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Burden Falls on Suppliers to Bridge the RFID Gap
Issue #161 | Sept. 12, 2008 | by Clarke McAllister
In postulating McAllister’s Law – that creation of true retail supply chains will not occur until the cost of encoding and applying an RFID tag is less than the cost of the tag itself – we must recognize the most significant obstacle. This is the chasm between RFID "slap and ship" techniques and 100% RFID-enabled production lines.
Suppliers need a bridge to cross that chasm. Universal thinking on what the requirements for a bridge might look like include the following:
1. The bridge needs to provide an efficient means for selectively commissioning
RFID tags or labels without having to, at least initially, pay for RFID tags on all of the pallets and cartons that will never be read by a non-mandated ship-to location. For some suppliers, the current list of Wal-Mart and Sam’s Club ship-to locations and volumes represent less than a fraction of one percent of their annual production output.
2. The bridge needs to fit with existing business processes. Changing business processes is costly and should be made only after thorough analysis and understanding of the total impact is modeled.
3. The bridge needs to have a low capital cost.
4. The bridge needs to have a low operating cost.
The costs for capital and operating (not including the cost of the tag itself), divided by the number of RFID tags deployed is the tag commissioning cost Cc. The tag’s direct product cost is CT. The sum is the Total Cost CTOT, where CTOT = CT + CC. McAllister’s Law states that CC < CT (i.e. the commissioning cost must be less than the tag cost) for mass adoption of the RFID mandates.
For supply chain mandates to succeed, both a bridge strategy and a long term tagging strategy must both adhere to McAllister’s Law. In other words, given that the promised benefits of RFID will indeed be delivered, the cost of activating and applying RFID tags must be less than the cost of the tag itself for widespread use in supply chains. This is true in supply chain applications, because the activation costs accrue to the suppliers, the source of the commissioned tags.
Labor and RFID Tagging Methods
Demand label printed tagging is labor-intensive, typically costing $2 to $5 per tag. RFID service bureaus provide pre-printed labels, third-party logistics providers charge for turnkey service, and even in-house print-encode-apply operations run at costs in this range. These solutions are the most attractive when volumes are low, because there can be a low initial cost and possibly no capital requirements. However, these solutions do not scale well.
In-process encoding is a labor efficient tagging method where RFID tags are applied within existing business processes, virtually eliminating extra handling. When in-process tagging includes the convenience of RFID tags in cartridges which can be refilled and reused, initial investments can be as low as $5000. Tags can be applied in rapid succession, at the point of activity, to selected selling units, cartons and pallets.
Upward scaling of in-process tagging to higher volumes is easily achieved when the tagging of many selling units or cartons from the same SKU is required. This aligns well with Sam’s Club’s shift from pallet tagging to unit-level tagging. Many suppliers will see a major increase in their tagging demand in coming months, where the flexibility of In-process tagging will adapt well.
Automated tagging and Smart Boxes will be the established kings of tagging solutions by 2020. The per-tag commissioning cost CC will be practically nil. Capital costs will be substantial, but almost zero when amortized over millions or billions of tags. That day will truly mark the arrival of the “Internet of Things” and will finally realize the vision of RFID’s early leaders.
A bridge to the future of RFID is needed now, because the mandates are real; fines are being imposed; and Wal-Mart (now officially 'Walmart') is committed to RFID. It’s not a matter of “if”; it’s a matter of when and how.
Weighing the costs
In-process tagging has a low upfront capital cost, so the dominant cost is labor. Assuming a fully burdened labor rate as high as $25 per hour still proves to meet the objectives of McAllister’s Law by achieving per tag labor costs well below the cost of the tag itself. Even at tagging rates as slow as 10 cartons per minute, the labor cost is less than half of the cost of the tag.
A breakdown of the tag commissioning costs CC fall into these three categories:
1. CCP = Cost of presenting or exposing a target surface of a pallet, carton, selling unit, book, or garment, to which an RFID tag must be attached. This cost component is minimized by avoiding special handling. A preferred method integrates the tagging process with an existing business activity, such as order picking. Tagging selected items while they are pulled from storage onto a pallet for shipment to Walmart has a CCP cost of nearly zero, avoiding special handling.
2. CCEV = The cost of laborers waiting for the machine’s encode and verify cycle for each tag. Unpredictable delays are attributable to tag print/encode equipment that requires a command from a remote computer issuing a unique serial number from a pool of numbers. If those delays become perceptible by the person applying tags, productivity is reduced. Not only do they work more slowly, their attention wanders and they lose focus on their tagging task.
3. CCT = The cost of transporting each custom-encoded tag from where it isencoded and verified to the exact point of each tag’s attachment. If the transportation involves shipping or footsteps, then CCT is too high to comply with McAllister’s Law.
Of all of these costs, CCT is the major source of cost that dominates the industry in its current state. It is also the cost most sensitive to an upward scaling of SKU count, tag count, and ship-to locations. Any printing and encoding process physically separate from the tagging location for requires matching the delivered tag with a particular carton and order. That matching process is time consuming, error-prone, and costly.
CC = CCP + CCEV + CCT.
Conclusion
Is McAllister’s Law the key to this enlightenment? You now have the proper variables, so don't take too long to do the math. Place your bets, the game has begun!
Clarke McAllister is Chief Technology Officer of ADASA, a leader in in-process encoding. Welcome - ADASA INC
Last edited by Monica : 02-18-2010 at 11:53 AM.
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