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Int. J. Enterprise Network Management, Vol. 2, No. 1, 2008

Is the RFID technology ready to integrate supply

chain activities?

H.K. Chan* and Felix T.S. Chan

Department of Industrial and Manufacturing Systems Engineering,

University of Hong Kong,

8/F Haking Wong Building, Pokfulam Road, Hong Kong

Fax: +852-2858-6535

E-mail: hkchan@ieee.org

E-mail: ftschan@hkucc.hku.hk

*Corresponding

author

Abstract:

Radio Frequency Identification (RFID) is not a new technology and

has been introduced for military applications for a long time. Nevertheless, it

has been recognised as a device that may soon change the mode of operations

throughout the supply chain. There is no question that the technology will

reduce labour and improve accuracy in inventory management by improving

inventory visibility. However, a review of recent research and the development

of RFID technology in supply chain related applications indicated that

deployment of the technology are restricted to the mandates of some giant

players in the industries. It is still unclear that how return on investment of

RFID-based projects could be justified. This paper aims to present a review of

the technology and some recent development of RFID in relation to supply

chain applications. Future research direction is then suggested.

Keywords:

Radio Frequency Identification; RFID; supply chain management;

logistics; data collection.

Reference

to this paper should be made as follows: Chan, H.K. and

Chan, F.T.S. (2008) ‘Is the RFID technology ready to integrate supply

chain activities?’

Int. J. Enterprise Network Management,

Vol. 2, No. 1,

pp.72–83.

Biographical notes:

H.K. Chan is a PhD candidate in the Department of

Industrial and Manufacturing Systems Engineering, the University of Hong

Kong. He received a BE in Electrical and Electronic Engineering and an

MSc(Eng) in Industrial Engineering and Industrial Management from the

University of Hong Kong in 1995 and 2000, respectively. His research focuses

on supply chain modelling and management in uncertain environment, and

applications of artificial intelligence in supply chains. He is a member of the

Institution of Electrical Engineers, a member of the Chartered Institute of

Marketing and a senior member of the Institute of Electrical and Electronics

Engineers.

Felix T.S. Chan received a BSc in Mechanical Engineering from Brighton

Polytechnic (now University), UK and received a PhD in Manufacturing

Engineering from the Imperial College of Science and Technology, University

of London, UK. Currently, he is an Associate Professor in the Department of

Industrial and Manufacturing Systems Engineering, The University of

Hong Kong. His current research interests are logistics and supply chain

management, distribution coordination, systems modelling and simulation,

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Is the RFID technology ready to integrate supply chain activities?

supplier selection. He is a senior member of the Society of Manufacturing

Engineers and a chartered member of the Chartered Institute of Logistics and

Transport in Hong Kong.

Introduction

Advances in information technology have changed the expectations for supply chain

management by introducing some breakthrough applications. Recently, the development

of wireless technologies with respect to inventory management has initiated another

opportunity for streamlining supply chain activities. These technologies, together with

associated intelligent software systems, could provide new and innovative ways to

operate supply chains. One of them is the Radio Frequency Identification (RFID)

technology. RFID technology is not a new technology – its origin could date back to the

1940s during the World War II for some military applications (Jones et al., 2004). At that

time, RFID was mainly used for aircraft identification but it is now being used to

improve supply chain management.

Nevertheless, little successful case studies could be found to demonstrate the

usefulness of RFID applications. In this connection, this paper aims to review the recent

development of RFID related supply chain applications and hence to suggest possible

ways of streamlining supply chain activities. The rest of this paper is organised as

follows: Section 2 presents the basic ideas of the RFID operations and the benefits and

limitations of RFID technology. Section 3 summarises recent development in supply

chain applications. Section 4 suggests how RFID can be applied to streamline supply

chain activities. Section 5 is the concluding section.

Basics of RFID

2.1 Principles of RFID operations

RFID technology belongs to the category that makes use of Radio Frequency (RF) signal

to identify individual objects (Jones et al., 2004). Generally, RFID systems consist of

three core components (Keskilammi et al., 2003):

a small electronic data carrying device called a tag (or a transponders –

transmitter and responder)

a reader or a scanner that communicates with the tag by using RF signals and

a host data processing system that contains information on the identified item

and distributes information to other remote data processing systems.

