The impact of RFID and EPC network on the bullwhip effect in the Italian FMCG supply chain

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Abstract

This paper provides a quantitative assessment of the potential reduction in the bullwhip effect, and thus in safety stocks, in the supply chain, thanks to real-time visibility of product flows provided by the Radio Frequency Identification (RFID) technology and the EPC Network. The assessment is grounded on a “representative” Italian Fast Moving Consumer Goods (FMCG) supply chain; specifically, the “representative” supply chain is composed of three echelons, namely manufacturers, distributors and retailers of FMCG, whose main features, in terms of both quantitative and qualitative data, were derived through an appropriate survey phase. Reduction of safety stocks is determined based on quantitative methodologies available in the scientific literature. The results of the assessment show that real-time visibility of the supply chain, brought in by RFID and the EPC Network, can dramatically reduce the bullwhip effect, substantially affecting the economical profitability of the whole FMCG supply chain.

Introduction

Radio Frequency Identification (RFID) is the use of an object (typically referred to as an RFID tag), applied to or incorporated into a product, for the purpose of identification and tracking, using radio waves. There are several ways of identifying items using RFID, but most systems consist of two parts. One is an integrated circuit for storing and processing information, modulating and demodulating a radio frequency signal; the second is an antenna for receiving and transmitting the signal.

Product data are stored into the tag chip in form of an Electronic Product Code (EPC). EPC standards have been developed by the Auto-ID Center, a partnership founded in 1999 by five leading research universities and nearly 100 leading retailers, consumer products makers and software companies (Niemeyer et al., 2003). EPC data of products are then passed to and shared through the EPC Network, which, according to EPCGlobal (2004), is “a way of leveraging the internet to access a large amount of logistics information that can be shared among authorized partners”. Once EPC data are collected by reading RFID tags of cases and pallets, EPC numbers become secure data on companies’ middleware.

Today, RFID is widely used in enterprise supply chain management to improve the efficiency of inventory tracking and management. In the logistics pipeline, RFID technology is expected to have a major impact on the efficiency of the whole supply chain. Commonly quoted benefits of RFID encompass increased processes automation, enhanced labour efficiency and better accuracy of logistics processes (Agarwal, 2001; Prater et al., 2005). There are several reasons for this diffusion, such as the capability of RFID tags to provide more information about products than traditional barcodes, as well as to avoid manual operations required to read them (Boxall, 2000; Bylinsky, 2000; Jones, 1999; Moore, 1999), thus improving process automation (Jones et al., 2004; Karkkainen, 2003).

Exploiting the EPC Network for data sharing enables users to find on the internet data related to a specific EPC and to gain access and retrieve those data. Through real-time data sharing, companies have broad and plain visibility over logistic flows and can leverage this information to optimize logistics processes and supply chain management. In the context of grocery retailing, the availability of real-time information throughout the supply chain is regarded as the main benefit of a wide employment of RFID technology EPC Network (Prater et al., 2005). Additional outcomes of RFID deployment can be found in increased inventory visibility, stock-out and safety stocks reduction, real-time access and update of store inventory levels, automated Proof Of Delivery (POD) (Fernie, 1994), availability of accurate Points Of Sale (POS) data and better control of the whole supply chain (Bushnell, 2000).

The earliness of sharing information is recognised to significantly improve supply chain performance (Karaesmen et al., 2002), while delays in information sharing are often identified as one of the major causes of the bullwhip effect (Hong-Minh et al., 2000). RFID technology, coupled with the EPC Network, enables the real-time exchange of necessary information between supply chain players, thus solving issues related to lack of communication (Asif and Mandviwalla, 2005; Lin, 2009). This is why RFID technology and the EPC system are also suggested as viable tools to reduce the overall supply chain inventory waste caused by the bullwhip effect (Lapide, 2004; Alinean, 2006). However, although RFID is expected to reduce costs, research indicates that RFID solutions may not be economically profitable (Becker et al., 2009; Fosso Wamba et al., 2008); carrying out a quantitative assessment of RFID impact on supply chain costs can provide valuable findings in this regard.

On the basis of the above premise, the purpose of this paper is to quantify the potential of RFID technology and the EPC Network in reducing the bullwhip effect, and thus safety stocks, in the Italian Fast Moving Consumer Goods (FMCG) supply chain. The paper is organized as follows. In the next section, the bullwhip effect is briefly described, together with available studies that assess the impact of automatic identification technology on the bullwhip effect and inventory management. In Section 3, after an overview of the case being examined and of the methodology followed for data collection, we quantify the impact of RFID technology and the EPC Network for safety stocks reduction for the FMCG supply chain. Concluding remarks and future research directions are finally proposed.

Section snippets

The bullwhip effect: overview and quantitative models

Lee et al. (2004a), define the bullwhip effect as a phenomenon where orders to the supplier tend to have a larger variance than sales to the buyer, and the distortion propagates upstream in an amplified form. The bullwhip effect involves both demand distortion and variance amplification moving upstream the supply chain. Such effects were first demonstrated by Forrester (1961) and are currently observed in several supply chains (see Lee et al., 2004b; Geary et al., 2006, for several examples).

The Italian FMCG supply chain and the data collection phase

The quantitative assessment of the impact of RFID technology and the EPC Network on the bullwhip effect is grounded on a “representative” Italian FMCG supply chain. A scheme of the supply chain investigated is provided in Fig. 1.

The data related to the supply chain considered is this paper were derived from previous research by Bottani and Rizzi (2008) in the field of FMCG.1

Conclusions

Many authors have discussed the expected impact of RFID technology and the EPC Network on supply chain dynamics and related cost savings; however, quantitative assessments of the economical results of their adoption are limited. Our work contributes to the literature in that it has presented a quantitative assessment of bullwhip effect reduction achievable thanks to real-time data sharing and visibility provided by RFID and EPC implementation in the Italian FMCG supply chain. The analytical

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