Users betting big on RFID

Using technology to tighten supply chains.

BOSTON – Tire manufacturer Michelin carries about $1 billion in inventory at all times. Consumer packaged goods company Procter & Gamble spends between $50 million and $100 million per year reprocessing orders that contain inaccurate information. Executives at both companies say wireless inventory-control systems can help minimize these supply-chain inefficiencies.

“If we could get a 10% improvement, that’s $100 million in inventory,” James Micali, chairman and president of Michelin North America, told an audience of IT executives last week at a Forrester Research event in Boston.

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Michelin has been working on ways to embed radio frequency identification (RFID) tags – which combine a wireless chip and antenna – in its tires for passenger vehicles and small trucks. It’s been a challenge to find tags that can survive the high-temperature tire manufacturing process, but the French company is making progress, Micali said.

At P&G, RFID is part of a broad effort to reengineer the Cincinnati company’s supply-chain operations. Expanding markets, retailer consolidation and product customization requirements are complicating the supply chain and making it difficult to forecast demand, said R. Kerry Clark, president of global market development and business operations at P&G, at the Forrester event.

“We have probably twice as much inventory in the system as we really need,” Clark said. In addition, if P&G can cut its out-of-stock rate in half, that’s worth $1 billion in revenue, Clark said.

Outfitting product cases and pallets with RFID tags is part of P&G’s makeover plans. Each tag will be programmed with an electronic product code (ePC) identifier, which acts like a bar code, but is unique to a single item rather than a type of product.

For Michelin, there are internal and external factors behind its pursuit of RFID. The tire maker wants to improve its supply-chain operations to reduce the level of inventory it maintains. In addition, government regulations and customer edicts are compelling the company to change its processes.

On the regulatory front, new laws require Michelin to be able to track where its tires are deployed so that it can notify buyers in the event of a recall. Conceived after Firestone’s recall of about 14 million tires in 2000, the Transportation Recall, Enhancement, Accountability and Documentation Act requires vehicle and equipment makers to submit reports about consumer complaints, warranty claims and field reports to the National Highway Traffic Safety Administration.

On the sales front, retailers such as Wal-Mart – which is requiring its suppliers to deliver RFID-tagged shipments in 2006 – are putting pressure on manufacturers such as Michelin to get up to speed with the wireless technology or risk losing shelf space.

Compliance will not be easy or inexpensive. The prices of RFID tags and scanners to read the tags are just the beginning of what companies need to spend. To purchase the gear, integrate it with existing systems, and store and analyze the data collected by wireless systems will cost millions – at least $13 million to $23 million for a consumer packaged goods manufacturer that ships 50 million cases per year, AMR Research estimates.

Clark declined to share specific costs, but said P&G’s outlay so far has not been significant. He acknowledged the company would have to spend more when it begins to work on the systems for aggregating and disseminating RFID data. P&G will go live with a major RFID pilot in 2005, Clark said. By 2007, he estimates that half of P&G pallets and cases will carry ePCs.

To companies considering deploying RFID, Clark recommends being proactive in addressing RFID privacy concerns. Over the past several months, consumer concerns about possible misuse of RFID-collected data have derailed RFID pilots by retailers including Benetton and Wal-Mart. It’s best to be aggressive about educating consumers and sharing details about how information will be used, Clark said.

Micali said the cost for Michelin to develop its RFID systems is “more than one would like to admit” – and somewhere in the $60 million neighborhood.

Michelin’s RFID plans are not its first attempt to marry electronics and tires. It already uses wireless sensors for its commercial truck tires to measure and transmit data such as air pressure and temperature, resulting in longer tire life, less maintenance and lower fuel consumption, Micali said.