From technological point of view, RFID technology is not difficult to understand. The

operating principle of RFID is in fact nothing more than physics. The most basic RFID

system consists of a tag, which is made up of an electronic chip with a coil (which serves

as an antenna) and a reader that also equipped with an antenna. The reader sends out

RF signal that carries information and the RFID tags ‘couple’ the signal by the embedded

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H.K. Chan and F.T.S. Chan

antenna. The chip then demodulates the signal and takes corresponding actions. The tag

may then send back a signal to the reader, if necessary. In most cases, the data is

transferred to a host computer.

Regarding the attributes of RFID-based systems, Table 1 summarises the key

variables (e.g. frequency of operation) and selection criteria. Further details could be

referred to Finkenzeller’s handbook (2003).

Table 1

Attributes

Frequency of

operations

Attributes of RFID projects

Options

Low frequency (125 kHz or

134 kHz)

High frequency

(13.56 MHz)

Ultra-high frequency

(300 MHz to 1 GHz)

Types of tags

Passive

Active

Selection criteria

Short transmission range, low system cost

Medium transmission range, cost effective

for most applications

Long transmission range, the highest

systems cost

No power source (power up by induced

magnetic energy) and low cost

Carries its own power source and higher

cost, can send information voluntarily,

more flexible

Status does not need to be updated (e.g.

consumer goods for sales recording only)

Status needs to be updated (e.g. an item

goes through a series of process to be

identified)

Reading individual items, for example, for

sales recording

Reading a bulk packed items, for example,

counting how many goods on a pallet

Depends on the usage

Programmability

Read only

Read/write capable

Reading mode

Single item

Multiple items

Standards

ISO 18000-6

EPCglobal Generation 2

Others (e.g. not need a

standard for internal

process control)

2.2 Pros and Cons of RFID systems

Many reports in the literature have discussed the benefits and limitations of RFID

technology. Tables 2 and 3 summarise the benefits and limitations of RFID technology,

respectively. However, it should be noted that the scope of these two tables are limited to

the technology of RFID technology itself, not the benefits or limitations of any particular

RFID-based applications. From Table 2, it is obvious that RFID can not only replace

traditional barcode technology, but also provides value-added features and removes

some limitations of previous alternatives, like barcode (Want, 2004). On the other hand,

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Is the RFID technology ready to integrate supply chain activities?

among the limitations of RFID technology as listed in Table 3, cost and standardisation

are the most important issues to be addressed in applications of the RFID technology in

the industry.

Table 2

Benefits

No line of sight

scanning

Flexibility

Benefits of RFID technology

Discussions

Tags can be read without being visible to the reader, as long as they are

exposed to the coverage of a reader.

Since there is no line of sight requirement as above, tagged products

can be packaged in, for example, harsh fluid and chemical

environments and can be read in rough handling situations.

Tags can be read over very long range, especially those systems with

UHF frequency tags. This attribute is superior in mass logistic

applications which need a range of at least a metre and up to 4 or 5 m.

The speed of reading a tag is very fast. This is especially useful when

the items needing to be identified are moving quickly, for example, on

a conveyor in a production system.

A number of tagged items can be read at the same time in a short

period of time.

Performance of paper-based barcodes can be degraded easily subject to

the environment, for example, if they become wet. This is not an issue

that affects RFID tags.

Many tags are read/write capable, rather than read only, like barcodes.

In addition, tags with different memory sizes are available for various

applications which may need extra functionality. Of course, additional

cost is incurred for tags with higher memory size.

Long reading range

High speed of

reading a tag

Ability to read

multiple items

Durability

Programmability

Table 3

Limitations

Cost

Limitations of RFID technology

Discussions

Since the unit cost of a RFID tag is still high, it is still not appropriate to

use RFID tags as a direct replacement of barcodes without any other

value added business benefits. A simple breakeven analysis to show the

effect of high tags cost can be found in Section 2.2.

RF signal may be absorbed by moisture, be it in the product or the

environment and may be distorted or even absorbed by metal. This

means that tags might be unable to be read in some circumstances.

Tag collisions occur when two tags try to respond to the reader at the

same time while reader collisions occur when two neighbouring readers

interrogate a tag simultaneously and confuse it or when they ‘blind’

each other to the relatively weak tag responses (Sarma et al., 2001).

