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The Present and Future of RFID
Article courtesy of Frontline RFID
Consumer goods manufacturers are caught in a quandary with radio frequency identification (RFID). On the one hand, their retail customers are asking (and in some cases demanding) that they absorb the cost of adding RFID tags to their products, insisting that the technology will benefit them in the long run. On the other hand, the ongoing cost of tagging goods seems to exceed the expected benefit in many cases.
The fact is, both of these positions are right. There are quantifiable benefits for RFID—for certain types of goods under certain circumstances. And for some companies, RFID really is a losing proposition, at least for the time being. Part of the problem is pure economics. Tag costs, although falling, are simply too high now to provide payback on low-margin goods. But that problem will correct itself over time. A larger issue for retailers and suppliers is that to achieve the most frequently cited RFID benefits, companies will have to collaborate in ways that they've been unable or unwilling to in the past.
Not all of the benefits are even clear at this point. "We don't yet know the size of the impact, but we know it's there in a big way," said Linda Dillman, chief information officer at Wal-Mart, at a conference earlier this year. Retailers trying to emulate Wal-Mart's RFID model are bound to encounter roadblocks, because every retailer will face a different set of challenges.
"There's no cookie-cutter approach to RFID," says Sara Shah, an analyst at ABI Research.
There is light at the end of this tunnel, however. Accenture recently completed a survey of 30 RFID early adopters and found that end users believe the technology is improving at a rapid pace, and that the long-term rewards outweigh the risks. The respondents emphasized that RFID "is solving business problems today" and that "the [return on investment] is in sight," says Lyle Ginsburg, a partner at Accenture.
Bleak Picture for Suppliers
The problem with RFID for suppliers was laid out clearly in a report last year titled "A Balanced Perspective: EPC/RFID Implementation in the CPG Industry," from IBM, A.T. Kearney, and the Grocery Manufacturers of America (GMA). Based on a survey of 24 manufacturers currently deploying RFID technology, the report found that falling tag prices would not be a business case panacea for many manufacturers.
"The picture looked pretty bleak," says Omar Hijazi, principal at A.T. Kearney. "Everyone seems to believe that if the price of the tags would drop, all of the manufacturing business cases would be positive. But that turned out to not be the case."
In fact, the report found that "even optimistic estimates for tag prices are insufficient to generate a positive return for widespread tagging of pallets and cases across all product categories included in this study. Some companies estimate positive returns when tags reach the 5-cent price point, yet many others do not project a positive return even if tags were free."
For the business case to improve would require lower tag prices, increasing participation from retailers, wider adoption of standards, improvements in technology performance, and much greater collaboration between retailers and suppliers, according to the report.
UK retailer, Tesco, is testing item-level RFID at several locations. The company has focused on improving on-shelf availability and reducing shrink for high-value/high-theft items such as DVDs and compact discs.
The report was not uniformly negative. Benefits varied by product category and across companies, and costs varied primarily by distribution method. "As a result, certain product categories have a better 'ROI profile' than others," according to the report.
Some manufacturers could see a positive return even if tags cost 20 cents, and others required cheaper tag prices. Others benefited from a more selective implementation for certain high-value goods.
There is, however, a clear disparity between retailers and manufacturers, primarily because manufacturers will absorb the ongoing cost of tagging goods. Retailers also have more to gain from RFID than manufacturers, who have invested more aggressively in other supply chain technologies.
"There's more fat to trim on the retail side, especially with inventory and stock-outs," Hijazi says.
Retailers are correct in thinking that these benefits will help all of their supply chain partners in the long term, but that will depend heavily on how well the retailers improve their own store operations.
"In fact," says the report, "three of the top four anticipated manufacturer benefits rely heavily on retail adoption and improved retail execution at either the store or [distribution center]. Because there is so much uncertainty about how and when retailers will change their operations, many manufacturers have limited confidence that they will achieve EPC/RFID's benefits."
The Case for Retailers
Even if Dillman of Wal-Mart isn't entirely sure about the size of RFID's impact, it's clear that retailers have a lot to gain. The most often cited benefits are improving on-shelf availability, improved inventory management, more accurate forecasting, labor reduction, shrink reduction, and (depending on the store) eliminating diversion and counterfeiting.
