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2014

Stuart Rosenberg's Blog

June 2014 Previous month Next month

The purpose of this article is twofold: present the question of how and will RFID change the supply chain landscape and then highlight areas of this technology which may be critical to further development and implementation. In addition, plan to show the differences between barcode technologies and RFID in their use for Supply Chain.

First a little background of RFID. Please pardon me if some of this is too detailed or seems boring. I am merely trying to set the stage for the present situation.  The first such system was developed by the British in World War II to identify friendly or unfriendly aircraft. Each plane had installed a transmitter which received signals from ground stations. Needless to say this was a primitive RFID system and not very secure or reliable.  The next important milestone occurred in 1973 when Mario Cardullo was granted a patent on RFID. This first widespread RFID could only detect whether the tag was present or not.

About the same time the Los Alamos National Laboratory in New Mexico supported research of this technology. This laboratory’s early claim to fame was the development of automated toll payment systems which is still being used today (today we know it as ‘Easy-Pass’).  The next step in the process did not happen until 1999 with a joint venture of Los Alamos, Uniform Code Council, Massachusetts Institute of Technology and Gillette Corporation founding an Auto-ID Center. The primary result of this collaboration was the electronic product code (EPC).

In 2005 at Johns Hopkins University research and development students created the Point of Sale system by ‘cracking’ the code of electronic payments. With this breakthrough companies could monitor power levels in the RFID tag and levels of risks in specific areas. However, a controversy arose as to individual privacy because RFID tags could be read from great distances without person’s knowledge. The more sophisticated protections the more opportunities for potential failures or breakdown in security.

Comparison between RFID and Barcode Technologies:  

In supply chains, the biggest advantage RFID has over barcodes is the capability to automatically read large groups of tags at one time. This eliminates the labor or manpower required to scan large volumes involved in the supply chain lines. Visibility in the supply chain systems allows for improvement in supply chain management in areas such as bottlenecks, targeted recalls and market research.  Potential advantages for RFID systems reside in the reduction of fraud and counterfeiting, labor cost reduction, stock shrinkage reduction, improvements in warehouse stocking and customer satisfaction. The drawback to barcodes is sensitivity to atmospheric conditions and the possible interferences such as dirt, dust or foreign objects obstructing the scanner. However, there is no common solution for RFID implementations.  Must fit RFID systems to company’s requirements; if company really needs RFID to reach 100% accuracy and reliability.  The security of RFID in the supply chain can be observed from several different vantage points: health industry (radiation devices), vehicle access control, inventory location tracking, software and hardware protection and tracking origins of goods.

Development of privacy enhancing technologies is vital to future RFID research and acceptance by the public. In the future RFID will allow consumers to scan tags attached to a particular product to verify that the product is genuine.   It will be used to track soldiers in battle, sense levels of glucose in diabetics and enable reading of bank accounts. In fact, the European Union is considering RFID tags in the Euro currency. 

The RFID technology is here to stay.  With new research and inventions for RFID new uses and fields of use will be adapted. Barcode will be a thing of the past but due to unpredictable corporate environment there is no definitive horizon for the complete replacement.  Questions about reliability, security and privacy issues of RFID technology are very important so there remains the question of complete acceptance.  Despite these controversies, there will be continued development and research of this technology with the goal of revealing all potential pitfalls for supply chain management.

 

Table 1. Levels of RFID in supply chain application

Level                        Use                              Application

Item

Consumer units

Products and individual items

Case or Carton

Traded units

Boxes (packaging) product carriers

Pallet

Distribution units

Pallets / Trucks

 

Table 2. RFID applications

 

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Spanning the last ten years or so, highly fluctuating pricing in the raw material markets has put a heavy financial burden on manufacturers.  From 2003 – 2008, prices for many of the raw materials needed for producing consumer goods, such as paper, wheat and milk, saw double-digit increases and then fall spectacularly the next year.  While some manufacturers have recovered others have not.  The consensus is more volatility is certain to continue.

Many manufacturers lack the capability to respond to these market fluctuations due to the failure to integrate the following functions: product development, procurement, manufacturing, finance and marketing. 

The failure to fully integrate these functions may lead to costly nonalignment of efforts. The lack of coordination between supplier and customer sales contracts is one example.  Say procurement renegotiates a higher price for a specific raw material to ensure its availability when prices are increasing, but sales department has locked the company into non-negotiable customer contracts that increase cannot be passed along to the customer.   In effect, the company has taken the full brunt of the supply risk, as opposed to sharing the cost with the customer.

Companies without department collaboration grapple to develop production methods that can and will respond to price fluctuations.  Implementing new processes in the production process can allow a manufacturer to substitute raw materials depending on the volatility of the time.  At many companies sales, procurement, product development and manufacturing are not working in unison to take advantage of these opportunities.

