Amid all the debate over Radio Frequency identification at Wal-Mart and Target, one question for those retailers and manufacturers not so huge remains: Is the technology worth it?
RFID tags have been called the next generation of bar codes. They use radio signals to communicate data — at present, a vendor ID number and a serial number — to readers over a distance of about 10 feet or less.
The answer depends on your business, say analysts, retailers and manufacturers. But for the most part, there is no business case for it yet, because the tags are too expensive, at anywhere from 25 cents to $1 each, the technology is not widespread enough to be useful — indeed, it is not even out of the test phase at Wal-Mart — and standards are not expected to be finalized until sometime next year.
However, companies should start testing now to find out how the technology might work in their organization and to develop technical expertise, said Christopher Boone, an analyst with market research firm IDC of Framingham, Mass. That way they won’t be left behind when costs do come down and adoption is widespread, which analysts are predicting won’t happen for at least several years.
“I believe there is a certain level of hype in the industry based on the idea that the vision for RFID is going to happen this year or next,” said Christine Spivey Overby, an analyst with market research firm Forrester Research Inc. of Cambridge, Mass. “Most manufacturers we speak with are looking at returns that are going to play out over the course of several years. That isn’t to say the business case isn’t there in the long term.”
Retailers with large, complex businesses that have trouble keeping shelves stocked to meet demand might benefit from RFID. At least, that’s what Wal-Mart is betting on. The retailer jump-started the retail industry’s move toward the technology when it mandated last year that its top suppliers begin affixing RFID tags on the cases and pallets in which goods are shipped, starting in 2005. The retailer last week began a test involving eight manufacturers and 21 products in its Dallas-area stores and distribution center. Wal-Mart installed readers in the distribution center and in the stockrooms and back hallways of the stores, but not on the selling floors.
“The whole idea of better merchandise availability for customers is the driving force behind this initiative,” said a Wal-Mart spokesman. “There’s a lot of money that is lost, especially on the weekends, because customers come in and there’s no stock on the shelves. Sometimes we discover it was in the back room, but because we didn’t have the technology, we [didn’t know it was there].”
The technology could also be used to reduce shrinkage, potentially a large savings for the $170 billion company. If a case goes missing, Wal-Mart could theoretically use RFID to pinpoint when and where it dropped out of the chain. It’s even possible that one day a system could be designed to alert security when an RFID tag exits through an outside door without first stopping at a sales register. Missing merchandise cannot be hunted down and tracked, however, because RFID tags cannot be read from great distances.
Wal-Mart doesn’t have to worry about justifying the cost of the tags, because they will be paid for by suppliers.
For apparel retailers in particular, RFID has the potential to speed up their distribution centers, said Mike Hahle, president of Real Time Integration Inc., a company that makes warehouse control systems and has many large retailers as clients, including J.C. Penney and AnnTaylor. If an RFID tag on a garment were to contain or refer to stockkeeping-unit information that could eliminate the placement of external bar codes, then warehouse workers could quickly throw the piece onto a sorter, where it would be interpreted and routed immediately. Today, folded and hung garments have to be placed on conveyer belts very carefully so they can be read by fixed and handheld scanners, he said. “RFID could save a third the time,” he said.
Smaller retailers, especially ones that deal with higher-priced merchandise, may not need more visibility into the supply chain or speedier distribution centers. That’s the case with Barneys New York, for example, which does a $400 million business with 21 stores and one distribution center.
“Our average price point is probably $100 or $200 higher than other retailers,” said Alan Barnett, Barneys chief information officer. “So with fewer units and fewer stores, we have great visibility to what’s where.” In addition, the retailer’s distribution center in New Jersey is very quick. “Things move through there in 24 or 48 hours,” he said.
The one area where RFID could be of use is in the shoe stockroom, he said. New shipments could be placed in random locations and employees would still be able to quickly find the right size and color. However, he added, signals would be disrupted in stockrooms full of columns and metal ducts, and the tags are still too expensive.
For manufacturers, the situation is the reverse of what it is with the large retailers. They have to pay for the cost of the tags, and the potential benefits of the technology — whether it’s used only on customer shipments or in their own factories and warehouses as well –— have yet to be spelled out.
Take Tandy Brand Accessories Inc. of Arlington, Tex., which is enthusiastic about Wal-Mart’s RFID initiative and has volunteered to comply by 2005 even though it is not required to. Tandy does about 38 percent of its $220 million accessories business with Wal-Mart and 10 to 12 percent with Target, said Stan Ninemire, Tandy’s executive vice president of operations.
“We’re learning things that we think in the longer term will put us in a better competitive position,” he said. More specific benefits to the company are as yet unclear. The company will be notified when its products reach Wal-Mart’s distribution center, for example. If and when Wal-Mart moves to item-level tagging on store shelves, Tandy said, the manufacturer could increase sales if Wal-Mart is able to improve its stock position on Tandy’s items, perhaps by reducing shrinkage. The company’s replenishment efficiencies are already high, said Jim McMasters, Tandy’s information systems director. The company receives sales data, inventory data and electronic orders every night from Wal-Mart.
For now, RFID is a cost of doing business. “Right now, we are absorbing the cost of this,” admits Ninemire. He estimated that at current tag cost, the company could spend as much as $110,000 to $150,000 a year to put tags on all the carton labels going to Wal-Mart’s distribution center.
Forrester’s Overby points out that the tags themselves will make up about 80 percent of the cost of compliance for manufacturers. In addition, manufacturers’ labor costs will increase slightly, at least in the short term, because they will have to hire more people to manually attach the tags to cases. She estimated a supplier that does about $12 billion in business a year could spend about $9 million in the first year for start-up and maintenance to be capable of shipping 15.6 million cases to Wal-Mart’s three distribution centers in Texas.
Consulting firm A.T. Kearney has estimated that a retailer might spend $400,000 outfitting one of its distribution centers, with costs running as high as $35 million to $45 million for manufacturers.
One thing that shouldn’t concern manufacturers or retailers too much is standards, said IDC’s Boone. “It shouldn’t be that big an issue.” He expects the first UBC global standards to be finalized sometime in 2005.
In the meantime, companies that are early adopters will probably have to upgrade their readers to accommodate new RFID tags that can hold more data, Tandy’s McMasters said. But with both Wal-Mart and Target requiring the same types of tags, there are no other standards issues to worry about. “Right now for our type of goods, we are only hearing one type of standard, and that’s passive,” he said.
One reason Wal-Mart and Target have become early champions of RFID is so they can influence the quantity and type of information that is stored on the tags, said Ninemire.
Eventually, said Boone, manufacturers will have to figure out how to make RFID pay for itself. Merely complying with retailers’ demands will eat too far into margins. “In the long term, it’s not a viable strategy,” he said.