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6/7/2005
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RFID To The Rescue

If ever there was an industry that has boomed thanks to globalization, it's shipping, logistics, and transportation. Overseas shipping now accounts for more than 90% of worldwide trade, with 95% of all U.S. cargo passing through the nation's 361 ports, according to a new report from A.T. Kearney. But navigating the "tangle of containers, ports, carriers, customs, and security checkpoints" is a tough nut to crack. Can RFID meet the challenge?

If ever there was an industry that has boomed thanks to globalization, it's shipping, logistics, and transportation. Overseas shipping now accounts for more than 90% of worldwide trade, with 95% of all U.S. cargo passing through the nation's 361 ports, according to a new report from A.T. Kearney. "It is a tangle of containers, ports, carriers, customs, and security checkpoints that confounds the goals of simplicity and visibility, not to mention security, in the supply chain," writes Omar Hijazi, a principal at the consulting firm and the report's author.

His report, based on interviews with senior-level supply-chain and logistics executives at most of the top 100 importing and top 100 exporting companies, postulates that if companies are to deal effectively with this challenge, it'll be with radio-frequency identification (RFID) tags. In this Q&A with contributing Web editor Howard Baldwin, Hijazi talks about how executives are tackling transportation tribulations.

Q: What was the biggest surprise you had in compiling this report?

A: A lot of the executives seem to have neglected the international side of supply-chain operations. Over the last few years, security has escalated everyone's focus, at the same time that people are sourcing more overseas than ever before. We thought we'd get a lukewarm response on these issues, but we were surprised at how heightened everyone's concerns are now. We got the feeling that concern has been bubbling up for a while, but homeland-security legislation and mandates don't seem to have caught up with corporate America yet. It would be a big deal for a prominent consumer company to be involved in a terrorist disaster, so we were surprised that they hadn't worked through how to tackle security issues.

People haven't implemented plans to mitigate risk, and that surprised us. We approached it from a supply-chain perspective, and then looked at effectiveness and efficiency. The message came back: Unless they can do both security and efficiency, nobody's interested in doing anything. Department of Homeland Security Secretary Michael Chertoff spoke in Brussels last month about his vision for "a technologically based system of security envelopes" that would represent a systematic approach to screening on both sides of the Atlantic using technological resources. But corporate America seemed frustrated because they didn't know how to approach this goal. Now technologies are starting to show up to alleviate this pain.

Q: What's the next step?

A: It's a matter of having a good business case to change practices. It's not just security for security's sake; it's also risk management. From the supply-chain operations standpoint, you need solutions for both security and operations, and they haven't been available. But now both the solutions industry and vendors are catching up to what corporate America needs.

Q: You're speaking of RFID. Are costs coming down?

A: They are. The issue is that the scale hasn't yet met expectations. There are two worlds in RFID: passive and active. [Active RFID tags can transmit specific data or instructions to a reader; a passive tag must be read.] The passive tags are the ones that Wal-Mart is asking suppliers to use. They're still about 25 cents each. They used to be $2 apiece, but everyone hopes they'll get down to a couple of cents. There are still a lot of technical issues with passive tags—for instance, they can't quickly read through liquids and metals.

The application speed hasn't caught up to the bar-code technology. A consumer packaged-goods company, such as Dole Foods or Pepsico, needs to process thousands of cans in seconds, and there's no technology that works as fast as bar codes today. The technology has to mature before huge orders come in, and when that happens, the costs will go down. Even Wal-Mart is setting more reasonable targets. It had wanted its top 100 suppliers to be ready by now, but it has ratcheted down its requirements to specific geographies and product categories.

Active tags, the technology used for cargo containers, are being tested in the Middle East. The U.S. Department of Defense had tremendous problems with logistics in the first Gulf War. Soldiers triple-ordered supplies in the hope that one of the shipments would arrive on time; they called it "just-in-case logistics" instead of "just-in-time." With active tags, they've reduced the number of shipments by 80% compared with the first Gulf War. The thing about the DOD, though, is that it's not cost-sensitive. So the technology has worked out, but now the onus is on solution providers to commercialize it for corporate America.

Q: What changes will RFID bring to the supply chain in terms of speed, information, and security?

A: I think the most important one is transparency, especially in the transoceanic supply chain. A hodgepodge of international companies makes up the supply chain: Shipping companies, ship owners, the carriers that move the cargo, port authorities, and land transporters are involved. A lot of them move cargo around at different levels of efficiency and service. It's difficult to track a container from its point of origin to its point of destination because so many authorities handle it between the time it leaves Guangdong [China] and the time it arrives in Long Beach [Calif.]. And if a shipment is misrouted, where's the assignment of liability?

With RFID, the entire history of the container from the point of origin forward is captured on the container itself. You'll know how long it spent in Guangdong, how long it spent in Dubai [United Arab Emirates], how long it spent in Antwerp [Belgium]. The manifest information is associated with the container. That's efficiency and transparency. Some companies are resisting because they fear the transparency would expose their inefficiencies. They can say there was a delay at the Dubai port authority, but you'll know the truth because the tag will tell you when the container left the ship and when it went through customs.

Also, if a container is delayed or misrouted, you'll know immediately because you'll be able to track it. You can be proactive in addressing inefficiencies. Otherwise, it would arrive at the wrong port before you could put it back on track. Those that are efficient and effective in their logistics will now have proof that they're providing a higher level of service. Some supply-chain executives are thinking of building this requirement into their requests for proposals.

Finally, there are sensors associated with the container that interact with the tag. From a security standpoint, you can know whether it's been tampered with. If you're Starbucks, you're concerned about temperature and humidity, and these sensors can record that.

Q: What changes will RFID bring in the future?

A: As the technology matures, the sensing technology will mature with it. The industry will combine active and passive tags for both kinds of visibility. Every container will have an RFID tag, as will the individual cases and palettes. All of a sudden, you can read and track everything. In five years, you'll be able to pass a container through a set of readers, whether it's in a port or on a freeway. You can track the truck, the shipment, and the cargo. The administrative burden of tracking things in the supply chain will become a moot point. It'll be basic technology. You'll know where cargo is and how long it will take to arrive at its destination. And unless there's a mechanical failure, the administrative overhead will be small.

Q: What are your thoughts about the Luddites who think RFID will be used to spy on us?

A: A big mistake was made with the first tests of RFID tags. They were done with shaving razors. Photos were taken of the people who picked up the item, and then matched with the people who left the store with the razors. That was poor marketing, and that's where people got the idea they'll be spied on.

But in Japan, they have RFID bracelets for school children. In hospitals, they use RFID on patients' bracelets so they get the right dosages of drugs. Once you hear more glowing stories about RFID, people will associate it with something beneficial rather than with Big Brother. You'll see higher adoption in foreign countries first, and consumers will realize that the benefits far outweigh the risk.

Feedback question: Tell us whether RFID is making your supply chain more efficient.

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