MIT's Auto-ID Summit Features Gillette and CVS Case Studies

Transcription

1 Event Summary MIT's Auto-ID Summit Features Gillette and CVS Case Studies Abstract: The Auto-ID Center at MIT hosted a summit to exhibit case studies from its field program. Radio frequency identification will have a major impact on supply chain needs in retail and manufacturing. By Susan Cournoyer, Jeff Roster and Geraldine Cruz Strategic Business Imperatives Step up monitoring of radio frequency identification devices (RFID), including awareness of auto-id (automatic identification) and electronic product code (EPC) network. Initiate intelligence gathering regarding adoption by competitors and vendors. Recommendations For companies in the retail and manufacturing sectors: Begin to line up internal and external resources within the next six months to perform due diligence on the use and scope of RFID for operational, tactical and strategic supply chain issues. Recognize factors that can influence RFID adoption, such as current technical limitations of RFID. Other factors include specific inventory and supply chain characteristics as well as cultural/operational issues. For IT vendors targeting the retail and manufacturing sectors: Vendors planning to target RFID-related opportunities will find 2003 requires investments in solution development and marketing visibility, with contract signings unlikely to materialize until Focus early offerings on pilot programs targeted at merchandise operations and marketing executives. Anticipate helping these buying centers with business cases that they can present to gain budget support and buy-in from C-level executives, including the CIO. Publication Date: 9 April 2003

2 2 MIT's Auto-ID Summit Features Gillette and CVS Case Studies Applying RFID in the Lab, on the Pallet and on the Retail Shelf The Auto-ID Center at MIT hosted an Analyst Summit on 6 February 2003 to discuss adoption of RFID and the (EPC network) supply chain applications. The Summit provided three case studies and vendor demonstrations of auto-id. Auto-ID stands for automatic identification, achieved through use of auto-id technology and EPC tags affixed to products. Although the system remains an area of study in MIT laboratories, early trials in commercial environments have been launched. This is not the first time applications using RFID have been applied commercially, since the technology has already been in use for tollbooth payments and pay-at-the-pump applications developed by petroleum companies. One of the largest deployments is in livestock trading. There is a range of vertical market applications and IT vendors that are either tracking or investing in RFID research. The work of the Auto-ID Center occurs in the context of an emerging market for applying the technology to supply chain challenges. RFID has captured the imagination of the Auto-ID Center researchers, many key stakeholders in major retailers and manufacturers, and vendors introducing auto-id offerings. Widespread acceptance will hinge on identifying and achieving business benefits. Anticipated benefits will differ according to where a company fits in the supply chain, but auto-id supporters target the following list of supply chain improvements: Improved stock replenishment on store shelves Reduction of fraud and theft in the supply chain Better inventory management along the length of the supply chain Auto-ID supporters contend that although it is hard to quantify these benefits, they will become obvious through pilots and through increased and reciprocal adoption of the EPC network throughout supply chains. Auto-ID Center Advocates Common Framework The course from research and development to practical application for RFID has taken decades, but most recently the story focuses on rapidly accelerating efforts to apply RFID to business challenges. Although the technology has been around for decades, costs and unresolved technical challenges limited the practical applications of RFID to supply chain challenges. In the late 1990s, however, as the bar code marked its twenty-fifth anniversary, members of the Universal Code Council decided to revisit the potential of RFID technology for supply chain improvements. Procter & Gamble, Gillette and Wal-Mart founded the Auto-ID Center at MIT in The center has worked to serve as a focal point of auto-id research. The center's earliest priorities focused on identifying potential stakeholders in the global supply chain and defining critical elements of a commercialized system Gartner, Inc. and/or its Affiliates. All Rights Reserved. 9 April 2003

