Page 2

By Jeffrey Rothfeder  |  Posted 08-01-2004

What's Wrong With RFID?


Page 1

: Introduction>

Beaver Street Fisheries is the prototypical manual-labor shop. Tons of clams, lobster, alligator, octopus and other exotica, from coastal waters in over 50 countries—hard-won catches of hard-edged fishermen and hunters—roll in and out of the Jacksonville, Fla.-based company's distribution site every day, to be carried by trucks, planes and ships to customers around the world. Beaver Street's more than 400 workers orchestrate a huge and noisy assembly line producing pallets of individually wrapped items for retailers, such as Wal-Mart Stores Inc., and bulk shipments for restaurants. Until recently, very little about Beaver Street's operation gave off the slightest whiff of high technology.

That changed last year, when Wal-Mart issued a much-publicized mandate requiring that by January 2005, its 100 biggest suppliers place radio-frequency identification (RFID) tags on most cases and pallets shipped to three of its Dallas-area warehouses. Beaver Street, with $500 million in annual sales, is hardly on Wal-Mart's A-list, but that didn't stop CIO Howard Stockdale from trying to meet the retailer's demand sooner rather than later. As he saw it, the mandate provided Beaver Street with a huge opportunity to cozy up to a customer with more shelf space and deeper pockets than anyone else—and to get there before the competition.

So far the strategy is working. Beaver Street has already spent upward of $75,000 to build a beta system that will test inventory management using RFID equipment. Electronic readers stationed at loading and receiving docks in Jacksonville scan incoming deliveries and outgoing shipments for RFID tags that identify the contents of pallets and then send the data to Beaver Street's ERP program. Once perfected, the system will produce detailed, up-to-the- second reports about which items are in-house and which orders are on their way to retailers.

The system is still experimental, but Beaver Street is racing to have it fully running by next year, perhaps even by Wal-Mart's deadline. Its efforts have caught the attention of the giant retailer, which regularly invites Beaver Street executives to its RFID brainstorming sessions, where they get to rub shoulders with such supplier superstars as Procter & Gamble Co., Kraft Foods Inc., Unilever and Kimberly-Clark Corp.

"We want to nurture and grow our business with Wal-Mart, and one way to do that is to prove that a medium-size business like ours can be just as innovative as a big, wealthy company," says Stockdale. "We also can automate manual tasks with RFID and deliver greater velocity through the supply chain and better inventory management by always knowing where our shipments are."

Page 2

: Hype Hop">

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.

Page 3

: A Penny Saved">

A Penny Saved

The return from RFID would be much higher, however, if the cost of the technology were lower. To a large degree, the inflated expenses associated with setting up an RFID system are responsible for the technology's lukewarm reception—and a prime reason why companies are moving gingerly into adoption of the technology. "The challenge for companies is how to offset the expense," says Mark Roberti, editor of RFID Journal. "And unless a company has a very targeted, carefully drawn up and highly discrete application with a built-in ROI, there's no easy answer for this yet."

A large supplier could pay as much as $9 million in the first year to comply with Wal-Mart's narrow regional mandate, with about 80 percent of that going to the electronic tags for upwards of 16 million cases and pallets, according to Forrester Research Inc. The next highest expense involves the readers for scanning the EPCs as the products leave the manufacturer's distribution centers, and, surprisingly, the additional labor costs for manual tagging—automated tagging and embedding RFID in packaging material is far from perfected.

Currently, tags cost anywhere from 20 cents to 40 cents each, depending on volume purchased and the quality of the tags. "If you're shipping a high-margin product, that's a negligible amount, but if you're shipping tomato paste, where the margin on a case may be 20 cents, adding a 40-cent tag turns your product into a losing venture," says Dave Douglas, executive vice president for products and strategy at ConnecTerra Inc., a maker of RFID middleware.

Tag, You're It

RFID tags currently come in two classes. The tag reproduced here in its actual size is a Class 1 tag manufactured by Alien Technology Corp. Unlike Class 0 tags, it is fully read/writeable, and can be programmed by customers when they deploy the tag.

