RFID and Lean Management

RFID can be a powerful tool in helping lean management initiatives, which can lead to important competitive advantages. Guest authors Chris Hanebeck and Pat Boutier explore this unique use of RFID, and provide real-world examples.

Guest Column – By Chris Hanebeck and Pat Boutier

Over the past few months, we have repeatedly argued that RFID is mainly a technology that leads to new business process capabilities with greater efficiencies, enabling task performance previously thought impossible. The specific relationship between new technologies and process innovation certainly lies at the heart of this argument. What has been less explored to date however, is the ability to leverage RFID technology in the broader context of corporate improvement initiatives. Here we see a number of interesting intersections between RFID technology and methodologies such as Six Sigma, Continuous Process Improvement (CPI) and Lean. Lean holds much promise in that it is focused on the creation of value for customers, the strict elimination of waste within business processes and on generating higher profits for companies.

What is highly interesting is that most technologies have a limited lifespan in the context of their benefits capture. In our discussion of best practices (see “RFID Best Practices”), we stated that RFID technology will only bring competitive advantage to those companies which, early on, successfully explore its potential and possibilities. We believe this to be true from the perspective that when all companies in an industry have gained similar advantages through RFID, then none holds a competitive advantage over the others. Conversely, those who quickly innovate through new technologies within an industry will realize cost savings and other efficiencies that other competitors may not yet possess. It is in this light that we investigate Lean as a means to implement a process of successive innovation which can be ignited by RFID implementations. In essence, if companies can leverage management methodologies to continue process innovation past an initial RFID project, then there may be opportunities to retain and secure competitive advantages that would otherwise diminish over time.

History of Lean – Focus on Waste Reduction
To gain an understanding of Lean, we need to go back to its origins in the mid 1930s. The basic methodology began at Toyota when the company moved from textile production into automotive manufacturing. Since these early days Toyota has gradually evolved its approach to continuous improvement based on many diverse influences that range from coping with the aftermath of WW II to observations about what led to the long phase of American mid-century prosperity. It wasn’t until the 1980s however that the concept was introduced in North American by MIT and became known as Lean. The main ideas within Lean still rest on insights gained through the famed Toyota Production System (TPS). Initially the TPS approach focused on the elimination of seven wasteful activities (Jap. “Muda”), a few of which include transportation, inventory and resource inefficiencies. From there, Lean evolved to cover virtually all business processes and industries.

On a strategic level, lean organizations continuously aim to understand customer value and improve their key processes by removing or at least diminishing wasteful activities. The goals of a lean organization therefore are to continuously learn how to identify waste and reduce or eliminate it, focusing on the flow of products to the customers. Attaining these goals however is not the only point of Lean. Rather, continuously moving towards those goals to improve the speed in with which value is brought to the customer is the key. Organizations thereby generate increasing returns which not only provide the necessary funds for further improvements but also lead to higher shareholder value. In essence Lean thinking, when stringently implemented, enables companies to persistently stay ahead of their competition by maintaining levels of increasing efficiency and customer satisfaction, which lead to the aforementioned lead in competitive advantage.

RFID as a Lean Enabler
However, here lies a crucial problem: typically efficiency is attained at diminishing returns. The more efficient a company is, the less can be gained through the additional application of resources to reach new levels of efficiency. In other words, highly efficient companies often have trouble furthering improvement in their business processes while finding they need to spend large amounts of resources on maintaining a high level of performance. A good example of this is a very large US corporation which has been a highly efficient, well managed organization for many years. When the company reached a point where further efficiencies became too expensive to attain by way of business process improvements and where financial returns from these initiatives continued to decrease, management turned to an interesting alternative: they sought a new, second level of efficiency instead. This was accomplished not through improvements of existing technologies and processes, but rather through the introduction of a new capability, namely the real-time management of products and resources in flow. The underlying technology the company chose was RFID for its ability to create near real-time visibility on a very granular level. It is essential that management not only knows where products are and where they are moving, but more importantly that they can react in near real-time to developments and events as they take place. This requires not just RFID technology, but also much more sophisticated software capabilities through reliable filtering of relevant business events. Taking business processes from their current to a new level of performance certainly is no small feat and it will likely take years before the company realizes the full potential of such improvements. However, not doing so may eventually endanger its current industry leadership position. In the light of our discussion, this is a good example of how RFID technology can be leveraged to enhance continuous process improvement initiatives based on Lean.

