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Case Study

1.1 METRO Group (Germany)

Abstract

This case study is about METRO Group RFID implementation for supply chain
operations and forward looking pilots of the technology that aim to drive retailing
innovation. The implementation project started in 2004 and focused mostly on tagging
pallets with passive RFID UHF transponders. Significant achievement resulted from the
implementation across METRO Group's retail functions, including supply chain process
efficiencies, and customer service enhancements.

Case study fact sheet


Full name of the company: METRO Group (METRO AG)
Location (headquarters / main Dusseldorf, Germany
branches):
No. of employees: 281,455 worldwide
Main business activity: Retail, and cash & carry wholesale
Primary customers: Consumers and wholesalers
Year of foundation: 1996 (merger of three German retailer
companies)
Turnover in last financial year (€): € 64.3 billion (total sales 2007)
Most significant market area: Europe, Asia
Main e-business applications studied: RFID in the retail industry and supply chain
1.1.1 Background and objectives

The METRO Group comprises more than 2,200 stores in 31 countries in Europe, Africa
and Asia and it is organized in 4 sales divisions through 7 different retail brands:
Cash & Carry: METRO, Makro
Food retailing: Real, Extra
Non-food specialty stores: Media Markt, Saturn
Department stores: Galeria Kaufhof

METRO Group's cross-divisional service companies are providing shared services such
as purchasing, logistics, IT, advertising, and asset management. Among the others, the
following functions are provided by:
IT: MGI METRO Group Information Technology (MGI)
Logistics: MGL METRO Group Logistics (MGL)
Procurement: METRO Group Buying International (MGBI)

Competitive dynamics such as growth of on-line sales, market differentiation strategies


and new market positioning of large European retailers, international expansion plans
and growth of discount format outlets, are putting pressure on retail companies in
enhancing productivity efficiencies, while offering consumers a more consistent and
appealing shopping experience across multiple channels. Moreover, the current economy
downturn is negatively impacting consumer confidence, thus customer service
enhancements and effective loyalty management are imperative to survival.

This challenging market situation requires an increasing focus on centralizing key


management functions, optimizing product assortments and replenishment efficiencies,
supply chain and store management capabilities, ultimately providing a more effective
service delivery and a better shopping experience. Achieving advanced retail demand
intelligence capabilities is a major cornerstone for retailers and supply chain partners
alike.

For the first time ever, during the second quarter of 2005, the foreign share of sales
increased up to 52% of total sales in line with the groups international expansion strategy.
Therefore, METRO Group ongoing consolidation and international expansion has urged
the company in achieving key efficiency improvements and central management of critical
business functions, for example supply chain operations.

The driving forces for METRO Group to roll-out RFID and conduct selected field trials of
RFID were:
Achieve higher visibility, accuracy and productivity efficiency of logistics and supply
chain operations.
Optimize inventory levels, minimize stock losses and improve working capital
management.
Optimise promotion management efficiences.
Reduce out-of-stocks aiming to achieve top-line and bottom line gains, but also to
improve customer service levels.
Enable fully automated replenishment efficiencies is the ultimate long-term goal for
the METRO Group. This will require the RFID implementation to move beyond
pallet-level.
Explore benefits of item-level tagging for the customer experience, store inventory
management, and store workforce efficiencies.

1.1.2 e-Business activities

METRO Group began introducing RFID in its supply chain in November 2004 with a
gradual and systematic approach. METRO Group extended the number of suppliers
involved in the initiative to 50 CPG companies by mid 2006, and approximately 150
suppliers are now shipping pallets tagged with RFID labels. In all of its 9 food and non-
food distribution centres in Germany, the METRO Group directly applies RFID tags on re-
commissioned pallets and deployed RFID gates at outgoing and incoming goods
locations. With the objective of achieving full supply chain automation and visibility in an
effective manner, METRO Group decided in 2007 to consider three supplier categories
when negotiating purchasing agreements. Starting from 2008, those suppliers that are
not tagging pallets with RFID labels and that do not use EDI messages will be more
penalized compared to suppliers that send shipping notices using EDI and/or apply RFID
tags on pallets.