That's why most large consumer-goods companies are minimizing their financial exposure by not going beyond Wal-Mart's requirement that they use RFID tags in the Dallas area. For even the biggest Wal-Mart suppliers, such as P&G, this will limit tagging to just 5 percent or so of their cases and pallets. VF Corp., maker of Lee and Wrangler jeans, among other consumer products, illustrates the wait-and-see response of suppliers to Wal-Mart's initiative. Most of VF's shipments to Wal-Mart are so-called multi-SKU boxes, which means that each box contains a variety of products in different sizes, colors and styles. Tagging these boxes is like slapping the label "building" on a house; it sheds no light on what's inside. Consequently, unable to justify RFID tagging of pallets and cases, "VF knows that it will just have to accept Wal-Mart compliance as a cost of doing business, with no payback," says Roberti.

VF's gains from RFID will come only when the price of the tags drops low enough to let the company tag every item it makes as the product is being manufactured, says Jim Jackson, VF's RFID project manager. When that happens, VF will be able, theoretically, to track products from plants in Asia through the "black hole" that items enter when they leave overseas factories and are placed on ships bound for the U.S., and then follow them as they're packed in cases and sent to distribution points, warehouses and stores. As retailers install shelf readers, VF could eavesdrop on sales activities at stores, thereby gaining a much richer idea of the specific color and size of items that are running low and need replenishment. That type of visible supply-chain application will be cost-effective and viable only when EPC tag prices slip to about 5 cents each, RFID experts say. And that's not expected until 2006, at the earliest.

But that also assumes that all the other critical RFID constraints will have been addressed by then. The accuracy of RFID systems is still well below the 99.9 percent rate that is required before they can be trusted to replace bar codes. The key problem is that with current technology, the tags have to be placed in just the right locations on boxes and individual items in order for readers to detect them. On top of that, RFID signals can be disrupted by metal, which reflects radio waves, and by water, which absorbs them. If 48 cases of Evian are stacked on a pallet, it's still unlikely that a case in the middle will be identified. And since most readers are programmed to scan their environments constantly—often as frequently as every five minutes, or less—to report on current inventory or the presence of new assets, inconsistent results would paint such a confusing picture of a warehouse that it could turn a supply chain into a Tower of Babel.

Page 4

: Standard Deviation">

Standard Deviation

Meanwhile, the readers, tag signals and middleware for translating RFID data into accurate and useable information that can be delivered to corporate ERP systems will lag as long as EPC standards remain in limbo.

Currently, all hardware and software is designed around one of two different RFID data syntax protocols, Class 0 and Class 1. Recently, some readers and middleware have been developed that decode both signal classes, but even RFID proponents view this as an interim and somewhat unreliable solution.

"This industry needs standards desperately," says Mike Sheriff, CEO of Dallas-based X-Change Corp., an RFID systems integrator.

"We'll only build the large user base that will allow us to deliver affordable technology, by eliminating the fear that if you use a certain type of tag it may not be able to be read by someone upstream or downstream in the supply chain. The lack of standards defeats the purpose of RFID, which is transparency, not opaqueness."

EPCglobal—a joint venture of the international supply-chain standards organization EAN International and the Uniform Code Council, its North American counterpart—is considering four proposals for so-called Generation 2 RFID standards that will finally ensure that all equipment and software is built around one set of rules. The organization says it will choose a protocol, which it promises will be backwards compatible with Class 0 and Class 1 tags, by the end of this year.

That's good news, but it still leaves open the question of when EPCglobal will finish work on a much more intractable problem: developing an EPC network that will permit password-protected access via the Web to RFID data anywhere in a company's supply chain—an essential component for widespread acceptance of RFID. The Coca-Cola Co. could, for instance, query the EPC network for the specific location of all cans of soda with the special Santa Claus promotion that were shipped out in November. Coke could then alert retailers to put the cans on the shelves, thus avoiding the cost of throwing out the inventory because it was buried through the Christmas season in store warehouses under other cases of Coke. It's unlikely, however, that a fully formed EPC network will debut before 2006, and it may not arrive until as late as 2007.

