Restrain Your Enthusiasm

By Larry Dignan  |  Posted 08-31-2005

Suppliers Push Back at RFID Demands

Bicycle manufacturer Pacific Cycle spent $700,000 on tags, hardware and software to test radio-frequency identification on its products in the last year. Why? Two big customers—Wal-Mart and Target Stores—want to wirelessly track its bikes.

But don't expect Pacific Cycle Inc. to spend another nickel for a third customer, unless there's a clear return.

"Those two are enough for us to handle right now," said Ed Matthews, the company's director of information technology. "These things cost money."

Welcome to the conundrum that is RFID. Large organizations such as Wal-Mart, Albertson's Inc., Target Corp. and the Department of Defense require radio tags to be placed on cases and pallets, but 28 percent of the companies implementing them can't justify the returns, according to an AMR Research survey.

Not everything is a good RFID target. Read more here.

Nevertheless, the pilots are piling up. Albertson's will have its top 100 suppliers shipping radio-tagged pallets and cases by Oct. 1.

Wal-Mart expects to have its top 200 suppliers shipping cases and pallets with tags by January. Target's pilot is underway.

"There is pushback on these RFID pilots," said Kara Romanow, an analyst at AMR. "More suppliers are unwilling to commit to pilots. ROI [return on investment] is the biggest reason."

So what should businesses do? Here are three steps to take in dealing with the next phase of wireless product tracking.

Step 1: Identify possible returns. Start tracking.

When more than 100 Wal-Mart suppliers began shipping tagged pallets and cases, the common way to comply with the world's largest retailer's efficiency drive was clear—slap on a tag and ship it to Wal-Mart.

Multiply that across all the products a company like Pacific Cycle sells—including Schwinn, Mongoose and GT bikes—and costs can escalate, said Kevin Ellison, manager of Sun Microsystems Inc.'s RFID test center in Carrollton, Texas.

"Slap and ship" means segregating goods in pilots and manually applying tags. In the short term, that approach will save money, Matthews said, but it's no long-term fix.

Matthews' plan is to at least identify potential returns.

Pacific Cycle plans to use RFID data to prove that a shipment of 10 bicycles was sent and received by a retailer.

Today, if the company sends those 10 bikes and the retailer says it got eight, Pacific Cycle has little recourse—the shipments aren't tracked at multiple points by serial number. The bottom line is that two missing bicycles could easily "fall off the back of the truck," Matthews said.

Now, the company can track any bicycle at any time.

For this real-time tracking, Pacific Cycle added SAP AG's Auto-ID modules to its enterprise planning systems to retrieve data from tags as they are transported and matched against Wal-Mart's shipping records.

Next page: Restrain your enthusiasm.

Restrain Your Enthusiasm

Step 2: Wait. Watch. Buy only what you have to.

Given that the returns for RFID are still murky, Romanow says suppliers are waiting to buy tags, readers and software. AMR's survey found that only 35 percent of companies with more than 5,000 employees thought the technology was mature enough to deliver returns.

That's why companies may be waiting for "Generation 2" technology, which will work anywhere in the world, allow for data to be added to tags and offer features such as password protection.

Sun's Ellison said his lab hasn't conducted any Generation 2 pilots yet, but notes that companies are hanging back to see how the standards develop.

Matthews said he is hoping next-generation radio chips, which have attracted the likes of Texas Instruments Inc., are produced in volume to bring down prices. For Matthews, tag costs remain a big hurdle.

"The costs of tags are 40 cents, and it is 10 cents to put them on," he said. "But we're not getting a 50 cent return. If we're lucky, we get 7 cents."

Step 3: Find your tipping point.

Find out here if the cost of RFID makes sense for you.

According to Ellison, it's pivotal for companies to find their tipping point with radio tags. That's the point where enough products are being tagged that it makes sense to apply tags to all goods as they are manufactured.

While there is no magic percentage that applies to every company, Ellison said, it will make sense for a supplier serving Wal-Mart, Target and the Department of Defense to automate the affixing of tags to cases and pallets of products, just as bar codes are today.

Ellison added, "There will be an inflection point where it makes more sense to put on tags at the manufacturing level than to add another [manual] line for RFID-tagged goods."