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The Path to the RFID-Enabled Supply Chain for Immediate Compliance and Rapid ROI

by Celestine Vettical | SAPinsider

July 1, 2004

by Celestine Vettical, SAP America, and Tim Motter, SAP Labs SAPinsider - 2004 (Volume 5), July (Issue 3)
Radio frequency identification (RFID) is the most transformational technology to hit the 21st century, one expected to have a dramatic impact across the supply chains of all industries. New RFID requirements from the DOD and the FDA — not to mention the compliance mandates from Wal-Mart, Target, and other retailers — are pushing the velocity of business change to new levels. RFID will drive requirements for improved data quality; greater visibility into real-time information; the ability to enable rapid, decentralized decision-making; and an unprecedented degree of flexibility and collaboration.

With RFID comes the opportunity to make applications and processes "real-world aware" by creating smart items that carry dynamic information about themselves (such as what they are, where they are, and what their respective history is). This, and their ability to communicate this information without human intervention, is bound to have a profound impact on business.

As the technology evolves and becomes more pervasive, not only will the physical world drive business processes, but applications will actually serve as sources of information that will then be passed along to smart items. In this scenario, every physical object has the potential to carry — and automatically deliver — dynamic information about itself. As such, the RFID-tagged item holds the promise of both enabling and revolutionizing business processes over time.

For many companies, the immediate focus is on trade channel compliance. However, RFID will only be able to unfold its full potential, and provide a meaningful return on a significant investment, if the data can be integrated into existing and future business processes and shared across business partners.

SAP's suite of adaptive business solutions, including mySAP ERP, mySAP SCM, and mySAP CRM, is already designed to connect people, information, and processes. By integrating RFID into these solutions, customers can extend this reach to include physical objects as well.

SAP's Approach to RFID

Companies across every industry share an interest in an open, standards-based RFID system built for interoperability. SAP is no exception. As the largest provider of business applications, SAP has a deep interest in shaping the impact of RFID and other advanced auto-ID technologies on current and future business processes, and has conducted extensive research around RFID since 1998. In 2001, SAP was the first software application vendor to join the Auto-ID Center and since then has been involved in a variety of pilot projects with both manufacturing and retail customers. These endeavors have made it clear that real competitive advantage will only be created when enterprises leverage RFID to drive business process excellence and innovation — and even new business models.

To help companies do just that, SAP's RFID solution is packaged as a standalone solution package built on top of SAP Web Application Server 6.40, and consists of:

  • SAP Auto-ID Infrastructure

  • SAP Event Management

  • SAP Enterprise Portal

  • Backend ERP adapters to SAP R/3 4.6C and greater

This RFID solution does support compliance (first-phase requirements) with retailers like Wal-Mart and Target by allowing customers to do case- and pallet-level tagging and to receive and send ASNs (advanced shipping notices) with EPC1 information. But along with this, SAP will deliver value-added services, allowing companies to:

  • Post goods receipt and goods issue based on tagged packaged goods

  • Track, trace, and authenticate RFID-enabled assets

  • Share the data with key trading partners

  • Analyze key business metrics for real-time decision-making

  • Harmonize data across the value chain

It should come as no surprise that RFID offers opportunities for theft reduction and lower stockout rates. But consider, too, the potential for smarter cross-sell opportunities, more effective hazardous material handling, initiatives to lower chargebacks due to incorrect shipments, programs to combat the spread of counterfeit products, and support for counterterrorism measures — these are just some of the examples of the limitless possibilities of value creation with the SAP RFID solution. SAP's RFID solution roadmap covers processes to support improvements in customer intimacy, effective production management, asset utilization, inventory tracking, visibility and shrinkage, labor productivity improvements, optimized transportation and distribution processes, and operational improvements.

What Is RFID?

We are all familiar with bar codes, which provide the basic manufacturer and product information on products we purchase. The information contained in those scans has enabled companies to have more visibility to their POS (point-of-sale) and inventory positions within their own four walls.

