The strange tale of RFID technology and supply chain finance

Radio Frequency Identification (RFID) has been around for decades, and has appeared to be the “it” app for transforming supply chains by enabling real-time data feedback at a container, pallet, case and even individual-item level.

The journey of RFID in the consumer packaged goods to retail supply chain has been, from visions of supply chain transformation to now, a very slow crawl.  In 1999, a trio of academics founded the Auto ID Center at MIT, which focused on a new path for RFID technology. In June 2003, Walmart made its first announcement about its planned supplier EPC tagging program, which started something of a frenzy.  However, Walmart and others found it was an uphill battle to get suppliers to adopt the technology. Also at that time, tags were still quite expensive, the technology was hard to implement, requiring specialized RF engineering expertise (which was in short supply), and standards were not mature. As a result, growth was anemic until about three years ago. Throughout the 2000s, some retailers had been experimenting with tagging items, instead of cases and pallets. They discovered they could improve store-SKU inventory accuracies dramatically (from typical 60 percent-85 percent to 98 percent-99 percent or higher), resulting in a significant reduction in out-of-stock rates, and a sales uplift that provided a healthy ROI. As a result, last year over 2 billion apparel items were tagged with RFID, and that number is expected to grow at 30 percent CAGR or more for several years to come (source ChainLink Research). However, the bulk of that growth is not using RFID in the supply chain, but only in the store.

I have always wondered how this technology could transform the way finance is done in the supply chain. With the ability to not only track inventory, but in some cases, assess its condition (temperature within proper range, vibrations, etc.), it sounded like a perfect solution to help control risk. Of course there is this issue of accounting, ownership of receivables, etc., but lets leave that for another day. I sat in on a recent webinar from the folks at ChainLink Research to see if anything new was coming down the pipeline. Bill McBeath, the organization's chief research officer, has been doing good work in this space for awhile. I asked him his thoughts on this, and in particular, the 3 key stages where finance can step in:

1) Pre-export: supplier receives financing based on firm order, before it has actually shipped the goods
2) Post-export: supplier receives financing after it has shipped the goods, but before the invoice is approved
3) Receivables financing: financing based on selling receivables

Bill commented,

"Of these 3 stages, the place RFID seems potentially most useful is No. 2, although there are use cases I can imagine in 1 and 3 as well.  I think the theoretical use case is something like this – the lender agrees to lend money to the supplier after certain conditions are met. Typically these conditions are verified by the presentation of some documentation to the lender (hopefully these days in electronic form rather than paper).  In theory, RFID could be used in place of some portion of that documentation to verify certain conditions have been met, typically that a shipment has arrive at a certain point, for example RFID tags affixed to the items, case, pallet, or container in question are read by a reader at a port or distribution center or other hand-off point in the chain that triggers approval of funding. Some RFID tags also have sensors, such as temperature sensors/loggers, or shock and vibration sensor/loggers. In theory, part of the condition of payment might be that the goods were not subject to temperatures or shocks outside a certain range."

While there are some people tracking containers through supply chains using RFID on the containers (mostly it’s the military doing that), and a handful of companies using RFID for temperature tracking (mostly food and pharma) both Bill and I don’t know of cases where it is being used to trigger financing events.

Bill told me he thinks there are a few (but very few) companies using RFID for electronic proof-of-delivery (ePOD). The driver delivers a shipment to some facility, scans the packages, and the receiving person signs on a tablet. The scan of the shipment is most commonly done using a barcode scanner, but it could be scanned using RFID if all packages are RFID-tagged. The ePOD is transmitted back to the vendor, triggering an invoice. It’s not really supply chain finance, but RFID is playing a role in facilitating the proof-of-delivery notification, and triggering the title transfer and invoicing.

While proven cases of RFID success abound for asset tracking (containers, raw materials, etc.), and item-level control and innovation continues to drive both costs lower (including more cloud solutions) with more applications, the reality is supply chain finance (other than the simple ePOD use case above) does not appear to be on the horizon anytime soon.

If you’re interested in learning more about RFID, ChainLink has a pretty rich set of research reports on their site at no charge.





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