U.S. firms have been slow to embrace radio frequency identification technology, but that is changing as both government legislation and factors driving economic efficiencies push RFID to the top of corporate agendas.
The Massachusetts Institute of Technology and a consortium of retailers and suppliers have been developing the circuit-bearing tags for years, but most expect 2004 to be the learning-curve year, where the technology begins its practical trials.
Considered to be the successor to the bar code, RFID tags contain an electronic product code, a unique identifier capable of containing more flexible and detailed information than a bar code. One example is an EPC representing one pair of socks versus a different EPC for a package of six pairs of socks.
As the RFID tags pass under automatic readers located at strategic points in the supply chain (such as assembly lines, dock doors, warehouse doors) they can give a history of where they’ve been, what they are and where they are bound.
By allowing retailers and suppliers to together trace a product’s path from factory floor to store floor, advocates contend retailers will be better able to judge demand against inventory levels.
Vijay Sarathy, manager for Sun Microsystem’s Auto-ID Infrastructure Solution, observed, “RFID technology has been around for a long time now, about 30 years. What’s happening in the industry today is that the dynamics are coming together. We’ve hit a critical point in that the technology can finally be applied to a number of different problems.”
As for corporate America, the benefits will help streamline operations and boost the bottom line as efficiencies are gained. “In a capitalistic society where we are delivering goods and dealing with finances, companies are always looking for the next level of efficiency. They want to find out exactly when the next order is coming in and they want to do [timely] replacement orders,” Sarathy said.
Of course, cost has been a huge stumbling block. It involves the expense of manufacturing the tags and the required installation of readers to grab the information as it passes through the system.
Experts such as Sarathy expect it will take at least five years before there will be use of RFID throughout the retail categories.
He noted: “The cost of the tags has to come down to a point where it is as cheap as bar codes. The tags have to reach a point where it is 1 cent each before it becomes bearable cost-wise for the firms. In addition to tag costs, there are also infrastructure costs. That means that all the shelves in the retail stores have to have antennas or readers to process the information. Those readers aren’t in place yet.”
Still, that hasn’t stopped some firms from advocating use of RFID. Gillette Co. and Procter & Gamble Co., for example, are some of the firms promoting the technology. That’s in part because RFID tags attached to consumer-goods products help reduce shrinkage.
European firms as a whole have been quicker to embrace RFID. Metro Group of Germany began testing its concept of the store of the future last year in Rheinberg, Germany, which pays special attention to RFID technology. The tags placed on items contain a programmable chip with a miniature antenna that is read by a reader with a range of 1 meter. Using an electronic link, the stored data can be read, processed and edited as necessary when the items pass through production, distribution and inventory checkpoints. As for warehouse management, the technology can tell the system where the item is in storage, and even charge off the “tagged” good upon checkout, according to Metro.
Tara Weiner, national managing partner, Deloitte Consumer Business Practice, observed, “When it comes to food safety and trafficking, such as questions over, ‘Where is that meat?’, Europe is more advanced than the U.S. in terms of RFID usage.”
European firms took the earlier lead in RFID adoption in part because of a European Union directive in 2002 that requires in the beginning of January 2005, food products at all stages of production, processing and distribution, can be traced, according to a Deloitte report. The U.S. has a similar requirement under the Bioterrorism Act of 2002, but firms here have been slower to react.
Right now, the big push into RFID territory in the U.S. comes from Wal-Mart, which recently announced that more than 100 of its largest suppliers must have plans in place for implementation of RFID tagging by February 2004, with successfully completed trial runs by Jan. 1, 2005. The balance of Wal-Mart’s suppliers are expected to migrate to RFID sometime in 2006.
Weiner sees the Wal-Mart mandate as a great way for the retailer to pare down costs. “The EPCs at the pallet base will help Wal-Mart lower administrative costs, such as its labor costs as [fewer people] will be needed to track and take stock of merchandise. The information captured by the reader will be sent [directly] to accounts payable, as well as help process receipts. The technology allows for a lot more information that can be embedded for [additional] uses,” she said.
Factors driving economic value will also push RFID to the forefront of retailing. Those values stem from three major business objectives: immediate return on investment, optimization of information and enhancement of safety and quality of products.