3 Table 1 Five Elements of Shared Auto-ID Network Five Proposed Elements of Auto-ID Network The Auto-ID Center at MIT has identified five elements that it believes are required to create a shared and potentially global EPC network to identify and track products as they move through the global supply chain (see Table 1). The Auto-ID Center works with its members to advocate for this model of the commercial application of RFID technology to supply chain challenges. 3 Element EPC ID System Object Name Service (ONS) Physical Markup Language Savant Source: Auto-ID Center at MIT Description Next generation of product identification similar to the UPC or bar code. Radio frequency tags, ideally in the cost range of no more than a couple of cents, to be applied during the manufacturing process, used in conjunction with Readers located in plants, warehouses, stores, and shelves. The readers locate the EPCs of nearby tags and pass the EPCs to a computer or local application. The ONS tells computer systems where to locate information on the Internet about any object carrying an EPC, similar to the Internet's established domain name system. A new standard language for describing physical objects, based on extensible markup language. Software technology to manage and move information in a way that does not overload established corporate and public networks by using distributed architecture, to act as the nervous system of the new EPC network. The Auto-ID Center acknowledges that progress has been made in certain areas while other technical challenges remain. For instance, some challenges still exist for using EPC tags for metal containers and containers with liquid products. The Auto-ID Center works with vendors and commercial enterprises to identify and spur research to address remaining challenges. Most recently, the center sponsored a field test with 11 end users to test the EPC network modelproposedbytheauto-idcenter. Auto-ID Field Trials and Business Case Development The Summit brought together auto-id researchers with supply chain decision makers from major companies and IT vendors to discuss auto-id offerings. CVS and Gillette presented information about pilot tests and planned use of auto-id in the retail and manufacturing sectors. In the MIT labs, meanwhile, they continue to identify and tackle remaining technical barriers and challenges to adoption. Finally, a network of IT vendors and solution providers are working to commercialize solutions related to auto- ID, based on common elements identified by MIT Gartner, Inc. and/or its Affiliates. All Rights Reserved. 9 April 2003

4 4 MIT's Auto-ID Summit Features Gillette and CVS Case Studies Gillette Applies EPC to Supply Chain The value chain group within Gillette's marketing organization has taken the lead in championing and piloting the use of auto-id by the global manufacturing company. Gillette notes that it is looking to auto-id to help solve the No. 1 complaint to its toll-free customer number, which is that customers cannot find specific Gillette products on the shelf at the retail stores where they shop. Gillette was a founding partner of the Auto-ID Center. In January 2003, Gillette announced its intention to purchase up to 500 million EPC-enabled tags from Alien Technology, for tags priced at less than 10 cents each. Gillette identifies low cost EPC tags as a critical prerequisite for practical application of the technology. Gillette is planning field tests of auto-id, targeting projects with two retail partners: Wal-Mart in the United States and Tesco in the United Kingdom. The pilots focus on the use of intelligent shelving to prevent out-of-stock situations for Gillette grooming products. The earliest stage of the field test is using Gillette's Fort Devens, Massachusetts Pack and Distribution Center where RFID tags and readers are being used to track and verify Venus cases and pallets from assembly to order loading. Priorities for 2003 include reviewing and sharing data from the pilot with supply chain partners to evaluate next steps in adoption. CVS Auto-ID Plan Targets Rx for Pharmacy Inventory CVS joined the Auto-ID Center in The stakeholder for auto-id at CVS is Jack DeAlmo, vice president of Inventory Management and Replenishment. CVS recently selected a vendor to help with the pharmacy supply chain pilot. CVS anticipates that the beta test of the pilot will be complete by late CVS' notes that its involvement in the Auto-ID Center and the use of EPC technology is meant to address operational challenges in the company's core business as a pharmacy healthcare provider. Although CVS sells consumer packaged goods, 67.6 percent of the chain's revenue come from the pharmacy operations. The inventory within the pharmacy supply chain is more expensive than the general store operations and at the same time is easily isolated, creating conditions conducive to an auto-id pilot. CVS emphasizes that the pharmacy supply chain creates specific challenges to auto-id adoption, particularly around privacy considerations that could create a barrier to adoption if not recognized and handled properly. Other challenges include inventory delivered largely as components, such as containers of liquids and pills, that need assembly by pharmacists into finished prescriptions Gartner, Inc. and/or its Affiliates. All Rights Reserved. 9 April 2003