RFID takes this simple concept and significantly increases its effectiveness through the use of computer chips ("tags") encoded with an EPC (electronic product code) that can be read by a radio beam. The resulting smart items can, in some cases, even receive information (read/write capabilities).

There is no line-of-sight requirement, and multiple tags can be read automatically and simultaneously by reader devices strategically placed within the production, distribution, and retail facilities (see Figure 1).

Simply tagging physical goods is the first step in RFID compliance. The next step is to ensure the data gathered in this process is passed along to your existing enterprise applications.

Figure 1
Basic RFID Process with Backend Integration

SAP RFID Solution Package and Landscape in Action

The SAP RFID solution package provides a complete auto-ID middleware solution connecting RFID data directly from auto-ID data capture sources, such as RFID readers and device controllers, and integrates the data directly into enterprise applications (see Figure 2). It converts raw RFID data into business process information by making the associations from key business rules, master data, and transactions to raw RFID data (see box below).

Figure 2
SAP RFID Solution Package in Your RFID-Enabled Landscape

Key SAP RFID solution capabilities include:

  • Encoding and rewriting of RFID tags

  • Local business intelligence and decision support at point of data capture

  • Multi-layered RFID data aggregation and filtering

  • RFID data capture device management

  • Central business rule, device, and inventory information management

  • Role-based access to RFID data

  • Synchronous and asynchronous communication with auto-ID data capture devices

  • Exception alerting and reporting

Extending Industry Standards

SAP's RFID solution further enhances the industry requirements established by the EPCglobal standards by reaching beyond established specifications for RFID software services.2 While this specification defines a framework for discovering available RFID services, it does not consider the integration capabilities with enterprise applications. SAP's RFID solution, on the other hand, is a standalone system capable of controlling devices and data capture, integrating RFID data into both SAP and non-SAP applications, and providing rules-based RFID data filtering, security, and communication capabilities, while at the same time facilitating overall business process integration and content.

Reducing Integration Costs

SAP's RFID solution reduces the need for multiple, custom data integration solutions. Using SAP NetWeaver, companies have a platform for total process integration of RFID data to leverage the full value of RFID investments. Preconfigured backend process enablement adapters and predelivered RFID adapters for SAP R/3 4.6C or greater reduce the need to set up point-to-point RFID data-sharing connections with backend enterprise applications and trading partners.

Enhancing Supply Chain Visibility from Order Entry Onward

SAP's RFID solution is not just a middleware solution; it also provides customers the ability to track and trace RFID-enabled assets across the supply chain with SAP Event Management (SAP EM), as shown in Figure 3. What's more, users across the company have the ability to view and share information via SAP Enterprise Portal (SAP EP) and communicate RFID information to trading partners with embedded SAP Exchange Infrastructure (SAP XI) components.

Figure 3
RFID and SAP Solutions Following an Item Across Its Life Cycle

SAP Auto-ID Infrastructure: How It Works with Your SAP Landscape

Auto-ID Infrastructure is compatible with SAP R/3 4.6C or greater, and it also has adapters for SAP Warehouse Management, SAP Business Information Warehouse, SAP Supply Chain Event Management, SAP Advanced Planning and Optimization, and all SAP NetWeaver components.

Auto-ID Infrastructure is designed to synchronize EPC and RFID information into your ERP systems by providing a complete, multidimensional data model of RFID-enabled assets, including:

  • EPC number

  • Asset location

  • Status

  • Last RFID read point

  • Handling unit number

  • Packing hierarchy association (such as item, item-to-case, or case-to-pallet)

It then maps this data to your SAP R/3 system via association to handling units (HUs). Handling unit headers include a standards-based HU number, weight, volume, and dimensions. HU content includes material number, quantity, unit of measure, batch number, plant number and location, and stock category (such as consignment), as well as serial number and inspection lot data.

These HUs are then associated with EPC numbers and are integrated into the appropriate transaction for processes such as production orders, transfer orders, sales orders, delivery (ASNs) and receipt, shipment, picking and packing, and inventory move and packing operations.

