Trends: RFID - ' Beta Testing '

Not everything worked like a charm. In the Sam's Club test, the store's existing bar code scanners "collided" with the frequencies emitted by the RFID tags, causing mixed signals and some devices not to respond. In addition, flawed hardware sometimes kept the RFID readers from picking up all sensors. In both cases, Ashton says, he and engineers are designing better readers and tags—and are also trying to fine-tune the algorithms so RFID tags don't suffer interruptions in signal strength from competing frequencies.

The test has two more parts. In February, the Auto-ID Center cranked up the information load on the system by tagging cases of P&G's Pantene Pro-V shampoo and Gillette's Mach3 razors. And in a final phase of the test, scheduled for this summer, the team will put new low-cost tags, priced at 10 cents each, on individual boxes of cereal, soft drink bottles and cans of Coke in an effort to see if it is possible to track individual items from the factory to store shelves—and see if companies throughout the supply chain can use sensors to respond to real-time demand signals—rather than basing production on forecasts that are invariably wrong. "With RFID, the potential exists to never have to do physical counts of inventory again," says Larry Kellam, P&G's director of business-to-business supply chain innovation. Kellam says RFID could cut P&G's total inventory in half, while simultaneously reducing the number of times a product is not on the shelf. So-called "out-of-stocks" occur about 7 percent of the time, on average, in the packaged goods industry, according to a study by PricewaterhouseCoopers. If the trillion-dollar industry could cut that rate in half, that would free up some $70 billion in savings for other investments.

Another big goal for all manufacturers is to cut supply chain costs. Kevin O'Marah, vice president of supply chain strategies at AMR Research, says losses due to stolen, damaged, misdirected or lost shipments amount to 3 percent to 5 percent of total supply chain costs. "Supply chain inefficiencies are still a gigantic pool of potential value to go after," says O'Marah. "If RFID makes companies even 1 percent more efficient, you're talking about a huge amount of money." P&G's Kellam believes his company could save some $400 million annually if RFID lives up to expectations and reduces inventory by 50 percent.

Of course, there are a lot of skeptics—and with good reason. RFID has been around since the invention of radar during World War II and has been seen as a promising technology since the 1960s, when the U.S. Department of Agriculture implanted RFID sensors under the skins of cows to track their movements. The Pentagon is using RFID to keep track of military supplies sent to Afghanistan.