5 CVS recognizes that improving the experience of pharmacy customers, which is the early focus of its pilot, can have business benefits because pharmacy customers tend to visit CVS more frequently and make larger purchases than general retail customers. CVS has formed an RFID governance committee to oversee a customer-centric pilot focused on tracking bottles and vials to speed prescription delivery to customers. The committee includes the following members: Senior legal counsel CVS regulatory lead Professional pharmacy representative Pharmacy operations representative Retail systems vice president Finance vice president Logistics vice president Gartner Dataquest Perspective Evaluating the use of RFID and auto-id technology creates a challenge for supply chain decision makers and IT vendors. The business case laid out by the Auto-ID Center targets business benefits, but it is too early in the adoption cycle to point to successful supply chain implementations. Lessons From Case Studies Recognizing that it is premature to expect proven solutions, case studies (see Table 2) provide a preview of adoption patterns. Although case studies cannot be used as a definitive guide to adoption, the following patterns emerge: Key buyers for using auto-id technology and the EPC Network are not just CIOs. In retail, the key people include merchandising and supply chain executives. In manufacturing, the key people are warehousing, supply chain, and customer service executives. The stakeholders all have a supply chain perspective in common. Business goals drive the adoption of RFID and auto-id. Companies that can articulate supply chain business problems and goals are the best near-term prospects. Logistics and transportation companies are conspicuous by their absence. Presenters at the Auto-ID Summit mentioned that bringing transportation companies into the fold remains a challenge Gartner, Inc. and/or its Affiliates. All Rights Reserved. 9 April 2003

6 6 MIT's Auto-ID Summit Features Gillette and CVS Case Studies Table 2 Summary of RFID Plans at Gillette and CVS Company Buying Center Pilot Business Goals of Pilot Usage of IT vendors Gillette Vice president of auto-id and product availability within Gillette's marketing organization Field tests focus on the use of intelligent shelving to prevent outof-stock situations for Gillette grooming products, verifying system performance and accuracy within Gillette's supply-chain environment Prevent out-of-stock; Improve customer satisfaction and loyalty through improved product availability; Decrease lost sales; Reduce loss within supply chain Announcement of plans to buy up to 500 million RFID tags from Alien Technology CVS Vice president of inventory management and replenishment, responsible for merchandise operations Source: Gartner Dataquest (March 2003) CVS has formed an RFID governance committee to oversee a customer-centric pilot that focuses on tracking bottles and vials to speed prescription delivery to customers Gain clear perspective on opportunities to improve customer service; Target increased delivery speed to customer; Enable CVS to understand implications and opportunities of tagging the vial/prescription (evaluating improved accuracy, operating efficiencies, quality improvements, and reduced theft and diversion) Interviewed and evaluated potential consultants and development partners; Selected development partner for pilot in 2003 to tag bottles and vials Assessing Hype vs. Reality of RFID in the Retail Supply Chain RFID has probably created more hype in less time than any ever did in the retail sector. The technology also is poised to have a major impact on the consumer packaged goods manufacturing sector, which has been exposed to RFID because of its participation in the retail supply chain. In the retail sector, virtually every IT vendor (hardware, software and services) has created an RFID story and every midsize to large retailer is buzzing about its potential. However, this technology has been around for several decades: It can accurately be described as an overnight success "10 years in the making." Adoption Time Frame There is little question that auto-id technology will be both revolutionary and transformational. At stake is the ability to solve the one problem that every retailer wrestles with and has not been successful in eliminating; that of running out of stock, and its disastrous impact on the bottom lines of both manufacturers and retailers. The key to this technology is that it will attack the problem with a very systematic approach and will offer many additional benefits throughout the entire organization, thereby making the large investment much more palatable for the organization. The adoption process, however, will not come all at once. More likely it will come in the following logical stages: Short term (2004 to 2005) Pallets/containers 2003 Gartner, Inc. and/or its Affiliates. All Rights Reserved. 9 April 2003

