Schiff puts its money on RFID

It could have saved thousands of dollars by taking the "slap on RFID and ship" route, but vitamin-maker Schiff thinks its full-blown RFID project will have a bigger payoff in the end.

By John R. Johnson

If Rod Farrimond ever tires of his career in information technology, he should have no problem landing a job in sales—not after the coup he pulled off last spring. Farrimond works for Salt Lake City-based Schiff Nutrition International, a maker of vitamins and nutritional supplements, but his sales feat had nothing to do with multi-year contracts for Tiger's Milk bars or Glucosamine Gelcaps. What Farrimond pulled off was a feat of a whole other order of magnitude: He convinced management to sink nearly half a million dollars into a project that offered virtually no prospect of a conventional ROI.

The story began with a mandate from Wal-Mart. In March 2006, Schiff got word that if it wanted to continue doing business with the mega-retailer, it had until January 2007 to start putting RFID tags on the cases and pallets it ships to Wal-Mart's DCs. That created a dilemma for Schiff, which had yet to get started with RFID. It wasn't a question of whether or not to comply with the mandate (it would). It was a question of how deeply to get involved with RFID to accommodate a single customer whose business represented less than 1 percent of the company's total volume.

For many suppliers in Schiff 's position, the answer would have been obvious: slap and ship. They'd buy some tags, slap them on the shipments that required them, and hope for the best. But Farrimond, who is the company's manager of business analysis, rejected that idea from the start. Though slap and ship might be cheaper in the short term, he felt Schiff would be better off finding a scaleable solution that would allow it to meet similar requests from other customers down the road. (At press time, Schiff had been asked to start shipping RFID-tagged product to a Sam's Club DC in Desoto, Texas.)

As reasonable as that argument might sound, it would still be tough to sell to management. That main hurdle? Return on investment (ROI). Farrimond's back-of-an envelope calculations showed that only 180 of the 25,000 cases the company ships each week would require tags, which meant Schiff wouldn't see any operational savings right away. He'd have to persuade management that the payback would come elsewhere in the supply chain. As Farrimond puts it, "We're not going to see it come back in any hard form of ROI, but we believe it'll be there. RFID is a supply chain initiative, and ROI studies usually have a hard time dealing with the fact that the ROI may not come within your own four walls."

In meeting after meeting, Farrimond laid out his case. Schiff might not see savings in its operating costs for a while, but it would almost certainly see sales growth through a reduction in out-of-stocks and increased inventory turns at Wal-Mart. "When that occurs,"he notes,"then our top-line growth accelerates. It'll probably never be attributed directly to RFID, but it's good for the company. We had to talk long and hard to our executive team about why that's important."

The right stuff
In the end, Farrimond's arguments carried the day. Management gave the project the green light and approved a budget of $465,000 for the RFID initiative. But as the project got under way, Farrimond began to wonder whether pitching RFID to management might not have been the easy part. In a matter of months, he and his team would have to design a system from the ground up, choosing the tags, readers, and middleware that best met their requirements. There was the added pressure to get it right the first time because Schiff, a mid-sized company (it recorded $178 million in sales in 2006), didn't have the luxury of limitless funds.

Rather than try to design the system on his own, Farrimond decided to consult with the experts. Over the next few months, he made several trips to IBM's RFID testing lab in Raleigh, N.C., to get recommendations from the center's specialists and test different types of equipment. He wanted to find a solution that would work for both cases and pallets, including mixed pallets, and that wouldn't require wholesale changes to the DC's operations. For example, the system had to allow DC workers to stack cases on pallets the usual way without worrying about the orientation of the tags.

On top of that, the solution had to be fully scaleable. "Schiff wanted a solution that not only offered enhanced productivity, but was also interoperable with other supply chain partners, highly scaleable, and replicable for future customers and their unique specifications," says Scott Burroughs, middleware software solutions executive for IBM Software Group.

In just 12 weeks, specialists from IBM and systems integrator OATSystems helped Farrimond come up with a system that's able to read tags on mixed pallets containing over 100 cases with 100 percent accuracy. "We know that all the cases on that pallet actually belong there, and we are able to associate a certain pallet with a particular sales order, and we know everything about the sales order and all the EPC numbers that went with the sales order," says Farrimond. Eventually, Schiff will be able to use the data collected to create an electronic "pedigree" that can be used to document the products' movement throughout the supply chain, verifying their authenticity and deterring counterfeiters.

The company rolled out the RFID system in late October at its DC in Salt Lake City. After a two-week trial period, it shipped its first RFIDtagged pallet to Wal-Mart in mid-November. In January, it began shipping tagged cases (corrugated cases of plastic bottles containing tablets and capsules) to three RFID-enabled Wal-Mart DCs. Farrimond reports that Wal- Mart achieves read rates of about 96 percent at its DC, which is slightly better than the average read rates recorded by the retailer. Schiff currently tags six stock-keeping units (SKUs), but Farrimond expects to increase the number to 15 shortly.

As for the cost, the project came in 30 percent under budget. The company had allocated $465,000 for the RFID initiative; Farrimond and his team spent only $323,000.

The next act
Right now, Schiff is using its RFID system purely for compliance with Wal-Mart's mandate. But it soon will begin taking advantage of the technology in other ways. For example, the company plans to start attaching RFID tags to promotional displays bound for the sales floor at Sam's Club stores sometime this month. "We're talking about putting a 20-cent tag on a $1,000 display of products," says Farrimond, "and being able to make sure that pallet is out on the floor when it should be. That type of thing has an immediate payback."

In the meantime, Farrimond has begun to identify possible ways to integrate the technology into the company's internal operations as tag use becomes more widespread. For example, he foresees a day when Schiff will be able to use automatic RFID reads, rather than laborintensive bar-code scans, to collect data for advance ship notices (ASNs).

Eventually, Schiff will be able to use the data gleaned from RFID reads to trace inventory down to the store level. "That's where the real gold is, and we're helping them to mine that gold by capturing the data and analyzing it downstream," says Paul Cataldo, vice president of marketing at middleware provider OATSystems.

That tracing capability will enable Schiff to confirm that its deliveries have been received at customers' DCs, which will help resolve disputes in cases where, say, a retailer claims to have received only 58 of the 60 cases it ordered. "We can look at our information portal and start to look for those case reads if there is a discrepancy," says Farrimond."If we see all 60 case reads, we can tell them that either their hand count was wrong or something else happened. We'll have the ability to tell them what distribution center received them and which store they were shipped to."

An equal opportunity technology
Though small and mid-sized companies often assume that RFID is out of their reach, Schiff 's experience shows that it's not just for the giants, says Farrimond. "One reason we wanted to share this story," he says, "is to point out that if you are smart and do it well and get a good partner to implement with, then even small and medium-sized businesses can do this without damaging your profitability."

What they need to understand, he adds, is that the ROI is unlikely to come from the traditional sources (like operational savings) but rather, from increased revenues elsewhere in the supply chain. "You have to recognize that it's the supply chain that becomes more successful, and not necessarily [operations within] your four walls. The ROI will come when the supply chain is more efficient and you can sell more things or sell them faster. If people realize that this little company can do it for 1 percent of [its] volume, then maybe others will realize they can figure out how to do it as well."

John Johnson joined the DC Velocity team in March 2004. A veteran business journalist, John has over a dozen years of experience covering the supply chain field, including time as chief editor of Warehousing Management. In addition, he has covered the venture capital community and previously was a sports reporter covering professional and collegiate sports in the Boston area. John served as senior editor and chief editor of DC Velocity until April 2008.
More articles by John R. Johnson

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