According to Weiner, one huge consumer complaint is not having adequately stocked shelves. “Our research shows that companies can increase revenue when there is on-shelf availability. RFID can help in reducing the order cycle times, as well as with automatic replenishment. In the supermarket industry, for example, out-of-stocks [occur] at about 13 percent of the time, which [equals] 6 percent in lost sales to the retailer and the supplier. An improvement in stocked shelves by just 4 percent would mean a 1 percent increase to the bottom line,” she noted.
According to a Deloitte consumer business research report entitled, “Chips With Everything: Who is funding your RFID programme?” better information optimization will help move goods faster through the distribution channel from more accurate picking in the warehouse to receiving efficiency, and even a reduction in the number of unsalable and wasted products because of poor rotation or spoilage. With up-to-date information, firms also will see benefits ranging from improvements in visibility of inventory to forecasting accuracy. In addition, optimization of assets will mean better control over reusable transit packaging — such as dollies, totes and kegs — and that will translate into less capital tied up in those assets.
While enhanced safety and quality control of products seem geared initially toward food and health and beauty care items, Weiner sees potential benefits in apparel.
“Initially, the tagging will help in gathering sourcing information, such as where it was manufactured. The information could be important to branded goods if child labor was used, for example, and help those firms to prevent any [further] taint to the brand. In addition, branded goods at the high end can use the information to track diversion. If firms find their goods where they shouldn’t be, they can now find out where those products have been and how they got to the wrong [destination],” Weiner said.
Greg Girard, vice president of retail marketing at supply chain software developer i2, said RFID, with its greater capacity for data management, will allow for pack-size optimization. That, in turn, has ramifications for apparel suppliers and buyers, who contend with how to size-assort stores with vastly different demographics.
“The well-worn example is the predominance of the Asian population in some West Coast cities and the need for more [size] smalls there,” Girard said. “With this [technology] you can stipulate and manage more varieties of pack-size configurations.”
If the tagging is eventually brought down to the product level, it could record a detailed tally of what garments were sold, when and at what price.
Retailers in general “don’t know how many large, medium and smalls they sell,” Girard noted. “It’s known at a local level in the store, but that information is aggregated and lost when it gets back to headquarters.”
For now, there’s still much work to be done.
RFID tags have a number of advantages over bar codes beyond their much higher capacity for information. Bar codes must be visible somewhere on the outside of the product to which they are affixed. Moreover, in order for them to be read, they cannot be scratched, covered with dirt or partially ripped. RFID tags, on the other hand, can be hidden and are better able to withstand certain hazards of shipping that would render a bar code unreadable. Also, whereas bar codes must be scanned one at a time, RFID tags can be read in large groups.
However, there are a number of disadvantages to RFID technology at this point that still need to be addressed. For most retailers and suppliers, cost remains the sticky wicket.
Tags cost anywhere from 25 cents to $1 a pop, meaning it’s financially unfeasible to tag most items and even some cartons. As well, according to analysts who have modeled out adoption scenarios for RFID, there are multiple levels of software needed to maintain the RFID readers and handle the data that will gush in.
In a study of the topic, consulting firm A.T. Kearney pegged RFID hardware costs at $400,000 per distribution center, with systems integration running as high as $35 million to $45 million for suppliers.
“Wal-Mart has said to its suppliers that they need to find a way to pay for it,” IDC analyst Christopher Boone said. “But they are never going to create a winning scenario if they look at it just on how to be compliant for Wal-Mart. They need to think about how they can use this new data.”
Chris Turnquist, vice president of Syntegra Retail, a business consultancy firm, observed: “So far, the edicts have come from retailers such as Wal-Mart and Tesco [the U.K.’s largest food retailer]. It is primarily retailers who are saying it is important to [their] business and [their] ability to track products. The disconnect is that while most people see value for the retailers, it is also the retailers who are asking [vendors] to take on the cost burden of implementing RFID. That is slowing the acceptance and evolution toward RFID.”
He added that EPC Global is the body that sets global standards for the operation of RFID in open supply chains, and that he expects some discussion shortly over what will become the worldwide EPC standard. Currently the U.S., for example, has a different standard than the one used in the United Kingdom.