Too often companies rely solely on hedging to manage the volatility of raw material pricing.  This is usually the financial areas’ domain and accomplished with limited visibility to sales and procurement during sales contract negotiating periods.  With the “wrong” bet, companies can be locked into these contracts while prices have fallen.  A little while ago when the natural gas prices fell from their peak, some chemical companies hedged with six month contracts and the company lost its price advantage as prices continued to fall.

A viable risk management strategy has companies looking up and down the value chain. Just think of the uncertainties from the supply chain point of view with transporting cheap raw materials from afar locations, storing large inventories and the capital or carrying costs expenditures of multi-plant locations. 

Once these risks are measured, there are four risk mitigation approaches to choose from: 

  1. Upstream risk transfer to suppliers: diversifying the supplier base for primary raw materials will give companies negotiation leverage and negates the power of some suppliers if and when prices spike.  Can share the risk with suppliers through fixed long term contracts.
  2. Downstream risk: when volumes are agreed upon for the long term, pricing can be updated recurrently as the market demands. Or companies can use indexing – trending prices to a market price for a specific class of raw materials.
  3. Risk transfer to outside entities: as stated previously about relying solely on hedging, these strategies can transfer risks to counterparties can work. However, a strong financial department must be in place to fully comprehend and understand the consequences of such strategy.  Companies that gain access to materials by negotiating a swap of raw materials with another company will allow both of them to reduce costs and gain flexibility.
  4. Internal risk mitigation: the solution is developing elasticity in product development and manufacturing. Companies can switch to cheaper materials when prices rise or move production to another geographical location for cost advantages. Stockpiling inventory is another option when prices are low.  There are carrying costs linked to having high inventory levels.  But they may be justified by cost benefits during times of volatility.

For any of these methods to succeed, companies as a whole must support the risk strategy.  First, strong leadership is required to synchronize the strategy throughout all the departments.   The risk tolerance must be agreed upon by all the top level executives with clear goals and communication to the entire organization.  In conjunction with this a risk management committee should be chaired to set the guidelines and policies.

Secondly, such a strategy requires an analytical support team. This team will help to identify the risk drivers and monitor performance indicators to forecast future market fluctuations.

Thirdly, recommend the initiation of cost curves.  These can identify margins at risk, evaluate the costs involved and their impact on the customer as well as mapping high and low cost producers.

Lastly, companies must establish transparency within each function and within the entire organization. With such an infrastructure I and shared information all managers can update and adjust decisions for market shifts while maintaining the risk policies.  In addition, management can establish targeted capability-building programs in risk management affecting purchasing, supply chain management, and sales to guarantee the skills necessary to develop, implement and maintain the new strategy.

For companies without internal and external collaboration, may I suggest now is the time to pursue this collaboration.  The markets for many raw materials have gone down considerably but the view is still a cloudy one.  Those companies that have policies and best practices in place will be well positioned for the next round of market volatility to outdistance their competitors.

Pricing is an important pedal for increasing supply chain profits through a more concerted effort of matching supply and demand. Tied to pricing, for better or for worse, is revenue management. Together they can increase the profit generated from a limited supply of assets. Revenue management suggests using pricing to gain a semblance of balance between the supply and the demand. Once this balance is acquired or met then can invest in or reduce assets – capacity and inventory. 

Pricing has a significant impact on the supply chain profits when one or more of the following conditions are met:

  1. The value of the product varies in different market segments
  2. The product is perishable or waste occurs
  3. Demand has seasonal and other peaks
  4. The product is sold in two ways – bulk and or sole item

To debate and analyze pricing we will discuss tow strategic pricing strategies – Everyday Low Pricing and Hi-Low Pricing – from this point forward known as EDLP and HLP. There remains a large difference of opinion concerning the effectiveness of these strategies.  EDLP charge a consistenly low price ignoring price discounts. This strategy avoids risk while simplifying forecasting, allowing for better customer service and reduces labor costs. 

HLP sets prices that discount selected items to clear slow moving inventory. It can be argued that manufacturers with a single ordering decision with the option to reduce initial prices are more profitable than those manufacturers who keep a fixed price. 

However, there are two major drawbacks to both of these strategies.  Most if not all HLP research is focused on the retail industry.  This assumes that item costs are independent of demand. The manufacturing level of the supply chain and the cost adjustments – overtime, hiring, training, subcontracting and inventory carrying costs -  have been largely ignored.  EDLP studies have been based upon items with fairly steady demand. Items such as clothing, toys and sporting goods are based upon seasonal patterns and EDLP will fail to stabilize those demands. 

My goal is to address identify operating conditions – demand patterns, demand amplitude, customer price sensitivity, production change cost structure and promotional cost structure – which favors pricing strategies in manufacturing supply chains.  

There may be other environmental factors favoring one pricing strategy over another but that assumes performance criterion is complete supply chain profitability.  Here, I will introduce a three level supply chain model for a single product.  This model will allow us to compare alternative pricing methods in the supply chain.

