RFID Reality Check 2

Mandates aside, real-world concerns may slow uptake of the revolutionary supply-chain technology.

InformationWeek Staff, Contributor

April 7, 2004

5 Min Read

Companies are scrambling to figure out how to pay for and implement radio-frequency identification technology in order to comply with mandates from some of the world's largest retailers, such as Wal-Mart Stores Inc. and Target Corp., as well as the Department of Defense. But the rush is hitting some serious speed bumps.

A report released last week by Forrester Research predicts that less than a quarter of Wal-Mart's top 100 suppliers will meet the retailer's Jan. 1 deadline. "It's not possible for these suppliers to meet Wal-Mart's 100% readability-rate deadline in the next 276 days," says Forrester Research analyst Christine Spivey Overby. Smaller suppliers, which have an extra year, are likely even further behind. "We've only begun to examine using RFID and may not be ready in time to meet the deadline," says an executive at a small consumer packaged-goods company, who declined to be identified.

Even Wal-Mart's time line is slipping. The retailer wanted to begin an RFID pilot with 18 pharmaceutical suppliers March 31, but only a few were ready. It's gone ahead with the ones that are compliant and expects the rest will join by the end of June, a company spokesman says.

The Department of Defense is advancing its plan to require its 43,000 suppliers to put passive RFID tags on pallets, cases, and single items costing $5,000 or more by Jan. 1. In October, it will publish the details of a new contractual clause for suppliers, but sources say it's still unclear if the department's mandate will launch on time. The department will hold a summit in Washington, D.C., this week in part to find out how far along companies are in their compliance efforts, a Defense Department spokeswoman says.

Not everyone is behind. Gillette, Procter & Gamble, Unilever, and Henkel Consumer Adhesives, part of the Henkel Group, have all said they'll be ready. VF Corp., a company with brands that include Lee and Wrangler jeans and Vanity Fair lingerie, plans to kick off RFID tests by September and will roll out RFID to its seven distribution centers by early December. "Wal-Mart is our No. 1 customer, so there's no way we will put at risk that partnership," says Eric Anthony, VF's VP of IT services.

RFID chart

Every week, more tech vendors announce RFID-related products and services, even as compliance, standards, and practical applications are still being determined. This week, Microsoft will debut the Microsoft RFID Council, which includes Accenture and Manhattan Associates Inc., and reveal that it's joining EPCglobal, the organization guiding development of RFID standards.

Last week, Oracle rolled out Sensor-Based Services, a set of software and services that deliver RFID capabilities to Oracle databases, application servers, and apps. It includes tools to help companies meet mandates and a kit that helps them get pilot tests up and running.

But the factors that could slow RFID adoption are formidable. There are steep costs associated with implementing it. In Forrester's study, which includes interviews with 10 of Wal-Mart's top 100 suppliers as well as 25 tag and reader manufacturers, the research firm estimates that Wal-Mart's mandate could cost a supplier $9.1 million in startup and maintenance fees for one year.

VF execs say they'll spend several million dollars on RFID, an expense the $5 billion-a-year company can more easily absorb than a smaller manufacturer. RFID costs could delay implementation at the unnamed small consumer packaged-goods company, the executive says. "For companies whose products are low-dollar items, the expense to build an RFID infrastructure is tremendous," she says.

In some cases, the costs won't pay off in the near term. That's because complying with the mandates, which is where most companies are focusing their efforts, requires tagging goods just before they're shipped. To lower inventory, improve product tracking, and reduce theft, companies will need to tag much earlier in the process, Forrester says. That requires RFID throughout the supply chain, which could cost more than $100 million in capital outlay, the research firm says.

"We haven't found that magical, positive thing that will have us jump in," says FedEx's Aaholm.Photo by Sacha Lecca

And many companies, such as FedEx Corp., have extensive bar-code systems that already work well. "It would be monumental for us to replace the bar-code technology," Sherry Aaholm, FedEx's senior VP of international and freight solutions, said during a panel discussion on RFID at InformationWeek's Spring Conference last week.

FedEx hasn't written off the technology. It uses RFID to track equipment and for employee proxy cards and keyless truck entry. In the supply chain, Aaholm could envision using RFID tags with bar codes on high-value shipments. But "we haven't yet found that magical, positive thing that will have us jump in," she said.

VF doesn't expect immediate returns on its investment. Today, it manually scans bar codes on cases and pallets as they're loaded onto trucks and uses that information to validate that all orders are filled and shipped. RFID could eliminate the manual scans, but the time saved may not outweigh the associated costs. VF expects tremendous value longer term, but only when RFID tags are used on individual items. "Your window of opportunity for savings is in the entire supply-chain process," says Jim Jackson, VF's RFID project manager.

In the near term, RFID is likely to create more hype than help. FedEx's Aaholm expects as much for the next couple of years. But, she said, 10 years from now, we'll look back and be amazed at the impact the technology has had.

--with Chris Murphy and Martin J. Garvey

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