METRO Group has focused mostly on tagging pallets with passive RFID UHF
transponders, which are carrying on data such as the Serial Shipping Container Code
that identifies logistics units, store number and refers to detailed information on the pallet
contents. Every item to be tracked is uniquely identified by a single electronic product
code (EPC) stored in the RFID tag.

The supply chain process is as follows:


RFID-compliant suppliers send to METRO Group a dispatch notice in advance to
shipments. Suppliers ship the goods in pallets, which are read through an outgoing
gate.
An incoming RFID gate tracks arrival of pallets at a METRO GROUP distribution
centre. Pallets are stored in the warehouse and RFID-tags are read again through
an outgoing gate when pallets are shipped to the stores.
Pallets arrive at the store back-room inventory, and RFID tags are read via a
receiving goods gate.
POS (point of sales) data is then used to calculate stock levels and eventually send
an alert for store replenishments or automated orders to suppliers.

METRO Group has deployed the following hardware and software to support RFID
applications:
RFID readers in over 180 locations, including over 160 METRO Cash & Carry and
Real stores (at goods receiving, some front and back store).
RFID applications and software components for enabling data gathering, EPC-
filtering, data transmission, data analysis, advanced inventory management and
event based alerting. A software integration project was required to enable RFID
data loading from the store goods receiving areas to the merchandise management
system (MMS) of METRO Group. In addition, the retailer’s warehouse management
systems (WMS) also had to be updated to address RFID requirements..The latter
project took approximately 5 months to complete from process re-design to
application deployment. Two months later, in January 2005, the rollout was
completed and the solution went live at all warehouses included in the RFID
implementation.
In 2006 METRO Group adopted EPCglobal Gen2 tags and moved to the new ETSI
frequency regulation, in parallel with the rollout of a new reader gate design. This
will also enable carton-level RFID tagging rollout while item-tagging trials will
continue and potentially expand especially for fashion items. METRO Group
expects additional productivity enhancements using RFID at carton-level especially
on incoming goods registration, inventory management and supply management
between store warehouse and store.

METRO Group is mainly supported by IBM, Intermec, Impinj, Checkpoint and Reva for its
RFID roll-out and pilots. MGI METRO Group Information Technology is responsible for
developing the end-to-end RFID business solution including the backend integration of
RFID data, the operational deployment of RFID as well as research & development of all
pilot activities in Germany, including initiatives on case-level tagging, the Hong Kong ALA
logistics project, RFID-tagged forklifts and item level trials.

METRO Group started an item-level field trial at Galeria Kaufhof Essen in September
2007. UHF RFID tags are applied at Kaufhof apparel distribution centre, for over 30,000
articles in stock in the outlet. RFID gates, equipped with motion sensors capable of
automatically activate readers when needed, are placed at the backroom goods receiving
area and at all transition points from the warehouse to the front store as well as inside the
dressing rooms. At the checkout desk EPC-compliant RFID tags are read without
requiring physical or visual contact. Using mobile RFID readers the staff can check which
articles are available in the front store and where they are located. Rags are also tagged
to enable article localization. Store assistants can thus provide real-time information on
articles' availability, thus supporting customer service enhancements and optimizing
inventory management. Information is provided to consumers with clear signs at the
shop, brochures and clear labelling of all readers with the EPCglobal logo.

The process definition and system design phase started at the beginning of 2007,
followed by the pilot implementation and education of store managers and personnel
involved in the process. Based on EPCglobal standards, MGI developed the EPCIS in-
house for this particular project in order to speed-up support issues and new
developments. IBM and MGI conducted software developments specific to this project,
and an RFID-enabled business intelligence application from Microstrategy was used.

