SCM - Case analysis on

RFID at the METRO group

Sec B Group 6 | Anjani Kumar | Nikhil Narayan | Pavan Kumar Gathala | Pradeep Kumar | Rajagopalan S | Vivek Krishnan | Vishwas TM

Company
A wholesale business serving commercial customers Founded in 1964 by Otto Beisheim and company went public in 1996 In 1996, Company merged its cash and carry operations with its retail holdings into one holding company, The METRO group Company operated in more than 2300 locations in 30 countries It was organized around 6 independent sales divisions Cash and carry (wholesale), Real (hypermarkets), Extra (supermarkets), Media Markt and Saturn (consumer electronics) and two other divisions

The flow of Goods

Pallets are sent by truck to Metro owned DCs or Stores

A typical Extra Store received 24 to 26 pallets per week from Metro DCs

Packed items into Cases and then put on pallets. These pallets were stored either in Plant Warehouse or Manufacturers DC

Here, at Metro DC, Pallets are normally repacked into Mixed pallets

Final sales point. Store Employees opened the pallets and transferred the cases to the selling floor

Factors that contribute to in-store logistics problem

Logistics Problems in Grocery Retailing 1 Shrinkage Problems either by store employees or by customers Out of stock Products not available in the shelf and also in the Backroom of the store Products not available in the shelf but available in the stores backroom Inventory Carrying and holding costs Low Productivity and labour efficiencies Demand Handling - High no of SKUs- Makes prediction more difficult High Warehouse and Distribution costs High Transportation Costs Promotion Compliance

3 4 5 6 7 8

Problem Reduction from Case and pallet level RFID

 Reducing Shrink in the supply chain  Improved On-Shelf Availability and Reducing Out of Stocks  Improving Planogram and Promotion Compliance Productivity and Labour Efficiencies Increase Customer Service level Increase Fill rate Reduced Lead time Both Manufacturers and Retailers are benefitted as Demand variability is reduced Total Supply Chain Surplus is increased

Process improvement with implementation of RFID at Metro

Potential Benefits
 Improving labor productivity through automating processes conducted manually  Replacing existing processes with more efficient ones  Reduction of inventory counts  Improved Product availability

Using Pallet level to improve Truck loading process

 With RFID, truck driver could automatically check the identity of a pallet No Manual Scanning  No need of Supervision of entire loading process  10 minutes of supervising time for each of the 15 trucks leaving the warehouse everyday. Euro 0.2 per pallet shipped is saved

Process improvement with implementation of RFID at Metro

Using case level to improve Mixed Pallet picking
 The picker no longer have to manually enter the number of cases picked  4 minutes is saved for every 1300 pallets picked per day  A cost of euro 0.017 per case is saved  Reduced picking errors, warehouse employees no longer have to check the pallets

Using case level to improve shelf Restocking

 RFID would improve in-stock rate from 96% to 98% due to improved replenishment and reduction of picking errors  This would lead to a 0.5% increase in store sales  Profit would increase by euro 0.5 per additional product sold  Efficiency improvement, theft reduction and improvement of product availability

Is RFID a Good Investment for Metro? (1/5)

Cost Savings for Case Level RFID Tagging
For Metro Labour Productivity Labour Productivity Labour Productivity Labour Productivity Shipment Accuracy Product availbility Shrinkage Elimination of counting in receiving goods Labour reduction in picking mixed pallets Elimination of sample checks of mixed pallets Reduction of Inventory Counts Reduction of mispicked cases Increased profit from better on-shelf status Reduction in Shrinkage Total Saving Total Saving per month per store Total Saving per year per store (Euros) Total Savings for Metro (Euros) Total Costs for Metro (Euros)
*Considered 250 stores and 10 warehouses

Cents 0.30 1.70 0.30 0.10 1.50 5.00 0.60 9.50 91,200.00 10,944.00 27,36,000.00 59,80,000.00

