04:30 PM

RFID Makes Slow And Steady Progress

RFID isn't changing the world, but it's being used strategically in government and business to track animals, stock products, and tag documents.

American Apparel storefront
American Apparel tracks each and every garment.
RFID was expected to change retailing forever. That didn't happen. Then it was expected to make the pharmaceutical market safe from counterfeit drugs. That didn't happen either. Still, the tracking technology has grown into a $5-billion-a-year industry, and shows up in lots of places--passports, transportation passes, livestock, hospitals, and in some instances, retail and pharmaceuticals.

Radio-frequency identification technology was a niche technology until 2003, when Wal-Mart ordered its suppliers to put electronic product codes on pallets and cases of goods going to its warehouses and stores. Wal-Mart hoped to use EPC tags, which store details about products and transmit them to inventory systems using RFID chips and readers, to create a more-efficient supply chain. These tags hold more data than standard bar codes and can be read from a dozen feet away.

But only about 600 of Wal-Mart's 20,000 suppliers have joined the effort. Suppliers such as Procter & Gamble and Kimberly-Clark are no longer the public advocates of RFID they once were. The technology is complex and costly to implement, requiring investments in the chips (ultra-high-frequency tags still run more than 7 cents apiece), readers, software, and new business processes. Some Wal-Mart suppliers have had problems with liquids and metal in their products interfering with readings, and, even more than the technical obstacles, many companies remain unconvinced they'll see a reasonable return on investment. Wal-Mart has pulled back on its original mandate: It still uses RFID in its stores and distribution centers, but doesn't require its suppliers to use it. However, in a meeting with financial analysts last month, CIO Rollin Ford said Wal-Mart is "still bullish" on the technology and remains committed to it.

Wal-Mart's vision of a vast, RFID-enabled supply chain hasn't materialized--tags for pallets and cases of retail goods accounted for just 10% of about 2 billion RFID tags sold worldwide in 2008, says research firm IDTechEx. But it has helped spawn an ecosystem of companies making RFID chips, readers, tags, and software, and consulting on their use. When opportunities failed to blossom in retail as expected, those companies went elsewhere. Initially, pharmaceuticals looked promising, particularly after California passed its electronic pedigree law to improve drug safety and reduce counterfeiting. It required manufacturers to use EPCs to track drugs as they moved through the supply chain. But the law, which was to go into effect this year, proved too costly and complex to implement, and the pharmaceutical industry won concessions that pushed implementation back to 2015.

Public Sector Advantage

But false starts in retail and pharmaceuticals haven't killed RFID. Sales of RFID tags, readers, software, and services will reach $5.56 billion this year, up from $1.9 billion in 2005, IDTechEx predicts.

One place where the technology is being rapidly adopted is in the public sector, where contracts have longer lives and there's less focus on quick ROI.

The problems with using RFID in retail go beyond cost, ROI, and interference issues, says Jamshed Dubash, a consultant who has worked extensively with the Department of Defense and other government agencies on RFID projects. Retailers and consumer goods companies use different technologies and processes for electronic data interchange. As a result, integration issues make it difficult for large retailers to exchange data with all their supply chain partners, Dubash says.

Retail contracts with suppliers tend to be short, based on the fleeting whims of consumer demand. Retailers have to squeeze the lowest prices out of their suppliers to make their margins, and that can make it difficult for all but the largest suppliers to invest in something like RFID.

Government agencies are different. They tend to work with fewer suppliers and their contracts last longer than the typical supplier contract with a retailer. They may require suppliers to use RFID as part of a contract and even require compatible systems. Because contracts are longer term, suppliers have more time to recoup their investments and, in some instances, can even incorporate the cost of the RFID implementation into the contract.

chart: Who's Using All The Tags? The military is increasingly using the technology--military organizations worldwide used 55 million RFID tags last year, according to IDTechEx. The Defense Department is looking for the same benefits from RFID as Wal-Mart, Dubash says. It's vastly more efficient to locate RFID-tagged airplane parts and equipment in the supply chain, and the technology lets the military easily deploy toiletries and other goods to overseas personnel from global distribution centers.