Most of these benefits will not be gained through improving supply chain operations, however; they are directly tied to store-level execution. In other words, the retail out-of-stock problem has less to do with the supply chain and more to do with cluttered store rooms, busy clerks, and aging, incompatible IT systems.
According to Sean Campbell, a partner at IBM Business Consulting Services, the out-of-stock problem originates at the retail store level almost 75% of the time. "There's only so much a manufacturer can do on their own to improve that," he says.
Despite all the technology advances that have been made in moving goods from the factory to the store, moving product those last few feet from the back room to the shelf continues to vex most retailers.
"There is significant room for improvement in inventory accuracy at the store," says Campbell. "Right now, it's at about 70% to 80%. Retailers do not have the most organized back rooms." While Wal-Mart has one of the best-run supply chains in the industry, its back rooms are just as messy as anyone else's.
With RFID, retailers (and suppliers) would at least know if a case or pallet had moved out to the sales floor. Employees could use hand-held RFID readers to find specific cases in the storeroom, and security personnel would know if merchandise was leaving via the back door (where most shrink occurs).
Results will vary depending on the retailer, though. "If I move 'eaches' to the floor, then I won't get tracking data if I'm only tagging cases," Campbell says. "For things like health and beauty products, you're dealing with mixed pallets that may be broken down into interpacks."
According to Shah at ABI, retailers are also piloting RFID for security, enhancing advertising and promotional displays, payment applications, and anti-counterfeiting.
There are still hurdles, though. UK retailer, Tesco, which has been aggressively piloting RFID, has committed to deploying thousands of RFID readers from ADT Security Services (part of Tyco Fire & Security) at its stores and distribution centers, and will require suppliers to tag cases starting this year.
Although the retailer has high hopes for RFID, group technology director, John Clarke, cites technical hurdles, including a lack of standardized dock door configurations at Tesco's stores and distribution centers, interference with in-store phone systems, damage to RFID labels during transport, and a shortage of tags.
"This has to be treated as an ecosystem," Clarke says. "[RFID] is a challenge, and it's no small thing."
Item-Level Tagging
One RFID application Tesco is keenly interested in is item-level tagging. While Wal-Mart has shifted its focus to pallet and case tagging, Tesco (and a few others) have reported promising results from item-level pilots.
According to a report from systems integrators R4 Global Solutions (now part of VeriSign) and Intelligent Systems (part of MeadWestvaco), item-level RFID tagging could reduce retailer out-of-stocks by 60%, and significantly cut theft.
The two companies based their study partly on their own testing, and also on results from their customers' pilots (Tesco uses technology from Intelligent Systems).
The report claims that item-level RFID used for inventory management delivered an eightfold increase in employee productivity, streamlined inventory management, cut out-of-stocks by nearly 60%, and reduced shrink by as much as 20% to 50%. Retailers piloting item-level RFID, such as Tesco, Marks & Spencer, and Prada, have focused on expensive items such as high-end apparel, DVDs, and electronics.
"The cost to apply and utilize passive RFID tags at the item level present[s] limitations in utilizing the technology for many product categories. Put simply, placing a 20-cent RFID tag on a $1 can of tuna fish will likely present a challenging economic model, no matter how high the out-of-stocks, shrinkage, etc.," the report says. "However, for higher-value and high-shrink items, the economics do work, and work quite well."
This is why Tesco has taken a product category approach to its RFID efforts. "Certain products have a better business case than others," Clarke says.
"All of this comes down to feasibility of tagging," says R4 president and chief executive, Jeff Richards. "You're not going to see grocers doing this for some time, for example. But there is a lot more going on in terms of esearch and development among the manufacturers than most people are aware of."
Supplier Benefits Suppliers are often told that the benefits are there if they'd just look for them, but the cost-benefit imbalance still seems insurmountable to many of them.
"Tag cost is still the number-one hurdle," says Campbell at IBM. "It's a tough pill to swallow for suppliers that don't have an overly attractive business case."