Is RFID a Good Investment for Metro? (2/5)

Cost Savings for Pallet Level RFID Tagging
For Metro Cents

Labour Productivity

Automating bar code scans in receiving and storing pallets Automating bar code scans in order assembly for store shipment Truck Loading for store shipment Total Saving per pallet Total Saving per month per store Total Saving per year per store (Euros) Total Savings for Metro (Euros) Total Costs for Metro (Euros)

11.20

Labour Productivity Labour Productivity

2.80 1.70 15.70 2,47,275.00 29,673.00 2,96,730.00 2,30,000.00

Is RFID a Good Investment for Metro? (3/5)

2004 Total Savings witnessed Total Costs 59,80,000.00 -59,80,000.00 27,36,000.00 28,72,800.00 30,16,440.00 31,67,262.00 33,25,625.10 2005 27,36,000.00 2006 28,72,800.00 2007 30,16,440.00 2008 31,67,262.00 2009 33,25,625.10

Total Cash Flow for Case tagging

Total Present Value at 10% discount rate 53,76,017.72

2004 Total savings witnessed Total Costs 2,30,000.00 -2,30,000.00

2005 2,96,730.00

2006 3,11,566.50

2007 3,27,144.83

2008 3,43,502.07

2009 3,60,677.17

Total Cash Flow for Pallet tagging

2,96,730.00

3,11,566.50

3,27,144.83

3,43,502.07

3,60,677.17

Total Present Value at 10% discount rate

10,01,604.95

Is RFID a Good Investment for Metro? (4/5)

Cash Flows Case Vs Pallet
4,000,000.00

2,000,000.00

2004 2005 2006 2007 2008 2009 Total Cash Flow for Case tagging -2,000,000.00 Total Cash Flow for Pallet tagging

-4,000,000.00

-6,000,000.00

-8,000,000.00

Is RFID a Good Investment for Metro? (5/5)

RFID is a Good Investment for Metro, because with this technology they can reduce shrink and other benefits are increased product availability, better data quality and higher labor productivity Metro can earn savings of 296K million per year if RFID is implemented at pallet level tagging Net present value of this project over 5 years is 1 million using pallet-level tagging and 5.3 million using case-level tagging Metro should implement RFID using case-level tagging so that it can earn more savings with better service

Analyzing the options

Limited launch of RFID was the right move  New IT implementations are extremely difficult and it is often impossible to foresee all of the possible problems  By doing small test cases and rolling out RFID to only a few supplier they greatly increased their chance of success Company did a nice job of getting full "buy in" by top management  The RFID implementation would definitely take several years and if top management did not fully buy in then support for the project would begin to wane Company did a nice job of doing research to immediately substantiate their benefits of RFID.  This research helped to prove the merits of the project. Furthermore, because they did research internally and through outside consultants, the benefits of RFID could proven and authenticated.

Analyzing the options

Stop RFID and focus on Traditional method
 Shrinkage may not be reduced with traditional methods  On shelf availability and out of stocks can be improved but overhead increases. Retailer may not be ready to share sales data with manufacturer  Metros objective is to increase in-stock rate from 96% to 98%. Achieving this with traditional methods may be a problem

Expand the Scope of current Pallet level RFID roll out

 Second generation tags would be available and Metro wanted to replace older model  These Gen 2 tags would have one global standard, offered improved read rates and were cheaper  However, Metro had to replace existing readers with new ones compatible to new tags

Recommendation: Case Level RFID

Pros
Since the overall savings increases in case level RFID, we suggest Metro to do a pilot study with case level RFID  Based on the learnings in pilot study, it can go on a full scale implementation of case level RFID

Cons
Lot more involvement from both manufacturers and metro Manufacturers have to purchase more tags Manufacturers have to change processes inside their plants Read rates may not be 100% Data storage in IT systems needs to be changed Metro has to invest in training at its stores and DCs

Thank You