Up to 10% of the total inventory value of a retailer is hidden in "lost" products, in other
words goods in stock that are not visible due to inaccuracies mostly deriving from errors
in manual processes. As a result, the trial aimed at minimizing locked-up capital in
backroom inventories and optimizing promotion management efficiencies. The 'Smart
Shelves' have been installed as a special service for the customers. They identify clothes
via RFID and supply useful information such as the price, size and material of the article
via an integrated display. Detailed information on the respective garments can also be
displayed on the 'Smart Mirror' and in 'Smart Dressing Rooms'. In the next project phase
the customers will also be informed about the additional sizes and colours available
together with suggestions about complementary products and combinations, aiming to
drive cross/up-sells opportunities leveraging on targeted promotions. Integration with
loyalty programs is reported as a key area of focus in the future.

Looking ahead in the next 10 to 15 years, METRO Group expects that mainstream
adoption of RFID will lead to:
Positive effect on logistics efficiencies that can result from RFID adoption may also
contribute to the achievement of environmental sustainability objectives, essentially
by reducing pollution caused by commercial vehicles due to optimized asset
management and dynamic transportation routing abilities.
Attainment of lean supply chain capabilities in distributive trades leveraging on the
combined usage of RFID and smart sensors
Provision of a better consumer experience and to front-end retail innovation, for
example with the introduction of personal shopping assistants, interactive digital
advertising systems and intelligent shelves. These are shelves equipped with RFID
readers that can automatically send information to the merchandise management
system when goods are removed or incorrectly shelved, so that staff can restock
the shelves or rearrange the products. An interesting application of intelligent
shelves is also the possibility to enable new forms of communications and
assistance to consumers via digital displays that can be triggered by goods'
movements from the shelves.

1.1.3 Impact

METRO Group's ongoing RFID rollout and trials are demonstrating business case
opportunities for RFID adoption in a large global retail environment, with several
measurable benefits already reported.

Improvements resulted from RFID/EPC implementation can be estimated as follows:


Supply process efficiencies: significant overall improvements have been recorded
based on full RFID-deployment scenarios. Compared to manual barcode
processing, RFID is enabling accelerated goods receipt, reduced idle time via
automatic monitoring, inventory management optimization, improved process flow
and fewer shelving errors.
Loss/theft shrinkage: 11% to 18%, depending on product category and the
utilization of RFID on the case level. RFID-based Electronic Article Surveillance
(EAS)-systems promise to increase efficiency gains, by enabling source-tagging
approaches.

Sales and customer service: 10% to 20% reduction of out-of-stock situations.


Improved merchandize availability may greatly impact sales performance, which in
the METRO Group experience can grow up to 15% to 20% (not attributable to RFID
integration only).
Counting only the automated dock-door incoming goods processes (2 out of 11
major processes in retail logistics) METRO Group expects that the combined use of
RFID and EDI would bring total savings of € 8.5 million per year in Germany
considering Metro Cash & Carry, Real and the distribution warehouses.
CPG suppliers will also achieve significant cost reductions. As an example, order-
picking efficiencies would improve as 16 seconds per pallet can be saved. In
addition, as the goods receiving process is also faster at the retail distribution
center, shortens waiting times can be expected for delivery trucks, thus further
reducing logistics costs.

Electronic dispatch note can lead to cost savings of up to €2.84 for each dispatch
note.
More effective promotions can be enabled via item-level RFID tagging and higher
working capital efficiencies can be achieved by attaining full inventory visibility of
items.
Space planning and store profit optimization – the item-level trial at Galeria Kaufhof
is also enabling instant visibility into the profitability of the different store areas. By
correlating this information with merchandise and promotions intelligence data,
METRO Group's store or department managers may achieve substantial
improvements in space planning and demand management abilities with a positive
effect on profit margins.

Least but not last, it should not be underestimated that RFID can also enable compliance
with 'track & trace' regulations while ensuring product authenticity. Event-driven
notifications enabling real-time decisions on actual information will play a significant role
in respect, for example, to food safety concerns.