  The Handling Unit Management (HUM) solution is leveraged by Auto-ID Infrastructure; however, the Auto-ID Infrastructure maintains hierarchical relationships as part of its native functionality. HUM is not necessary for the deployment of SAP's RFID technology.

Because it is built on SAP Web Application Server, Auto-ID Infrastructure supports multiple communication interfaces (HTTP, SOAP, WSDL, SOCKET/ TCPIP), as well as mobile interfaces to PocketPC 2003 and Mobile Linux (Sharp). It runs on Windows (XP, 2000, NT), Unix, and Linux, and supports Oracle, SAP DB, DB2, and Microsoft SQL Server.

Address Common — and Costly — Challenges Across the Supply Chain

By using SAP's solution to RFID-enable the processes in the business suite, customers can address real-world problems such as:

Massive theft rates, which can amount to as much as 2-3 times net income for the average retailer
Continued high out-of-stock rates, which cost retailers $7-$12 billion per year
Incomplete and poor data quality, including incorrect product shipments and chargebacks that can cost as much as 4% of retail sales
Expensive manual processes, such as labor costs that reach 89% of distribution center costs, and instances where over 30% of labor is tied up in receiving alone due to manual order processing
Diminishing brand and store loyalty accompanied by increased promotion and branding costs
Increasing complexity and collaboration challenges across supply chains
Outsourcing of assets and logistics processes
Shift in responsibility for inventory from retailers to vendors

How Will SAP Enable Compliance and Beyond? The Three-Phase Approach

Wal-Mart and other leading retail organizations are requiring their suppliers to provide a greater level of product visibility through the use of RFID. SAP will enable companies to manage their RFID projects by providing leading-edge applications and solutions — from initial compliance to a fully integrated environment. The fact is that the ROI on the software solution is positive; the challenge is the hardware costs. Due to the mandates, companies must invest in hardware, but they can also invest in SAP's RFID solution to achieve a positive ROI on the software. This helps to lower the net cost for the hardware investment.

There are several choices for deploying SAP's RFID capabilities from channel compliance to full integration:

Phase 1: "Slap & Ship" Channel Compliance and Localized Efficiency Improvement

Solution: Standalone Auto-ID Infrastructure

At a minimum, companies will need the capability to generate EPC tags, which are placed on both the cases and pallets for compliance. There will be those companies that will have these pre-printed and will manually apply these on the cases or pallets as needed. However, this provides no value to the company, since any data that might be generated will be lost in the process. The ability to capture this information across several variables such as location, GTIN (Global Trade Item Number), and even business process is the start to achieving benefit. Capturing this level of data is enabled through SAP Auto-ID Infrastructure.

SAP's RFID solution is based on a distributed management approach to provide data management at the right level at the right time. For example, this standalone solution provides shipping efficiencies by ensuring the accuracy between what was ordered, picked, and packed to what was actually loaded onto a truck. Whether your facilities are internal or outsourced, SAP provides companies with the ability to meet compliance, capture and manage vital RFID data, and do it within a simple software deployment architecture using just the Auto-ID Infrastructure.

Phase 2: Advanced Ship Notice (ASN) Generation: Supply Chain Visibility and Partner Collaboration

Solution: Auto-ID Infrastructure with SAP Event Management and SAP XI

A strong RFID solution must go beyond EPC data requirements while also operating in a heterogeneous systems environment and, in many cases, without backend systems integration. Those systems can provide information that will not necessarily be captured in a company's Auto-ID Infrastructure. For example, production and warehouse information — such as batch and expiration dates, production location, maintenance history, and more — can be combined with required EPC data to provide valuable information within your trade channel.

What's more, enriched information and greater visibility enables better business process management. For instance, many customers require a range of information in their ASNs, from many applications and systems. SAP XI can combine data from many systems in a heterogeneous environment for the outgoing ASN message, thus eliminating redundant data management.

