Businesses Get a "Sense and Respond" Nervous System Like animals, companies have always monitored changes in their environments. Historically, companies have moved slowly in response to changes. For example, if a retailer’s sales of red sweaters outpaced sales of green sweaters during the Christmas shopping season, the results would not be noticed until months later. By the time the retailer could react, the holiday season was over, and the insights might not be relevant to the following year.
What is different today is that technology is enabling companies to respond at such blistering speed that the response is nearly simultaneous with the event that triggers it. Today, businesses of all types can sense changes in their competitive environment in an instant, and then act to seize the opportunity.
When organizations respond to changes, whether large or small, they learn from the experience in one of two ways that experts refer to as either single-loop learning or double-loop learning.
Single-loop feedback and response processes result in immediate effects for the organization. Double-loop learning processes lead to longer-term effects.1
The “sense and respond” trend involves a wide range of corporate initiatives to put in place the technology needed for real-time single-loop organizational learning. As we’ll discuss later in this issue, many firms are going beyond “sense and respond” systems to create “learn and adapt” systems. Those systems use technology and enhanced business processes to maximize double-loop learning.
To understand what we mean by a single-loop feedback process, consider the lowly thermostat. This device monitors a building’s temperature for deviations from a target temperature. When the temperature falls below the target setting in the winter, the thermostat instructs the heating system to increase the heat pumped through the building’s air ducts. In the summer, the thermostat detects temperatures above the target setting and signals the air conditioning system to cool off the building.
It’s just like the hard-wired reflexes in the human body. The nerve endings let us know what’s going on, and we instantly react based on a fixed script. And, just as these reflexes are crucial for human survival, sense and respond systems are becoming crucial for corporate survival.
Such a system typically consists of a set of electronic sensors corresponding to “nerve endings,” coupled to a communications network corresponding to “nerve fibers.” And, just as the simple brain of a nematode can’t really think, the computers in typical sense and respond systems simply follow “if-then” logic rules.
First-generation sense and respond processes are becoming pervasive. For example, millions of drivers using toll roads, bridges, and tunnels speed by wireless detectors everyday, which automatically record their action and deduct payments from their accounts based on signals from transponders in their cars.
Other systems, such as Exxon/ Mobil’s Speedpass, are based on the same technology. In Los Angeles, a sensory web controls traffic lights and buses in order to regulate and synchronize traffic flow; this has already resulted in a 15 percent saving in city bus transit time.
As these single-loop feedback processes grow in complexity, they appear more intelligent and almost life-like in their responsiveness. Over 30 years ago, Stafford Beer predicted that such a tight connection between “business sensors” and “business activators” linked by real-time technology would one day enable companies to operate in an increasingly human-like manner.2 And that’s exactly what we’re seeing.
But today’s sense and respond applications represent just the first tentative steps toward realizing its full potential. Thanks to the remarkable technology known as RFID, which is short for radio frequency identification, sense and respond is about to take a quantum leap.
RFID technology typically consists of two components: a reader with an associated antenna, and a transponder, also known as a tag, that carries the data. The reader transmits a low-power radio frequency signal through its antenna. The tag receives the signal via its own antenna and uses the signal to power an integrated circuit embedded in the tag. The tag briefly converses with the reader for verification and the exchange of data. Once the data is received by the reader, it is sent to a computer controlling the reader for processing and storage.
These passive RFID tags ? those operating without an internal power source ? can store much more information than is available on the bar codes used by today’s optical scanning systems. The tag’s 32 to 128 bits of stored information can identify a specific product, individual, vehicle, and so on by providing a unique serial number and Internet address at which more detailed information about that entity is stored.
Direct line of vision is not necessary to obtain this data, as is the case with optical scanning. All that an RFID tag requires is a radio frequency field from which to draw enough power to broadcast its stored data. Low-frequency systems have short reading ranges and lower system costs. They are most commonly used in security access, asset tracking, and animal identification applications. High-frequency systems, offering longer reading ranges and high reading speeds, are used for such applications as railroad car tracking and automated toll collection. However, the higher performance of high-frequency RFID systems incurs higher system costs.
