October, 2004

Fruits of Thought

Looking Too Closely?

If you want to know how the mighty have been humbled, all you have to do is read the press release Winn-Dixie sent out in the wake of the recent hurricanes. This once-mighty chain saw the need to let everyone know that they had adequate liquidity. It was one of those no-win situations, since the very need to reassure is simply not reassuring.

Another unexpected message may be delivered if RFID becomes the next big thing. RFID is short for Radio Frequency Identification, which is basically a method of identifying a product by the use of a radio wave emitted from a small tag implanted in the product. It can be used within a factory to keep track of, say, ingredients. It can be put on pallets or boxes and track an item through the supply chain. It can be put on individual consumer packages.

In theory, RFID technology will create absolutely clear supply chain transparency. Every item, everywhere and always, can be tracked. So, for example, headquarters can tell if the clerks aren’t restocking an item. And the quality of data will be high because there will be no human typos or other mistakes. The data can be richer as well, including tracking things like temperature and expiration dates at all times. Finally, much interaction with the data can be automated. For example, a bagged salad could automatically go on sale when it gets close to an expiration date, a transportation claim could be filed automatically if a contract of carriage was violated; continuous replenishment should be a snap.

There are still plenty of obstacles, but both Wal-Mart and the Defense Department are pushing the technology. There are special issues with produce, including moisture on the boxes and the suitability of various frequencies of radio wave for different types of items. These issues and others, though, are being addressed, and it seems highly likely the technical obstacles will be solved.

When it happens, though, be ready for an earthquake in the produce industry. It has been written that the truth shall set you free, but ours is a business filled with dirty little secrets.

Virtually every day, somewhere in the country, something like this happens: A load is delivered to a retailer, the retailer finds quality problems with the load and rejects it, the load is then sold to a wholesaler who sells it to a broker acting as a principal, and the load is resold to the original chain two days later and accepted without incident.

Or sometimes the load is rejected, consigned by the shipper to a local wholesaler where the exact same product is bought by the rejecting chain as a fill-in. On other occasions, there are two chains, each rejecting a load. The loads are switched and delivered to the other chain, and both accepted.

What do these scenarios tell us? That the product slipped through by mistake? That RFID should be used to reject anything that was ever rejected before? That retailer inspections are rather flawed? Or that retailers should reform themselves because they are rejecting perfectly good product?

Will buyers require complete RFID trails? What if there is a gap? A lot of retailers think that everything they buy comes from a farm direct to their door. But when product is tight, it is not uncommon for shippers to have street buyers out looking for product. In fact, it is not uncommon for product to go through several sets of hands before it gets to any retailer’s door.

Right now, we have a “Don’t ask, don’t tell” policy in the produce industry. Other than a vague assurance — “You guys are growers right?” — retailers really don’t want to know all the places their product has been. But if RFID comes into play, the truth will have to be confronted.

It is not a bad thing for retailers to take a long hard look at their policies. The urge to deal directly with growers — and only directly with growers — is very difficult to do if your definition of grower is that all the produce you require must come off his farm.

But the recent hurricanes pointed out the folly of the goal.

Let us say a retailer worked with a pure farmer in the path of the hurricane. After the deluge, the retailer is left with no produce and a supplier incapable of securing produce for his customer. Perhaps the retailer would have been better off dealing with a company with more diversified capabilities so that if the produce is gone, the supplier can get product by purchasing from other growing areas, importing, etc.

Many things that sound good in theory don’t work out as well in practice. For example, many big buyers have strict criteria on what percentage of rejections is acceptable. This seems to make sense. Rejections are very expensive for all concerned.

And if strict criteria lead, for example, to stricter inspections at source and thus prevent problems before product is shipped — then the rejection criteria served a great purpose of driving costs out of the system.

On some products, though, the rejection allowance is so low for that type of product that it is, practically speaking, unobtainable. So vendors have been securing facilities near distribution centers so they can bring in product to be first inspected by the vendor and only then delivered across the street to the DC. In effect, the unreasonable criteria have added expenses to the system by setting unrealistic requirements.

RFID will make many things transparent. Whether it really helps will depend more on how the retailers use the product than the product itself. The transparent glass is very contemporary, but that old rose-colored glass is a hue some may become nostalgic for.  pb