Of course, there are many other ways in which RFID technology fits well into the framework of Lean thinking. The ability to look at systemic effects for example is necessary to accomplish overall optimization. Historical improvement theory and financial measurements often drive companies to improve individual and equipment efficiencies. Isolated measures however leave many aspects of improvement untouched and most importantly may negatively affect the flow of products. In Lean the corresponding principle is called “system efficiency” and states that management should change from optimizing separate technologies, assets and departments to optimizing the flow of product e.g. goods, information or services through the entire value stream to customers. This thought has also taken root in many RFID initiatives through the view of optimizing supply chains as a whole rather than as isolated nodes. Collaboration and data sharing within RFID implementations are two key concepts that often come up in this context. One such example is Killdeer Mountain Manufacturing, a Boeing supplier, which has recently implemented a RFID-based replenishment system so that it only manufactures a part when Boeing actually needs it. Learning to see and eliminate waste along entire value streams, instead of at isolated points, ultimately creates processes that require less human effort, less space, less capital, and less time to accomplish tasks at a lower cost and with fewer defects compared to traditional business systems. When a company looks at the total time it takes to react to customer demand and then decreases it, this creates the ability to handle a higher variety (read: flexibility) at a lower cost. This, of course, is highly interesting when flexibility translates into lower inventories and faster reaction to changes in market demand. RFID implementations often strive for the same or similar results and we have seen many projects where visibility has led to increased flexibility already.

We had discussed some of these effects already in the light of leveraging RFID technology for business process improvements. Given that wasteful activities are those which do not contribute directly to the value creation as perceived by the customer, we can apply RFID technology to processes in a way that exposes inefficiency through performance metrics and allows for secondary optimization within an organization (see “RFID and Business Processes”). An instructive example is that of an industrial goods manufacturer which measured the performance of its manufacturing operations by output only. The company basically looked at how many units of product were completed in a given time period to assess tangible rewards for manufacturing employees. Due to constant parts shortages, this persistence on a single metric eventually led the manufacturing team to remove parts from finished products in order to place them in new ones coming down the line. Naturally, this approach created a constant stream of work in progress products which could not be sold and delivered to customers. This behavior is not intuitive and certainly does not take system efficiency into consideration. In Lean, the example is considered wasteful and in need of improvement. To resolve such a situation, we first need to look into why there are parts shortages and to assess how these can be minimized or eliminated. RFID technology can play a key role in that it allows the tracking of parts or the totes in which parts travel. Procurement and order management processes also require attention to assess whether parts are ordered too late or whether suppliers are simply not providing expected shipments. Here RFID technology can help when shipments on the supplier side and receipts by the manufacturer are tracked. Once this has been addressed, we can also look into how work in progress flows down the assembly line. RFID technology can play a crucial role in that it allows for the monitoring of work in progress all along the assembly process. In addition the granularity that RFID provides, allows the company to more easily practice the “Five Why” technique implicit within Lean root cause analysis and therefore see whether items previously produced were being reproduced. Depending on the specific circumstances, active or passive RFID technology can be used. Tags can be placed on products or assembly carriers to determine when products leave the line or when finished products are moved back to the line. Likewise, RFID has been successfully used to trigger replenishment signals from the manufacturing line to the parts warehouse. If replenishments do not move towards the line, this can trigger automated alerts to enable immediate interventions by management. In summary, these are examples of how RFID technology contributes to the identification and resolution of problems which then are leveraged by measures devised in the context of Lean thinking.