The proposed model spans manufacturing sectors, multiple periods and can be constrained to simulate a variety of operating environments. Key limits are manufacturing level costs such as labor costs, production change costs, limitations and production rates.  Some variables are replenishment orders to the manufacturer and the manufacturers’ short term capacity to meet those orders.

The model has several assumptions.  Let us assume an open market with seasonal and price-sensitive demand. The role of the manufacturer is to set a sell price for each product and to order nough to satisfy forecasted and customer demand. These forecasted decisions will influence demand, revenue, and inventory costs. Secondly, EDLPis chosen to maximize profut throughout the entire supply chain.

A manufacturer with short term capacity constraints, should produce sufficient quantities to satisfy the chronological demand in the replenishment plan.  The manufacturer can use a combination of production planning strategies – overtime/undertime, workforce level changes, inventory – to fill orders at minimum cost. Since the interest should be with total supply chain profitability transfer pricing between the manufacturer and supplier are at cost.

When dealing with maritime supply chains it is anyone’s guess how port labor negotiations will pan out or affect inbound and outbound traffic. A prime example of this was the U.S. West Coast port negotiations amongst the Pacific Maritime Association and the International Longshoremen and Warehouse Union.  Imperative to evaluate your supply chain on a constant basis and introduce contingency plans to avoid potential trouble that negotiations such as these might cause.

As the dock employees and employers prepared for an intricate contract negotiation we need to be aware of the disruption to their supply chain and to the effect on the U.S. economy. The concern is well-founded.  In prior negotiations the Pacific Maritime Association brought in new technology such as scanners, sensors and bar-coding system to make cargo flow more efficient. But at the same time these improvements eliminated 10 percent of longshoremen positions.  Passionate talks resulted in a 10 ten lockout and only intervention by President Bush settled the lockout.

While all this occurred in 2002,  a few years later, 2008 to be exact, saw another dispute cause major  interruption.  The Pacific Maritime Association (PMA) charged the International Longshoremen & Warehouse Union with deliberately creating work stoppages at all West Coast ports. The International Longshoremen & Warehouse Union (ILWU) counter charged that individual members were merely exercising their rights to protest the war in Iraq.  Ultimately, the sides compromised agreeing to wage rates and to have automated cargo handling systems. 

Once again in 2014 uncertainty reared its ugly head.  The primary issues for both the ILWU and PMA were healthcare c costs, pensions, etc. Compared to past port disruptions based upon automation and wages these discussions were very time consuming.  

These negotiations resulted in unpredictable work stoppages, increased costs, capacity challenges, transit time delays and lack of supply chain stability.

Not only did each of these three incidents cost the U.S. economy about $1 billion dollars per day but the resulting six months to recover deeply affected retailers, importers, manufacturers and  agricultural exporters.  While companies can track negotiations over time they cannot gain any certainty about the process until contracts have been signed.

The best way of protecting your business is to assess the impact of potential disruptions on the current state of the supply chain.  Afterwards, create response plans to minimize the landed costs and delivery times.  Be proactive and appraise potential disruptions before they occur is critical and will make a response plan.

There are three phases to this appraisal that need to be followed:

  1. 1- Assess the impact of disruption.  Port disruptions will cause companies to deviate from their existing supply chain strategies.  For example, cost-driven companies may be forced to reroute through different ocean routes which have longer transit times.  This will lead to lack of product availability and lost sales.
  2. 2- Explore options.  Form contingency plans for the affected product flows.
  3. a- Develop alternative sources of supply.  Suppliers closer to distribution centers will avoid material movement via transportation.
  4. b- Build onshore inventory. Increase safety stock of materials normally routed through ports.
  5. c- Plan for alternate routes. Map out and assess the viability of these routes.
  6. d- Evaluate airfreight strategy.   Examine the impact of changing modals from ocean to air by comparing costs, transit time and service.
  7. 3- Prioritize the response options.  The building of onshore inventory and finding alternate routes require long term planning and execution perspectives.  These options should be considered along with three factors: severity, occurrence and detection (SOD).
  8. a- Severity of impact. A contract negotiation could differ from no impact, a slowdown or a complete work stoppage.  The severity depends on the duration of each scenario.
  9. b- Occurrence. Use a rating system of 1 to 10. More frequent occurrences will pull the scale toward a ten (most severe and occurrences).
  10. c- Detection. This is most difficult factor. How can one pre-judge the severity and occurrences of a work disruption? The option here is to build relationships with neutral logistical service providers.

To minimize the impact of port disruptions firms should monitor developments of the negotiations from both parties, use response planning options throughout the disruptions and find impartial logistic providers for transportation capacity, alternate routes and space for additional inventory.

The sooner planning is initiated for any and all impending disruptions; your supply chain will be able to withstand the disorder.