7 Midterm (2006 to 2008) Cartons and high value items Long term (2012 and beyond) All items RFID is shaping up to be one of the most significant disruptive technologies ever in the retail supply chain. End-user organizations and vendors making wrong choices could face significant hurdles in catching up. It is very telling that Wal-Mart is a key retailer in the pilots. Wal-Mart is not an organization with a reputation for adopting unproven leadingedge technology. Rather it will experiment with technology it sees great value in and take great pains to minimize the downside risks of adoption. Then when the company believes it has found a technology with great value, it aggressively adopts and relentlessly squeezes every advantage out of it. The fact that Wal-Mart is so aggressive in its involvement should serve as a warning sign to all retailers about this technology's potential. Gartner Dataquest Recommendations Gartner Dataquest makes a number of recommendations to retailers, manufacturers and IT services providers. For Retailers RFID is clearly a technology in which companies with world-class reputation and supply chain excellence see great potential. End-user organizations must understand the adoption patterns of critical technology. As seen with customer relationship management, a significant percentage of retailers will not put this technology through the rigorous return-on-investment process that they would for a point-of-sale refresh program. They will instead consider this technology so strategic that they need to move ahead. It is important for every retailer to understand the potential impact of this technology on their business and be prepared to adopt at a faster rate than they have on other projects, if the technology proves successful. For Manufacturers Despite the hype around RFID, the market is immature. Manufacturers that invest too early in the technology could be burned by a high investment in applications development, systems integration and debugging a high price to pay given executive's insistence on controlling cost. However, these are not reasons for complacency. When the economy improves and executives refocus on growing the business and forging competitive advantages rather than stemming expenses IT executives should be prepared to take support these new initiatives with new IT strategies and the appropriate supporting portfolio. To the extent that RFID poses significant benefits for the supply chain one of manufacturers' top three key pain points IT leaders in manufacturing companies must pay their due diligence in understanding the use and scope of RFID to support their strategic, tactical and operational supplychain initiatives Gartner, Inc. and/or its Affiliates. All Rights Reserved. 9 April 2003

8 8 MIT's Auto-ID Summit Features Gillette and CVS Case Studies Within the next six to 12 months, Type A manufacturers should fund a band of entrepreneurial IT and business managers in developing business cases for the use of RFID. Type B/C companies should assign IT staff to monitor and track RFID vendors and service providers and the benefits and challenges of RFID in user organizations. For IT Services Providers Plan for hybrid uses of RFID and traditional barcoding. Gartner Dataquest anticipates that that RFID will not replace barcoding in 95 percent of manufacturing companies in the next five years (0.8 probability). Begin to create thought leadership pieces on the benefits and challenges of RFID and develop models to help end users begin to quantify the benefits (and costs) of RFID over barcoding technologies. Assemble a team of alliance managers and solutions developers to assess RFID technology maturity, vendor viability and the ability of RFID product vendors in enhancing your supply-chain vision. Key Issue What impact will this event have on IT vendors or users? This document has been published to the following Marketplace codes: ITSV-WW-DP-0484 For More Information... In North America and Latin America: In Europe, the Middle East and Africa: In Asia/Pacific: In Japan: Worldwide via gartner.com: Entire contents 2003 Gartner, Inc. and/or its Affiliates. All rights reserved. Reproduction of this publication in any form without prior written permission is forbidden. The information contained herein has been obtained from sources believed to be reliable. Gartner disclaims all warranties as to the accuracy, completeness or adequacy of such information. Gartner shall have no liability for errors, omissions or inadequacies in the information contained herein or for interpretations thereof. The reader assumes sole responsibility for the selection of these materials to achieve its intended results