RFID technology can provide the ability to see work in progress and finished product inventory at every step in a process. Semiconductor manufacturer AMD for example uses RFID in their Dresden, Germany fab to ensure that each wafer lot is always at the right tool so that rework, scrap and machine downtime can be avoided. If data such as this is available on a very granular level, it helps organizations to monitor the velocity of product flow and to efficiently establish process cycle times for the entire value stream. In any Lean initiative the speed to achieve customer value is a key. Shortening that time span from order to cash flow in turn creates tangible savings that lead to higher shareholder value. Organizations which intend to improve their order to cash cycle can rely on a wide variety of metrics and best-in-class performance measures which are part of the standard repertoire in Lean. As a consequence, organizations can measure performance through the data generated by RFID systems to compare these results to industry as well as cross-industry best-practice metrics so that their relative performance becomes apparent. This obviously could lead to financial impacts when further process changes are implemented.

RFID Improves Lean Initiatives
In “normal” Lean initiatives this data is calculated perhaps once every six months or so and utilized as a benchmark to view the status of internal improvement and for industry comparisons. Obviously a metric measured twice a year, if that often, does not tend to receive a great deal of attention within companies that are not uniquely attuned to their Lean initiatives. With RFID the metrics can be calculated on an hourly, daily, monthly, etc. basis at a minimal cost. In addition, most metrics that are calculated manually are static in nature. They often do not allow for comparisons between time periods and against utilization measures, which have a significant effect on performance, quality and ultimately value delivered to customers. Measuring process cycle efficiency (PCE) in near real-time on the other hand allows for dynamic (or “active”) measurements. The measurement system now provides a view of the entire system at all times. It enables corrective measures almost instantly and thus leads to the ability to optimize a system at virtually any time. This is not a part of Lean thinking at the moment and we believe that it has the ability to dramatically change the way in which Lean initiatives are implemented. The visibility into business process performance will also permit changes in how activities are perceived and ultimately performed on an individual worker level. Every person in the process could potentially have the ability to view, analyze and correct inefficient behavior right away. Currently the approach to leverage relevant data in Lean initiatives is much more manual in that performance is noted on a board. However, the approach enabled by RFID allows for the implementation of performance dashboards to provide visible indicators of current performance as compared to expectations. Such a system can ultimately enable tremendous synergy between workers, groups and teams.

The idea of measuring performance metrics through RFID systems is one that can be explored much further for RFID practitioners as well. In an ideal world organizations such as EPCglobal could collect and store metrics from a variety of companies in different industries to allow for effective comparisons by all participants. This, of course, would require normalization and abstraction of the data to the degree that individual organizations are not exposed in regard to their own, confidential performance. However, on a smaller scale, even the monitoring of supply chain performance on the level of EPCIS applications could generate highly interesting results in terms of Lean thinking. Developments in the speed of product flow over time for example can be very valuable e.g. are we doing better or worse compared to a previous period.

In summary, it is evident is that RFID technology not just enables, but also automates process improvement initiatives to a high degree. This leads to the ability to provide a wide range of statistical data that any type of Lean and Six Sigma project can leverage to obtain direction in what changes should be implemented to decrease waste and improve process cycle efficiency. Once an RFID system has been implemented, there is room for these additional improvements and companies might now have an opportunity to stay ahead of their competition beyond the advantages of RFID technology itself.

Chris Hanebeck has over a decade of experience in international management consulting, strategy development, change management, software implementation and technology innovation. He has successfully completed projects for over 65 clients on three continents, authored over 50 publications, holds US patents on RFID and wireless technology and regularly speaks at major conferences. Chris also teaches MBA courses on supply chain strategy at the University of North Texas. Chris can be reached at hhanebeck@yahoo.com

Pat Boutier assists companies with Lean implementations and RFID applications as a specialist at TMAC with UT Arlington. His technical and multiple plant managerial experiences include Motorola and Tandy Electronics in addition to founding his own design and manufacturing corporation. Pat proudly holds a BSEE from Marquette University and a MBA from Loyola. He has certifications in RFID+ and Training Within Industry. In addition he holds the Bronze certification in Lean, a Black Belt in Lean Six Sigma and is a Shingo Prize Examiner. He can be reached at pboutier@uta.edu

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