The management and storage of information also plays a key role in the performance of an RFID solution. Through effective distributed data management, the SAP solution manages data in the right place at the right time to provide optimal performance and information.

Tracking and tracing the EPC tag facilitates visibility into events — both to the enterprise and to its trade channel partners. This visibility can significantly enhance the supply chain benefits on both sides. Total visibility can facilitate fewer stockouts, improved data quality, decreased complexity in partner collaboration, and a host of other opportunities.

For companies seeking value from their RFID investment, optimally managing this data and providing total visibility in, across, and among their supply chain operations is vital to their solution.

The management and storage of information play a key role in the performance of an RFID solution. Through effective distributed data management, the SAP RFID solution manages data in the right place to provide optimal performance. The XI component of SAP NetWeaver helps to make this possible. SAP XI can combine data from many systems within a heterogeneous environment to enhance the outgoing ASN message, thus eliminating redundant data management.

Phase 3: Full Integration

Solution: Auto-ID Infrastructure with SAP Event Management, SAP XI, and RFID Adapters

The value of RFID lies in the ability to fully integrate the sources of information within and amongst the users of that information. Business process management is improved from better decisions based on real-time information and drives the true value of RFID. SAP offers a complete solution for those companies looking for that level of value.

This scenario captures auto-ID data in relationship to expected activity to support exception-based processing. For example, if the received ASN is notified to expect 100 pieces and the Auto-ID Infrastructure indicates only 98 were received, a rules condition can trigger an exception response.

By integrating the execution and planning activities impacted by RFID, companies will be able to automate business processes and streamline operations, create real-time visibility to customers and partners alike, and further reduce the expenses associated with managing the assets of their business — leading to a truly adaptive enterprise that can respond quickly and intelligently to change at all levels of the business. This leads to improved return on assets, return on investment, and improved bottom-line results.

A Real-World Example of Bringing "Real-World Awareness" to the Supply Chain: The Metro Future Store Initiative

One of SAP's most recent projects is the Metro Future Store Initiative (FSI), a joint venture between Metro Group, Intel, and SAP to drive the future of retailing. The objective is to test RFID applications alongside other advanced technologies, ranging from personal shopping assistants to self-checkout systems, in a real-world environment.

To gain a better understanding of the potential benefits and robustness of RFID in day-to-day operations, Metro transformed a supermarket in Rheinberg, Germany, into the Future Store. Here, RFID is being tested in a variety of applications, starting in the distribution center, where all pallets and cases destined for the Future Store are equipped with EPC-compliant RFID tags.

As the shipment is loaded onto the truck, the contents of the pallet are read and verified against the store order. Process-level integration not only ensures 100% order accuracy, but also creates new levels of visibility into the status of the shipment for all process participants, including store personnel and manufacturers. Once the shipment arrives at the Metro Future Store, the technology is used to automate the receiving process, monitor on-shelf availability, and support the in-store replenishment process by triggering out-of-stock alerts and helping staff locate backroom inventory.

The Metro Group is currently working with SAP and Intel to define the next phases of the project, which will extend the business process across several manufacturers.


With the SAP RFID solution package, enterprises can leverage mandated RFID technology to bring real-world awareness to their SAP solutions. By improving the supply and demand chain effectiveness through value-added RFID-enabled adaptive processes, companies can look to realize rapid returns that go beyond the expensive step of initial compliance. Improved customer intimacy, effective production management, asset utilization, increased labor productivity, effective inventory management, and operational excellence are just some of the examples of the limitless possibilities of value creation with SAP's RFID solution.

For more information on SAP's RFID solution package, visit

1 For more information on Electronic Product Code (EPC) standards, visit EPCglobal at

2 For example, Savant specifications for RFID software technologies and services are defined by the Software Action Group (SAG) of EPCglobal.

Celestine Vettical is the Solution Principal for Supply Chain Management at SAP America. You can reach him at

Tim Motter is Product Manager for Supply Chain Management at SAP Labs. You can contact him at

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