Bear Stearns Produces Most Comprehensive RFID Report to Date

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With the flood of RFID information on the market, my perspective was that most of it was fragmented, and difficult for potential users to really get their arms around what was happening. In a market moving this fast, that challenge will always be with us. However, the excellent supply chain analysts at Bear Stearns (Philip Ailing, Ed Wolfe) have just recently released what we believe is the best and more comprehensive RFID report to date. While the report was ultimately developed to support investment guidance for publicly traded technology-related companies that intersect with RFID opportunities, it nonetheless provides a wonderful summary (70+ pages) of the technology, market developments, and vendor solutions that will be of great interest to end users generally.

Some interesting highlights:

	Bear Stearns estimates Wal-Mart's top 125 suppliers will spend approximately $500 to meet the retailer's RFID compliance mandates, based on assumptions that it will cost between $200,000 to $250,000 per each of their warehouses to become fully compliant.
	In a recent "shippers survey," Bear Stearns found 9% of its survey group had already "decided" to invest in RFID. 35% were "more likely to invest in RFID" due to the Wal-Mart announcement, while 54% said the Wal-Mart announcement would not impact their RFID plans.
	Company investment continues to expand. "Our channel checks indicate that significant human resources (including key personnel) are being devoted to RFID within corporations."
	Some user updates: Abbot Labs is pilot testing the technology, using starter kits from several different companies; Georgia-Pacific has budgeted a "significant amount of money in 2004 for RFID piloting"; Kraft says it is likely it will roll out RFID first to "radio-frequency friendly" products packaged in paper/cardboard; Nestle will significantly expand pilot activity in 2004, and has been doing testing with Wal-Mart in its pet foods group; the United States Postal Service will begin aggressive testing of RFID to track and sort mail trays in early 2004; Boeing has been testing (albeit with free technology from vendors) RFID on airplane parts.
	Bear Stearns believes that Target will be the next major retailer to mandate RFID, though it views current deadlines (i.e., Wal-Mart's plans) as too aggressive.
	There is more going on in health care than I realized. In addition to numerous pilots, the FDA is actively involved in work to mandate pharmaceuticals coming in from overseas are RFID tagged, to protect against fraud and counterfeiting. Johnson & Johnson is planning on using anti-counterfeiting RFID technology as early as next year.

My sense from reading this report, in addition to simply enjoying having so much information in one place, is that the "chicken and egg" cycle that has always characterized the market ("we'd use more technology if the price/performance was much better"; "the price/performance would get better if only user volumes would increase") is starting to change, or at least that cycle is accelerating rapidly. That, of course, is what Wal-Mart is betting on, as they know the price/performance equation is untenable today.

But, Bear Stearns notes risks that could seriously impact RFID market growth. These include: Wal-Mart and/or the DoD delaying their mandates; RFID technology performance in the short term just isn't good enough; and that the expected ROI just doesn't materialize, in part because the job of integrating and using all the RFID data is bigger and more expensive than expected.

One last thought: Whatever the infrastructure costs for Wal-Mart's suppliers, the job of Target and other retailers will be much easier as they piggyback off this initial investment.

You can get the entire report by clicking on the link above.

What do you see as the biggest risks to RFID technology really taking off? Are Wal-Mart's expectations too aggressive (remember, we'll keep your comments anonymous if requested)? Let us know your thoughts.

CFO Magazine Article Says E-Commerce is Back in Style
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CFO magazine notes this month that quietly but consistently, e-commerce and even "dot coms" have been making a solid market comeback, to the point that " finance executives [should be] revisiting their dot-com strategies. Odd as it may sound, investing in Internet projects may make sense again."

The story notes that for the first time since the bubble burst, dot com companies can be seen actively advertising their services again.

What's happening? Well, a second wave of dot comers (e.g., QuickParts.com, RedEnvelop, Netflix) are having significant - and real - market success. Customers and businesses are becoming increasingly comfortable with on-line transactions - web-based consumer and business purchases continue their strong rise every quarter. The strong growth of consumer broadband and increased network bandwidth in corporations make the net experience more positive.

Suddenly, we're seeing strong growth again in dot com start-ups - and venture capital money is starting to come back in to support to them. Meanwhile, probably of most impact to the SCDigest audience, larger companies are again starting to look at emulating successful e-commerce models. For example, rumors out of Bentonville are that Wal-Mart will begin offering a web-based video rental service to compete with Netflix.

