HP's $150 Million RFID Venture

Late last year, the big question about RFID in the CPG (consumer packaged goods) industry was whether Wal-Mart's top 100 suppliers would be able to meet the retailer's Jan. 1, 2005 compliance deadline. Problems such as rampant tag failures and inconsistent read rates plagued these early adopters. Analyst and press reports questioned the probability of the technology working itself out as the deadline loomed closer. But, against what some might call heavy odds, most companies made the deadline. As the stories of compliant RFID programs emerge, the new question about RFID is, "What next?"

For $80 billion Hewlett-Packard (HP), finding the answer to that question is the focus of its RFID programs. HP was one of the first eight suppliers to successfully ship RFID-tagged products to Wal-Mart. To the retailer, this RFID program is a success story. But for HP, it's only the beginning. HP is investing more than $150 million to research the data that will come from its RFID solutions — and how it can use that data to better manage its supply chain.

HP began investigating RFID in early 2001 and began trials with the technology in late 2002. The company's interest in RFID was twofold. First, HP was interested in how it could market the technology through its professional services arm (see sidebar on page 12). Second, HP wanted to use RFID data to improve its supply chain processes. "Early on, we believed RFID would allow us to identify products in our supply chain without human intervention or line-of-sight scanning," says Salil Pradhan, CTO of RFID programs for HP Labs. "We knew we could make processes such as pallet building, container loading, goods receiving and put away, and component verification more rapid."

When HP first complied with the mandate, it shipped three of its SKUs (stock-keeping units) with RFID tags. Now, eight months after Wal-Mart's deadline, HP ships more than 60 RFID-tagged SKUs and has implemented the technology in 30 manufacturing sites around the world. By 2006, HP will have shipped more than 1 million of those SKUs.

RFID ELIMINATES DC INSPECTION POINTS
In the supply chain, RFID can produce benefits that save time and money beyond mere compliance. "We think about RFID as a way to create a continuous flow of goods," says Frank Lanza, worldwide director of RFID for HP Services. "In a supply chain situation, you want to keep the line going without interrupting it to read a pallet or case of product."

For example, most manufacturing companies are set up with a manufacturing facility and a warehouse or distribution center (DC) located at the same site. Finished goods are moved from the manufacturing area to distribution, which are usually treated by the company as separate facilities. Moving product from one site to the other triggers a fiscal transaction to represent the transfer of assets. To track this movement, most companies verify product shipment and receipt — whether in a manual-based process or with bar coding — at several points in the process. HP was no different. "We scanned pallets as they left manufacturing, as they were received at the DC, and when they were placed in the DC," says Lanza. "All of those verification points eat up time in your processes. With RFID, if you put antennas and readers where you normally scan, you can track products without stopping their movement."

RFID has also reduced the time needed to inspect pallets as they leave the DCs. After pallets are picked and readied for shipment, HP requires a final verification of the cases on the pallet. Before implementing RFID, employees scanned a cheat sheet of bar code labels (all of the bar code labels included on the pallet were printed on a single sheet of paper, which was affixed to the outside of the pallet). Now, antennas and readers surround the dock doors, and pallets are verified as they move through the doors with no manual scan needed. "With RFID, we streamlined a process that takes 2 minutes into a process that takes 10 seconds," says Pradhan.

RFID read rates still aren't consistent — and HP's goal of eliminating manual inspection points requires a 100% tag read rate. But, as Pradhan explains, the key is a cumulative 100% read. "We ensure we don't miss reading a case because we built in multiple opportunities to get a read — we read each tag six or seven times throughout the DC," he says. "As long as a case's tag gets read once along the line, it adds up to a 100% read." HP is currently using SAMSys, AWID, and Alien RFID readers and antennas, and purchasing RFID tags from the EPCglobal consortium. Collecting six or seven reads of a pallet could cause an inundation of data in its system, so HP uses OATSystems and Shipcom middleware to filter the data. Once a tag is read, the middleware no longer updates the companies enterprise system with that tag's data.

RFID PROVIDES SUPPLY CHAIN VISIBILITY
The truly exciting — and truly elusive — aspect of RFID for CPG suppliers is the data they will receive from their trading partners. "We've always said RFID is not about the tag, but what you do with the data," says Lanza. That data can include everything from how long products are held in warehouses to incorrect shipments to out-of-stock merchandise. Technology is still emerging to address this abundance of data, but HP is making progress.

Internally, HP can see data on every case that moves through its supply chain. It can see exactly what product is in that case, how long the case stayed at each location, when and where it was read, and when it was shipped. "Once we get data like that, we can sit down and analyze things like dwell time," says Pradhan. "We can see how long it takes cases and pallets to get from one point to the other. Any type of idle time adds to excess inventory, which is an added cost to us and to our partners." In one situation, HP looked at data from RFID reads and found three days of extra time built into its process. Where two DCs are in the same local area, product is sometimes transferred between the two. HP found that it sometimes took three days for product to move from one place to the other — even when the locations are only an hour's drive apart.

RFID CAN ELIMINATE EXCESS INVENTORY IN DCs
HP is beginning to receive RFID data about its shipments to Wal-Mart, via the retailer's Retail Link program. "We can see when our products were received at the customer's DC, when pallets were broken down, when cases were shipped from the DC, when a store received the cases, and the case movement from store inventory to store shelves," says Lanza. HP can also view sales data and item inventory of its products at Wal-Mart. Because the data is limited to one retailer, and HP is shipping a limited number of its products, it can't yet use the data to accurately determine its procurement and manufacturing processes. "We can get to the point where inventory is very tightly managed, where we can implement demand monitoring and forecasting," says Lanza. "We can get to the point where we reposition material in different DCs early on in the process, so retailers have what they need, when they need it, and there is no excess inventory."

Though forward thinking, HP's RFID predictions are not guesswork. The data that HP hopes to receive from its RFID systems already exists. HP now needs to determine how to capture that data and apply it to improve business processes. HP does plan to invest $150 million on RFID research and development over the next five years — too significant an amount of money to spend based on a mere guess.