With all of these obstacles, the most prevalent supply-chain RFID application currently in use is "slap-and-ship," and it's the technique adopted by most of the Wal-Mart top 100 suppliers. This involves merely putting a tag on cases and pallets just as they are about to leave the warehouse. Electronic readers at the supplier's loading dock will scan these shipments and produce a list of the products included in the order. This "ship notice" will be e-mailed to Wal-Mart, whose own RFID readers will examine the incoming shipment and compare it against the supplier's documentation.

Although it's a relatively primitive application, even slap-and-ship has some potential benefits for suppliers. Order payment should be speeded up, because the shipment will be logged in immediately when it arrives at the distribution point and is scanned by the RFID readers. And chargebacks, in which retailers pay only a portion of a bill because they claim not to have received the whole shipment, should be cut back, because automated RFID systems will have verified the order at both ends of the transaction.

"By starting in this limited way, suppliers get a reasonably low-cost vehicle to evaluate the potential impact of RFID on their business processes without spending tens of millions on revamping their whole supply chain," says Kellam. "During this stage—the learning-curve stage—companies can determine how RFID data can be integrated into their enterprise applications and into their warehouse and factory infrastructures."

Page 5

: Baby Steps">

Baby Steps

Moreover, the tentative steps taken by large suppliers should turn out to be a boon for small and midsize companies.

Instead of having to compete against big initiatives driven by a stable technology, smaller manufacturers and distributors can also begin to assess nascent RFID systems on the cheap, and that should better prepare them to participate in the gains from RFID, along with their larger rivals, when automated EPC-based supply chains become prevalent.

Four Stages of RFID

1. This is the current phase, involving pilot projects, such as manufacturing automation, asset tracking, and tagging products for distribution to a retailer. It's an assessment period when RFID is being evaluated for how well it works within discrete environments and for its potential impact on business processes and enterprise applications.

2. In this phase, the pilot project is connected to another link in the supply chain, such as factory to warehouse, or warehouse to logistics. The most difficult aspect will be making sure that middleware and enterprise software are able to decode and filter RFID data well enough to produce reports so management can make supply chain, inventory and shipping decisions.

3. The intercompany phase when RFID-based processes are shared among partners in the supply chain to produce efficiencies unavailable to companies operating independently. This could be the hardest step, as system failures can occur at many points in the chain. But if it succeeds, suppliers could know better when to replenish inventory, and retailers can better forecast demand.

4. Synchronization occurs at this stage when RFID is used across an entire industry, so that it is possible through Web-based networks to monitor and locate all items in the supply chain at any moment. Low-cost hardware and software, workable standards, massive adoption, and a strong business case, are necessary before this phase can be made workable.

That, of course, will have to wait a few years.

Until then, the most successful RFID applications are likely to remain very targeted, "closed-loop" efforts that operate solely within a single facility or company operation and don't require transmitting data among business partners or even business units (see

Delta Air Lines recently launched just such an RFID initiative.

In July, the carrier began a 24-month program to embed invisible RFID tags in all labels placed on baggage sent on domestic flights.

Readers at check-in counters, on conveyer belts where the bags are sorted, and at aircraft cargo compartments will continuously monitor the whereabouts of every bag. This should all but eliminate the problem of misdirected bags, because an inventory of the plane's cargo before takeoff, based on RFID data, will determine if the right luggage made it into the hold. And if a bag is loaded onto the wrong plane, Delta will be able to locate it instantly, without the huge labor costs currently incurred in tracking down lost luggage.

This project—among the first full-scale airline RFID implementations—is slated to cost between $15 million and $25 million and is expected to be operational by 2007. That's a small price to pay, as Delta sees it.

U.S. carriers currently mishandle about one bag for every 250 pieces of luggage they carry, and Delta spends about $100 million a year in labor, delivery and other overhead costs to find and return lost items to their owners.

Delta estimates that the technology will soon pay for itself.

"We've reached the end of the improvements in baggage handling that we can accomplish without new technology," says Delta spokesman Reid Davis. "Any way you look at it, the RFID system is a great investment."

It's unusual to hear "great investment" and "RFID" spoken in the same breath. But most technology experts argue that it won't be long before ROI and RFID will be synonymous. The question, they say, is when, not if. But the only certain answer, is not now.