"There's a feeling in the industry that suppliers are stuck with a bad ROI model," says Shah. "A lot of them believe that tag costs have to come down to single digits, but I'm not sure if they know all the ways they can leverage the technology. A lot of people have a very short-sighted view. They want a return on investment in a year."
In addition to improved sales through reducing out-of-stocks and shrinkage, suppliers can benefit from improved proof of delivery, receiving/shipping efficiencies, and deductions management—a big deal for suppliers that often find themselves on the short end of the stick when there's an invoice dispute.
"These are the types of benefits manufacturers would like to see given a higher priority," says Hijazi at A.T. Kearney.
"All that work done by the Auto-ID Center, all of those benefits, are in play," says Randy Dunn, head of RFID sales and marketing at ADT. "But they had the order wrong."
Those benefits will vary by category, however. According to the GMA/A.T. Kearney study, companies shipping mixed pallets will face more challenges, as will direct-store delivery companies, which have a higher infrastructure cost because they operate more shipping points. Reducing out-of-stocks, for example, was more beneficial to distribution-center-based companies than direct-store delivery companies. RFID could also improve a supplier's internal distribution center operations, but most are waiting until the last minute to place the RFID tags because so few retailers are asking for them at this point.
"There's a cost to buy and a cost to apply," says Dunn. "Most manufacturers are not applying the tag until they know for a fact that it is heading to a distribution center that has to have a tag."
As more retailers ask for RFID tags on more products, manufacturers can push tagging farther back into their own operations, which can lead to an even bigger payback.
"If they could just move the point of tagging back to the point of induction into the distribution center, they could drive more accurate picking, for example," says Alan Melling, senior director of EPC solutions at Symbol Technologies.
Even some low-margin manufacturers are optimistic about RFID's potential. Tyson Foods, for example, manually applies RFID labels to shipments of chicken headed to Wal-Mart from four of its facilities. Labels are placed just prior to shipping because, says chief technology officer, Gary Cooper, "I cannot afford to label more of the product than I absolutely have to."
The level of existing automation at these facilities will affect the return as well, though. "For a company that already has an efficient process in place, there are few immediate benefits," says Stephanie Childs, spokesperson for the GMA.
Even the much-touted reduction in out-of-stocks will have less of an impact over time, says Hijazi. "Reducing out-of-stocks can improve the situation, but it's still highly debatable what the impact would actually be," he says. "Once [out-of-stocks] are eliminated across the supply base, there's no more competitive advantage since all suppliers would conceivably be in-stock all the time.
It Takes Teamwork
In the long term, for RFID to succeed and for suppliers to benefit from better availability at the shelf, retailers have to do a better job of managing store-level data and sharing it with their suppliers.
"Retailers are going to quickly realize—until there's this massive movement across the industry—that to entice suppliers to add tags, they must give them something in return. Primarily, that will be access to store-level data," says Dunn at ADT.
Right now, many retailers don't even use the data they have—including point-of-sale information. "These retailers are not getting that data in real time, and they're not processing it in real time," says Shah at ABI.
Many of the problems with on-shelf availability and shrink could be solved with other technologies. But the buzz around RFID might finally spur retailers into action.
There are business process changes to make first, which is why Wegmans Food Markets, for one, has held off on RFID for now and instead focused on data synchronization. "The [data synchronization effort] is very dry, very different work, but we believe it's absolutely crucial," says Mike Bargmann, senior vice president and chief logistics officer. "We're also looking at business process re-engineering. We don't need the technology right now to make those changes." The company expects to pilot RFID by the end of this year or early in 2006.
Germany's Metro Group has also put as much emphasis on business process re-engineering as it has on flashy technology. In its Future Store initiative, not only did the retailer deploy shelf-level RFID readers, but it also designed processes to ensure employees would be alerted in a timely fashion and would be able to restock the shelf.
That falls in line with what the GMA study recommends: that retailers and suppliers develop a standardized way to share information, participate in global data synchronization, create an open forum to share pilot results, and roll out the technology by product category rather than geography.
The GMA report and other studies have shown that RFID data is useless unless stores use it effectively, and more importantly, can share it with their suppliers.
"An RFID tag on its own won't put new products on the shelf," says Childs.