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10/15/2004
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SmartAdvice: Consider Limited RFID Adoption As The Technology Sorts Itself Out

Don't retool your factory, but consider limited RFID use as it moves into the supply-chain mainstream, The Advisory Council says. Plus, there's room for blade servers and rack-mounted servers in many IT architectures; and weigh cumbersome against secure in deciding on passwords, biometric-based ID, or some combination for security.

Editor's Note: Welcome to SmartAdvice, a weekly column by The Advisory Council (TAC), an advisory service firm. The feature answers three questions of core interest to you, ranging from career advice to enterprise strategies to how to deal with vendors. Submit questions directly to smartadvice@tacadvisory.com


Question A: In February, you said that RFID wasn't yet ready for widespread adoption. Is it now?

Our advice: The short answer is "Yes." Companies that take a sensible approach to complying with retail-chain and U.S. Department of Defense mandates can do so without unduly disrupting their operations.

Our long answer starts with "adopt RFID very carefully."
The most-publicized concern about RFID centers on the high cost of tags, as much as 50 cents today versus long-term projections of 5 cents. The second major issue is that readers don't recognize 100% of the tags at high speeds, particularly if environmental conditions are sub-optimal, which describes the typical factory. Practitioners schooled in methodologies such as Total Quality Management and Six Sigma cringe when considering cost and reliability issues associated with current-generation RFID technology.

These RFID deficiencies suggest that completely reengineering plant, warehouse, and supply-chain processes is a potentially risky strategy--but many companies fail to realize that limited RFID adoption can be managed as a far simpler project.


Related Links

RFID Insights

RFID Journal

Electronic Product Code

EAN-UCC standards


Most manufacturers facing customer mandates find that less than 5% of their shipping volume needs to be RFID tagged initially. This percentage will grow slowly over the next three years because of the tremendous effort required to implement RFID reader networks at the customer sites that receive shipments. Very few manufacturing companies are likely to tag even 30% of their shipments before 2008, when early-adopter customers are fully implemented, and the next tier of retailers is well under way.

We've examined the costs of RFID adoption and determined that "sensible RFID adoption" isn't a budget-breaking burden, even for midsize companies. As an example, let's use a $100 million manufacturing plant where the average case of product wholesales for $50. For most manufacturers, the contribution margin for such a case would exceed $20. If 5% of their volume is under RFID mandate, the mandate represents $5 million of sales, and $2 million of contribution margin.

The direct costs of RFID-tagging one case of product today are typically between 32 cents and 65 cents, depending on the type of RFID label required and factory labor costs. At 5% of total shipments, volumes would be less than 2,000 cases per week. The incremental direct costs of RFID-tagged shipping are likely to be $30,000 to $60,000 for a year. Doesn't it seem reasonable to spend $30,000 to $60,000 to stay in the good graces of major customers? I'm sure the marketing department thinks so--particularly knowing that direct costs will drop as economies of scale affect RFID label production.

Furthermore, if RFID is implemented sensibly, the current generations of RFID hardware and tags are perfectly adequate for the relatively low-volume exception processes required. However, companies do need to be careful during software selection and process design to assure that their systems fit the exception processes they must implement. Over-sophisticated software that's designed for large scale, high-volume implementations can easily drive adoption costs to wasteful levels.

Given that most companies will tag far less than 30% of their total shipments, it's hard to conceive of major benefits being produced by full-scale reengineering of plant operations, warehouse facilities, and overall supply-chain management. So delay the reengineering until improvements in RFID tag and reader reliability are achieved. Pace the RFID adoption so that implementation costs are prudent.

-- Walt DuLaney

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