RFID-enabled innovation at METRO Group

METRO Group RFID Innovation Center is a permanent establishment located in Neuss,


Germany, that was formed in 2004 with the twofold objective of driving innovative
developments of RFID and demonstrate new applications of the technology. The center
also hosts the European EPC Competence Center (EECC) launched in partnership with
Karstadt Quelle, DHL and GS1. Among the activities performed in the competence
center, a lab is focused on assessing and optimizing RFID tags performance and
certifying RFID readers. Workshops and consulting services for companies that are
evaluating RFID implementations are also offered.

Lessons learned

MGI reported that retailers using RFID in supply chain operations could achieve a
competitive advantage between at least 8 to 12 months. But stronger opportunities to
improve retailers' competitiveness resulting from the implementation of RFID are to be
found in process optimization efficiencies and in the enablement of next generation
shopping scenario.

Early-stage involvement of CPG manufacturers in RFID trials has been a critical success
factor for METRO Group and supply chain partners alike. The essential requirement for
CPG companies in participating to the RFID rollout is the ability to exchange electronic
delivery notes to METRO Group using the Despatch Advice message format (DESADV).
DESADV messages are including information such as delivery date, consignment details,
handling instructions, customs clearance procedures, and invoice/order references.
RFID is driving a business process re-thinking at the METRO Group, thus positively
driving the retailer in optimizing its operational efficiencies, internal productivity, suppliers'
workflows and overall business performance. Customer service enhancements and
shopping experience innovation emerge as fundamental opportunity areas in the future.

The UHF band harmonization from the European Commission represented a critical
milestone in order to bring tags and readers' costs down, but still more effort is required to
the Commission and other regulatory bodies in preventing long-term risks for enterprises
that are investing on RFID as a strategic business enabler.

Training represents a difficult task to accomplish, thus companies evaluating RFID


implementations and pilots shall not underestimate the effort required to educate the
workforce.

Theoretical business case evaluations shall be validated by real-life assessments and


process performance measurements. This hold true fro the METRO Group and other
companies may benefit in taking the same approach.

Regarding RFID item-level tagging, it emerges a win-win-win scenario for suppliers,


retailers and consumers, with all parties benefiting from the adoption of this technology on
single items. In contrast, tags deactivation due to privacy concerns may completely
extinguish the business case for item level tagging, for example considering reverse
logistics operations, which are of particular relevance to consumer products
manufacturers.

References
Research for this case study was conducted by Ivano Ortis, Global Retail insights, an IDC Company,
on behalf of the Sectoral e-Business Watch. Sources and references used:

• Interview with Dr. Gerd Wolfram, September 26th, Dusseldorf, 2007

• Visits to Metro Cash & Carry RFID Warehouse; Galeria Kaufhof Essen; METRO
RFID Innovation Center laboratory and demo-rooms; September 26th, 2007

• METRO Group annual report

• METRO Group Communication Department publications

• METRO Group Future Store publications

• Websites:
• METRO Group, www.metrogroup.de
• METRO Group Future Store Initiative, www.future-store.org

A special thanks goes to Daniel Kitscha, METRO Group Corporate Communications, for
supporting the study author and allowing open discussions with METRO Group
representatives.
About this document
This case study was initially published as part of a comprehensive Sectoral e-Business Watch study report on
RFID adoptions and implications (2008). The European Commission, Enterprise & Industry Directorate General,
launched the Sectoral e-Business Watch (SeBW) in late 2001 to monitor, study and assess the implications of
ICT for enterprises and sectors. The results support policy formulation, notably in the fields of industrial and
innovation policy. All study reports and further resources such as data on ICT adoption in enterprises are
available online at the SeBW website (www.ebusiness-watch.org).

For further information, please contact

European Commission
Enterprise & Industry Directorate-General
D4 "ICT for competitiveness and innovation"
e-Mail: entr-innov-ict-ebiz@ec.europa.eu

Sectoral e-Business Watch


c/o empirica GmbH
Oxfordstr. 2, 53111 Bonn, Germany
e-Mail: info@ebusiness-watch.org