Tags can be read through a variety of substances such as snow, fog, ice, paint, crusted grime, and other visually and environmentally challenging solutions, where bar codes and other optically read technologies would be useless. RFID tags can also be read in challenging circumstances at remarkable speeds, in most cases responding in less than 100 milliseconds.
Consider some of these possibilities: Warehouses equipped with an array of radio-frequency readers that “know” when products arrive and depart; an RF-equipped shelf that “knows” what items are removed and can order new stock automatically; and a supermarket checkout that involves nothing more than wheeling your shopping cart through a radio frequency field. What does this mean to companies? They can reduce their inventories, while keeping retailers’ shelves stocked continually.
The impact of this trend will be enormous: The Grocery Manufacturers Association estimates that 31,000 U.S. grocery stores lose over $6 billion in retail sales due to stock-outs! In October 2002, AMR Research reported that RFID implementations commonly result in a 3 to 5 percent reduction in supply chain costs, and a 2 to 7 percent increase in revenue resulting from better inventory visibility.
McKinsey & Company estimates that “a retailer or consumer goods maker using RFID could cut total warehouse labor costs by nearly 3 percent, chiefly through more efficient receiving, shipping, and exceptional handling.”
According to a recent report in McKinsey Quarterly,3 “More promising still are the potential effects of RFID on vendor-managed inventory systems. By exchanging the information gleaned from RFID readers over the Internet, a consumer goods maker could manage its own stock replenishment for key customers more efficiently, saving both parties 20 to 40 percent or more in inventory and out-of-stock costs.”
The promise of RFID technology has attracted investments form heavy hitters. For example, the Auto-ID Center was founded to develop RFID standards in 1999 by five leading research universities, including MIT. Today, it includes nearly 100 leading retailers, consumer products makers, and software companies as corporate sponsors. These sponsors include Procter & Gamble, Coca-Cola, Home Depot, International Paper, Johnson & Johnson, Unilever, UPS, and the United States Postal Service.
Several of the largest companies are already implementing large-scale RFID projects. Consider the following examples:
By 2005, Wal-Mart expects its top 100 suppliers to begin fitting their cases and pallets with RFID tags that automatically send all of the information about a container’s contents or about individual products to a scanner at Wal-Mart, according to McKinsey. Wal-Mart is allowing its smaller suppliers an extra year to comply. To prevent being removed from the shelves of Wal-Mart’s thousands of stores, suppliers are working feverishly to meet the schedule for implementing the technology.
In 2003, Gillette ordered 500 million RFID chips that will be used in the biggest deployment so far of RFID technology. Every package of razors packed at Gillette’s facility in Fort Devens, Massachusetts now carries an RFID tag consisting of a chip and antenna alongside a traditional bar code. In a joint venture with Wal-Mart and with Tesco, the UK’s biggest supermarket group, Gillette is testing smart shelves that can recognize the RFID tags on the razors.
The UK retail group Marks & Spenser has started implementing RFID technologies across its fresh food distribution network to eliminate spoilage.
Boeing uses RFID technology to track parts moving through its facility in Wichita, Kansas, improving its managers’ visibility of components moving through the parts pipeline.
The impending investment in RFID systems will be substantial. Research firm Frost & Sullivan estimates that companies spent $1.42 billion in 2002 on RFID chips and associated software, 16.1 percent more than in 2001. Frost & Sullivan also estimates that RFID spending will rise to $7.25 billion in 2008.
The good news is that the unit price of RFID tags is expected to decline sharply, making it cheaper to implement them virtually everywhere. According to the McKinsey Quarterly,4 RFID tags cost roughly $1 each as recently as the year 2000. Today, the price has dropped to between 25 and 40 cents. By 2007, we expect the cost will plunge to less than a nickel apiece.
That will drive a widening adoption of RFID by companies in the next five years for an ever-expanding number of applications.
Based upon all of the facts we’ve explored, we forecast the following six developments:
With the price of RFID tags dropping to less than 5 cents each, they will start appearing on nearly every consumer packaged good. That will permit your refrigerator to inventory the kitchen and e-mail a shopping list to your PDA or an order directly to an on-line grocer.
RFID tags will potentially intrude on personal privacy. Consider what will happen when they are embedded in the city stickers on your cars or in your license plate. Suddenly, the police will be able to monitor how fast you drive, as well as where you go and how long you stay there.
