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By Jeffrey Rothfeder  |  Posted 08-01-2004 Print Email
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Hype Hop

If ever there was a can't-miss, high-return technology, radio-frequency identification would seem to fit the bill. The successor to bar codes, RFID tags—which allow goods to be tracked via an electronic product code, or EPC—boast a stream of enthusiastic and powerful backers. The Pentagon, Boeing Co. and the Food and Drug Administration, among others, have all joined with Wal-Mart to put the heat on their suppliers to begin tagging products with chip-based identifiers that send data via UHF waves to computerized readers 10, 12 or even dozens of feet away. (For details on the major RFID efforts, see "Key RFID Initiatives").

Remarkable claims have been made for RFID.

Studies maintain that goods with RFID tags can move through distribution centers ten times faster than those with bar codes, and still be read accurately. Report after report predicts revenue increases of as much as 10 percent, thanks to more efficient stocking, and a big drop in inventory expenses for companies adopting RFID.

Key RFID Initiatives

Michelin North America Inc.: Implanted RFID tags on some tires to keep track of their performance and wear over a period of time. Date: January 2003.

Tesco Corp. (U.K.): RFID tags are being placed on cases of nonfood items at the retailer's distribution centers, and these products are being tracked into stores. Deadline: April 2004.
An unspecified number of suppliers are required to tag cases delivered to some Tesco distribution centers. Deadline: September 2004.

Wal-Mart Stores Inc.: Top 100 suppliers must tag pallets and cases shipped to three Dallas-area distribution centers. Deadline: January 2005.

Department of Defense: Pentagon suppliers must place RFID tags on cases or pallets shipped to the DoD. Deadline: January 2005.

Target Corp.: Unspecified number of top suppliers are required to apply tags to pallets and cases sent to "select" regional distribution facilities. Deadline: Late Spring 2005.

Food and Drug Administration: To thwart counterfeiting, the agency recommends that all pharmaceutical producers, wholesalers and retailers begin developing plans to place RFID tags on pallets, cases and unit items. Deadline: 2007.

Boeing Co.; Airbus S.A.S.: Suppliers are asked to study putting RFID tags on airplane parts so these items can be tracked through their lifecycle for manufacturing and maintenance. Deadline: Not yet set.

Sources: RFID Journal, ConnecTerra Inc., Company and agency reports.

Judging from most of the publicity, you'd think we'd reached the tipping point when the inevitability of RFID had achieved critical mass.

Not so fast.

Despite the hype and the pressure, most companies have been taking little more than baby steps toward adopting electronic tagging. For most businesses, RFID is too expensive, doesn't work well enough (the accuracy of some readers is well below 90 percent), suffers from a lack of standards, and requires a resource-heavy overhaul of supply chain, logistics and manufacturing processes and systems before a worthwhile payoff can be toted up.

That said, as Beaver Street demonstrates, it may be a mistake for companies to put RFID on the back burner for too long.

"There is no business case for tagging everything today," says Christopher Boone, program manager for U.S. vertical-industry research at technology analysts IDC.

"RFID has the potential to be a revolution in the supply chain, but not yet. Ten years may be a bit aggressive for RFID to be ubiquitous. It will be closer to 15 years—half as much time as it took bar codes. Still, it's such a sure shot that now's the time for ramping up—or at least to take ramping up seriously—and not the time for ignoring it completely."

Initially, Wal-Mart's primary goal is to see how well its RFID readers and computers can monitor incoming shipments for order accuracy and track the movement of products out of the distribution centers and into its stores. The company hopes that this level of product visibility will reduce theft and help keep tabs on inventory, without having to manually scan bar codes constantly during the operation. Eventually, Wal-Mart wants to have RFID tags on every item in its supply chain (not just on pallets and cases), so that it can follow products from warehouse to store shelf. That would allow the company, it hopes, to replenish items more quickly than Wal-Mart is able to do now. And it's already pretty quick.

A study by consultants A.T. Kearney Inc. found that a retailer with an RFID system throughout its organization could expect a one-time cash savings of about 5 percent of total inventory, thanks to improved customer-demand forecasting; an annual reduction in store and warehouse labor expenses of 7.5 percent; and a yearly recurring gain of $700,000 per $1 billion in annual sales thanks to fewer out-of-stock items and less theft. All told, according to Kearney, a retailer with a wall-to-wall RFID system—which includes readers downloading actionable information, literally by the second, into middleware connected to networked corporate databases—could save 32 cents on every sales dollar. Not a bad return, considering that most big retailers' net margins aren't much better than 3 percent.

Eventually, suppliers should achieve significant benefits as well. Thanks to erratic forecasting and a lack of precise information, out-of-stocks of the top 2,000 items sold in retail outlets are estimated to average about 10 percent currently. If real-time RFID data diminishes out-of-stocks by even 50 percent, as is expected, suppliers could realize "a revenue gain of 5 percent that most companies would kill for," says Larry Kellam, former director of supply-chain innovation at Procter & Gamble (where he was an EPC pioneer), and currently the principal at the Kellam Group, an RFID consultancy.


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