These problems require anticollision mechanisms to coordinate

behaviour between tags and readers.

RF transmission and communications may interference by electronic

noise (e.g. fluorescent light or electric motors).

Reliability

Tag and readers

collisions

Electrical

interference

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Table 3

H.K. Chan and F.T.S. Chan

Limitations of RFID technology (continued)

Discussions

RFID is not yet a 100% solution (Anderson, 2004). It can be difficult to

identify and read a specific tag from all the others that are within the

range of a reader.

There is a lack of standard govern RFID operations. An open system is

sought in order to ensure interoperability while the tags are moving

from one place to another place or even one country to another country

with the products.

The ability to write information to tags is one of the main benefits of

RFID technology. The mechanism, however, needs to be secure to

ensure that unauthorised parties are unable to write false information

into the tag. In addition, competitors may be able to retrieve sensitive

information from the tagged products. Therefore, security is an issue to

be tackled before an application can be phased in.

Some consumer groups have concerns about the possibly privacy

implications of RFID (Weis, 2004).

Limitations

Accuracy

Standard

Security

Privacy

With respect to the cost of RFID, a simple breakeven analysis can be used to reach the

conclusion that the tag is not a cost effective means to be applied at the item level for

consumer products, at least at this moment. Only using the tag in high value goods can

justify the cost of an extra tag. Since the profit of a certain product is the multiple of its

profit margin and consumption as given by Equation (1), this means that the profit

margin will be decreased at least by the tag cost if RFID technology is introduced.

Profit

before

Profit margin

Consumption

(1)

If the benefit is increased in sales, the total profit after introduction of the technology is

the multiple of the new profit margin and new consumption. According to Jones et al.

(2004), percentage increase in sales from pilot is 7% when RFID was used to improve

the inventory visibility on the shop-floor. Therefore, an estimation of 10% is used in the

following analysis which means new consumption is 1.1 times the original consumption.

Total profit after using RFID can be calculated by the following equation:

Profit

after

(Profit margin

−

Tag cost / Selling price)

(Consumption

1.1)

(2)

It is only reasonable to phase in RFID tag at item level if the profit after implementation

of the new technology is higher than the original profit. That is:

Profit

after

Profit

before

(3)

After simplifying the arithmetic operations, we can get the following inequality:

Tag cost

Selling price

Profit margin

(0.091)

(4)

At breakeven, the maximum allowable tag cost is equal to the right hand side of the

above inequality. If we assume that the profit margin is 10%, the relationship between

the tag cost and the selling price is plotted in Figure 1. It is obvious that for low cost

products (e.g. packaged consumer products in supermarket), the tag cost at this moment

is still too expensive and only high value product can be justified to use with RFID tag

at items levels. Of course, above calculation is just a very simple one, which assumes

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Is the RFID technology ready to integrate supply chain activities?

many factors to be constant before and after using RFID technology. However, it gives

an insight to us that RFID is not really a ‘cost effective’ means at this moment to track

products at item level.

Figure 1

Breakeven analysis of using RFID tag at items level

Regarding the standard of RFID operations, two leading parties are now working to

standardise RFID systems with the aim to achieve interoperability. One of them is the

International Standards Organization (ISO) as part of the ISO 18000 family, with the –6

group of documents dedicated to UHF operation (Glidden et al., 2004). The other one

was the Auto-ID Centre with labs at Massachusettes Institute of Technology and

Cambridge University. The centre has renamed as Auto-ID Labs (http://www.autoidlabs.

org), which was an organisation that recognised the potential of RFID in an early stage

and was attempting to overcome the barriers in developing RFID tags. The Auto-ID

centre’s goal was to develop the standards and protocols for RFID systems (Atock,

2003). The Centre has completed its work and transferred its technology to EPCglobal

(http://www.epcglobalinc.org) to promote worldwide acceptance of an Electronic

Produce Code (EPC) standard. EPCgloabl is a standard body in development of

industry-driven standards for the EPC to support the use of RFID. A 96-bit version

of EPC has been defined by the EPCglobal which can help to accelerate the adoption of

the technology.