The article concludes with the following thoughts: "Certainly, there's growing evidence that E-commerce is on the cusp of a new era, one of innovation tempered by experience and rational expectations. 'There is no question that what was in place two or three years ago was flawed," says Nick Vidnovic [of Mellon Financial]. "But there were also a number of ideas that were pretty darn good.'"

Well, the reality is that corporate companies have been continuing to invest in web-based connectivity to trading partners even as the bubble burst, though with less fanfare. What is changing, I think, is that as the article notes, a combination of factors are leading to improved models for success in the consumer sector. What's clear is that e-commerce will continue to have a significant impact on supply chain processes and technology - and that again, as has really always been true, those companies that get it right and early will have competitive advantage. There will be Dell's in every industry.

Accenture Report Says More Companies are Outsourcing Procurement Functions
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According to a new report from Accenture, " Businesses are increasingly outsourcing part - or all - of their procurement functions to a growing number of third-party organizations known as procurement service providers, or PSPs."

So, what is a PSP? It's a services firm that integrates procurement technologies with product, sourcing, and supply management expertise, to provide outsourced procurement solutions. A PSP serves as an extension of an organization's existing procurement infrastructure, managing the processes and spending categories and procurement processes that the organization feels it has opportunities for improvement but lacks the internal expertise to manage effectively.

Some key data from the report, which was developed from surveys with companies in many industries and global geographies, include:

	While more companies today use PSPs for indirect materials than direct (production) materials (20% for indirect, 9% for indirect), 22% of manufacturers are considering PSP for direct goods.
	Which procurement functions are being outsourced to PSPs? In order of popularity: hosting of procurement technology solutions (e-procurement, auctions), execution of "procure to pay" processes, inventory management, and strategic sourcing.
	The biggest drivers of corporate use/consideration of PSPs? Allowing more time to focus on strategic sourcing, and to reduce transaction costs.
	Companies only use PSPs after gaining experience from outsourcing other functions (IT, logistics, manufacturing, etc.). No one starts with PSPs.
	Companies with experience with PSPs are generally satisfied, and plan to expand the scope of services their PSPs perform over the next few years.

Well, there's nothing that can't and won't be outsourced today. As few companies view procurement of indirect materials as a core competency, it's not surprising that many would consider outsourcing associated functions. Procurement of direct materials seems more tricky, in part because it's always been difficult to measure procurement effectiveness. Also, one wonders whether supplier integration, so fundamental to supply chain excellence, can be easily achieved when outsourcing procurement functions. I can easily see, however, companies striking strategic sourcing contracts internally, then using PSPs to execute the purchase order transactions.

Will we see more companies outsourcing procurement functions, especially for direct materials? What are the pros and cons of PSP? Does your company have experience? Let us know your thoughts.

Feedback of the week - "On Backhauling Best Practices"

This is a subject near and dear to my heart. Inbound freight management is a core staple of my business unit and we look to continue to increase the management of inbound freight. My business unit is also a 3PL company, servicing organizations outside of our own businesses where we have deployed our inbound best practices and strategies for those organizations as well. I applaud the efforts of these groups [FMI and GMA] to bring more collaboration and understanding to inbound freight management.

My team manages roughly 70% of inbound loads into our network and has done so for over seven years. Nearly 23% of this volume is managed as a true backhaul using our private fleet, and the balance is managed with a core contract carrier team. We currently manage inbound freight using many of the recommended processes and with "term and notices" obligations such as a one- year term of management with a 30-day notice for conversion. This process allows for ample time to source carriers, reposition equipment and meet delivery requirements. We also set an annual standard bid for all high volume lanes, and work this along with the supplier so not to de-leverage individual lanes, better known as "Cherry Picking".

We would prefer to take the entire ship-from location volume than to abandon less than desirable lanes, leaving that burden for the supplier to manage. Given that this is not a perfect world, we do have situations that arise forcing us to vary from these strategies, but overall, this process is the basis deployed for the vast majority of our system. I maintain that our success has come from a very open book, collaborative approach and am excited to see materials being published that support these strategies.

To answer your three points noted: Do shippers and customers need to make it easier to facilitate customer pick-ups? Should "lowest total landed cost" be the key metric in making this decision across parties? Do we need new technology to make this work better? Yes, Yes and perhaps. We already use Internet-native, state of the art TMS technology that significantly improves our process and ability to manage this business, over 72% of our inbound freight is "un-embedded" and many of our customers benefit from a lower landed cost with our services.

Vice President of Logistics