendonk.de/uk, www.soreon.de/en
SAP AG: www.sap.com/rfid

Dr. Andreas Schaffry
Dr. Andreas Schaffry