2.3 Implications of the RFID technology

By looking at the characteristics, benefits and limitations of RFID systems as

summarised above, a short conclusion can be drawn for RFID systems as follows: RFID

system is in fact another type of information system that makes use of RF signal to

collect data and it is useful only if a proper tool is used to analyse the large amount

of collected data. Software solutions have to be developed to cope with the large

volume of data that RFID systems generate (Walko, 2004). On top of this principle,

if the technology can be deployed for in house applications only, the chance for

successful implementation will be raised. This is because the cost impact will certainly

be minimised if tags can be designed as reusable for internal usages. Also,

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H.K. Chan and F.T.S. Chan

non-standardisation of RFID operations (e.g. frequency) would not be a hurdle anymore

since the applications are not required to be used somewhere outside the factory.

Therefore, it is suggested that at this stage, applications of RFID technology should be

initiated for in house applications, rather than phasing it to streamline the whole supply

chain activities, which is too ambitious as an initial objective. As long as real benefits

can be gained from internal operations, the RFID-based systems can be spread out to

other inter-company activities.

Recent development in supply chain applications

The most well know supply chain applications are the mandates of Wal-Mark and the

US Department of Defence (DoD) (Byrne, 2004; Morgenroth and Fobes, 2004). The top

100 suppliers of Wal-Mark were required to place RFID tags on all its pallet and cases

by January 2005. The US DoD required all of its suppliers to put RFID tags on their

shipping pallets and cases also by January 2005. However, they are not the pioneers in

the application of RFID in industrial and supply chains. For example, Octopus card

system (http://www.octopus.com.hk), an electronic payment system using contactless

smart card and Autotoll (http://www.autotoll.com.hk), an electronic toll collection

system to identify registered cars which are equipped with RFID, in Hong Kong are

among the most successful and famous examples.

In the year 2000, Sainsbury rolled out RFID systems as a trial in tracking chilled

goods. Tags, which store product related information (e.g. expiry date), were applied to

recyclable plastic crates in its supply chain (Kärkkäinen, 2003). It was estimated that the

potential benefits for the company were 8.5 million (pounds) a year by reducing the

chance of out-of-stock situation. In 2003, Gillette, probably the first consumer goods

manufacturer in adopting RFID technology, placed a big order for RFID tags (Jones

et al., 2004). Gillette estimated that its sales would be increased by 15% if out-of-stock

situation could be reduced or even be eliminated, by the technology. In the same

year, Tesco announced that movement of its trays and cases were tracked by RFID

tags between its distribution centre and its stores (Jones et al., 2004). Then, Marks &

Spencer revealed that a trial with RFID tags had been conducted to men’s clothes

(Jones et al., 2004).

It can be observed from above mandates and trails that, a number of large players in

the industry are really interested in using RFID in order to streamline their operations

since the beginning of 2000s. This also led to some projections of exponential growth

and huge user benefits (Trebilcock, 2004). However, there are others players who would

prefer to slow down the pace in using RFID technology. A recent survey on retailers

indicated that capital of only 1.7% of the respondents would go towards RFID

in 2004, with 75.9% of respondents indicating no investment at all (Chain Store

Age, 2004). Moreover, 86.2% of retailers had allocated the same budget for RFID in

2004 as they spent in 2003, that is, the budget for RFID had not grown. Another survey

concluded that only 6% of the respondents had done a RFID project before

2004 (Trebilcock, 2004).

It seems that the survey results are surprising since RFID has been a hot topic both in

the academia and the industry in the past few years. If we look at the benefits of RFID as

summarised in Section 2, there is no question that RFID technology is a potential tool to

reduce labour and improve accuracy in many facets of supply chains. In fact, more

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Is the RFID technology ready to integrate supply chain activities?

applications like counterfeit protection (Staake et al., 2005), physical asset management

(Chow et al., 2006), asset management (Goodrum et al., 2006), etc., could be found in

recent years. However, no published studies could be found to support that RFID

provides greater gains than expenditures. Only pilots or trials results were available.

Since there are many intangible factors get involved in a RFID-based project, calculating

a precise return on investment may be impractical, if not impossible (Smart and Schaper,

2004). In fact, phasing in RFID is not risk-free. The most fundamental risk that many

firms have to overcome is simple and raised by Rappold (2003): “Are they prepared to

take advantage of the faster acquisition and transmittal of data that RFID promises?”