We will witness an explosion in the amount of data available to companies contributing to information overload that will have to be aggressively and wisely managed. As RFID technology is implemented, not only in your organization, but across your firm’s supply chain ? by your suppliers, your suppliers’ suppliers, your customers, and your customers’ customers ? the amount of information created by tracking every product, all the time, could swamp the most robust planning systems. Already SAP, one of the leading providers of Enterprise Resource Planning software, is busy modifying its products so that they work with the anticipated avalanche of data that will be generated by RFID. Other software vendors will follow suit. McKinsey estimates that such ERP software upgrades could cost tens or hundreds of millions of dollars for large companies. Computing and communications infrastructures will also need to be upgraded to handle the impending data streams generated by RFID applications.
New ways of information processing will be developed to make sense of this continuous flow of information. The MIT Auto-ID Center is already developing a business process architecture based on a hierarchy of what it calls savants, simple computers that collect data about RFID-tagged products, filter it, and decide when a noteworthy event has occurred.5 Only then will a message be passed up the “chain of command” to other computers in the network that will interpret the event rather than handling the detailed data. According to one MIT professor, the result will be “a sensory network that tells you what is going on in the business.”
Increased linkages between RFID and other IT applications will increase a company’s “presence” in the minds of its suppliers and customers. RFID could be linked to “instant messaging” to provide individuals with context-sensitive, real-time updates and alerts. It is estimated that currently almost 30 percent of the 3 billion instant messages sent every day across the Internet are business communications. Cutter Consortium claims that instant messaging “will change business communications almost beyond recognition as it is threaded into every application, every phone, every device, and every part of the warehouse shelf.”6 For example, remember that suit you admired at your favorite retailer last week ? the one that wasn’t available in your size or the color you liked? Well, according to the text message you just received on your PDA or cell phone, and a follow-up e-mail, one like it arrived this afternoon in a new shipment from Italy. By scanning the RFID attached to the item you wanted, the store’s receiving department initiated a series of alerts to you, to the sales clerk who originally helped you, and even to the store’s computer systems which have placed a temporary “hold” on the item until you can visit the tailor for alterations. Over the next five years, we anticipate an explosion in the number of commercial applications pairing RFID-generated data and IM communications. In particular, we expect that bricks-and-mortar companies will roll out RFID- and IM-enabled applications as a way to regain customer “share of mind.” Traditional retail players will aggressively exploit such applications in an attempt to regain market share they’ve lost to Internet-based competitors.
Simple RFID technology is just the beginning: Intelligent sensor networks will emerge by the end of the decade that will enable even more sophisticated sense and respond applications. DARPA (the Defense Advanced Research Projects Agency) is already working with several electronics manufacturers and universities to develop wireless sensor networks, sometimes referred to as sensor clouds. Unlike RFID tags that communicate only with the reader, sensor networks composed of tiny computers with embedded sensors form a peer-to-peer wireless network. Together, they create a picture of what’s going on in the environment and share that picture with other computers in the network. While the first sensor-network applications will be found on the battlefield and helping ensure homeland security, they’ll inevitably unlock dramatically more sophisticated and lucrative sense and respond opportunities.
References List :1. On Organizational Learning by Christopher Argyris and Donald Schon is published by Blackwell Publishers. ⓒ Copyright 1999 by Christopher Argyris and Donald Schon. All rights reserved.2. The Brain of the Firm by Stafford Beer is published by John Wiley and Sons. ⓒ Copyright 1981 by Stafford Beer. All rights reserved.3. McKinsey Quarterly, 2003, Number 4, "Smart Tags for Your Supply Chain," by Alex Niemeyer, Minsok H. Pak, and Sanjay E. Ramaswamy. ⓒ Copyright 2003 by McKinsey & Company. All rights reserved.4. ibid.5. Financial Times, March 5, 2003, "Alien Concept Coming to a Store Near You," by Simon London. ⓒ Copyright 2003 by FT Publications, Inc. All rights reserved.6. To download the report "Time to Get Real: Moving Toward the ‘Real-Time Enterprise,’" go to:Stoweboyd.typepad.com/imrf/cutter/bit0403SB.pdf