In other words, RFID technology itself is not the most important tool, how to handle the

information or data that are recorded by the technology should be the focal point of

future development in RFID-based supply chains applications. Middleware (e.g. legacy

or new information systems), which can filter unwanted information or data, by

incorporating with proper data mining techniques would be the essential research

direction in the near future.

How can RFID streamlines supply chain activities?

As in the Wal-Mark and US DoD mandates, RFID will not be applied at items level in

the near future. One reason behind this is due to the fact that the relatively high cost of

tags at this moment. The technology is still too costly for many consumer product

applications. However, the benefits of a RFID tag can still offer organisations with better

supply chain visibility and control over their security and assets such as inventory and

working capital. Below are some examples that how RFID can streamline supply chain

and logistics activities.

4.1 Inventory management

Since RFID scanning does not require line of sight, inventory is visible to the

middleware without human intervention for counting, even tags are applied at the pallets

or cases level. Therefore, inventory replenishment is easier than before if an intelligent

inventory tracking software is linked with the RFID system. Joint replenishment

schedule with suppliers is possible whenever the inventory falls below a threshold, the

middleware can generate a signal to the person-in-charge. The middleware can even send

the most updated inventory details to its suppliers. In fact, the principle can also be

extended to help Vendor Managed Inventory (VMI) systems.

VMI is an alternative to traditional order-based inventory replenishment practices

(Kaipia et al., 2002). The rationale of the VMI systems is to push stock back to the

upstream of the supply chain, usually the manufacturers or suppliers, who have the

responsibility and authority to manage the entire inventory replenishment process. RFID

technology is an enabler for manufacturers or suppliers to coordinate with their

customers for monitoring real time inventory level, both internal and external, in order to

define some policies to estimate the level of inventory at a particular period. In the past,

manufacturers or suppliers can only access customers’ sales information from orders.

With RFID, real time point of sales data is available and they can be retrieved through a

middleware. Trust or security issues can be resolved by incorporating the specifications

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H.K. Chan and F.T.S. Chan

in the middleware. In this connection, VMI should result in reduction in excessive stock

and reduce penalty cost due to late shipment. In other words, total supply chain costs

should be reduced.

These examples also show the importance of middleware – even if the inventory is

visible to you, you may not be able to take the next action if there is a lack of decision

making tool. Above applications can be implemented at pallets or cases level. However,

as mentioned before, it is too costly to attach a RFID tag with individual item.

4.2 Reverse logistics

Reverse logistics, which is a relatively new concept in supply chain management

(Dowlashahi, 2000),

“includes the processes of receiving returned goods, determining product

status (i.e., resale, repair, remanufacture, parts, scrap), and crediting customers

before either processing the material or taking back the product and its

packaging to deliver recyclable or reusable material to the manufacturer”

(Brockmann, 1999).

Since returned products/materials are usually not in a good condition, handling such

materials may waste a lot of labour, hence cost. If reverse logistics is found to be useful

between companies, it is worth to apply RFID tags as identification so the whole reverse

logistics process may run smoothly. For example, date of manufacturing of

returned materials can be traced back if life time is an issue for reuse. Even if the

returned materials are those rejected items, manufacturers can make use of RFID tags

to trace the date of manufacturing or process information that have been stored in the

tags so that process control or quality improvement actions can be analysed (e.g. track

quality problem due to seasonal environmental problems). These value added

activities can compensate the relatively high cost of the RFID tags. In addition, returned

tags can be reused, which can further lower the barrier of using RFID tags due to its

high cost.

4.3 Quality management

Regarding quality management as mentioned above, RFID tags can also be integrated

with ISO quality system. Since document traceability is a core ingredient of ISO quality

system, RFID tags can be used as a ‘stamp’ on each ‘valuable’ paper (like controlled

copy, work instructions, etc.,) so that maintenance of the system can be done

electronically. For example, once a document is revised, its tags can be ‘killed’ by a

command like the situation when a consumer buys a tagged item at the checkout counter

and the tag can be ‘killed’ by a device. In other words, only valid documents will

respond to the readers. Applying the tags can also improve quality assurance when a

production line is switched from one product to another product. In such case, a new set

of instructions and related documents are required. Since the documents are assigned

with unique number (analogue to the documents number with version number printed on

the document), valid documents on production line can be traced electronically. In other

words, no visual inspection is required for checking whether the documents on site are

matched with the process or not. In fact, the principle can be extended to any documents