But military groups aren't the biggest public sector RFID consumers. By far, the biggest use of RFID is smart cards, a $3 billion market that consumed 559 million tags last year, or 28% of all tags sold. Most of these smart card projects are for passports, ID cards, and prepaid transportation cards. Last year, China completed a three-year, $6 billion project to implement RFID-chipped national ID cards--the largest RFID project to date.

The United States began adding RFID chips to passports in 2006. The United Kingdom will spend $570 million on RFID chipped-passports this year, and India will spend $40 million, according to IDTechEx. In transportation, London is projected to spend $1.7 billion on RFID-chipped smart cards for its bus and train systems; New York and New Jersey spent $500 million on RFID for a drive-through highway toll collection system last year, and Florida spent $60 million.

Governments also are driving the use of RFID for tagging livestock to help stem the spread of Mad Cow disease and other threats to local food supply chains. Ninety million tags were used on animals around the world last year, IDTechEx says. In Australia, which exports a lot of beef, RFID tagging is required by law. Cows' ears are tagged with RFID chips so that if a diseased cow turns up, it can be tracked back to the ranch it came from, and everywhere it had been.

Hanging In With Retail

The retail industry, with a total consumption of 468 million RFID tags last year, according to IDTechEx, is short of the revolution some projected, but it's too early to give up on it becoming pervasive in the retail supply chain. Proponents note it took decades for bar codes to become standard practice.

Wal-Mart still has "substantial investments" in the technology, which is in use at all of its Sam's Club stores. "We have tested it and piloted and implemented it to a degree" a spokesman says. "We know what works, and we're finding new applications for the technology." If suppliers don't tag pallets, Wal-Mart does it as they come into Sam's Club distribution centers.

Among Wal-Mart suppliers, interest in RFID technology varies. Some have found it useful to track and manage promotions and sales, since RFID data lets them better monitor which stores executed promotions correctly and on time. That helps them assess, if sales don't go up as much as hoped, whether a weak advertisement or poor in-store execution is to blame.

Companies such as Kimberly-Clark and Gillette have put RFID tags on promotional displays and the products being promoted before they leave their warehouses. The promotional material and products are tracked as they move from distribution centers, to store stockrooms, to store floors. The companies tracked which stores receive products and promotional materials before a promotion begins and which get the products out on display at the time of a promotion's launch.

Stores that move products from stockrooms to display shelves before a promotion begins naturally have higher sales than those that don't, but early tests by Kimberly-Clark and Gillette found that more than a third of stores didn't execute on promotions properly. "It makes a lot of sense and offers a lot of value. It's hard to understand why more consumer goods companies aren't moving down this path," says Dubash, who led Gillette's RFID effort in 2005, before becoming a consultant.

Procter & Gamble has "select applications" for the technology, a spokeswoman says. Some Wal-Mart suppliers, such as Pacific Coast Producers, a producer of canned vegetables, remain staunch supporters of RFID. By aggressively complying with Wal-Mart's mandate, Pacific Coast says it reduced out-of-stocks by 50% and improved its promotional sales.

Other big retail users of RFID include Metro stores in Europe, Mark & Spencer in the U.K., and American Apparel, the largest U.S. clothing manufacturer.

American Apparel Experience

American Apparel has used RFID for two years and is implementing the technology in 46 of its 300 stores. It works for the $340-million-a-year company in part because it makes its own clothes and can run a closed-loop supply chain system between its manufacturing and its stores. As the only supplier to its stores, data about the products never has to leave the system to be shared with outside companies.

To put as many different products in front of customers as possible, American Apparel has only one of every item on the store floor at a time--so there's only one small, peach-colored, V-neck T-shirt on display at a time. Every item is tagged with an Avery Dennison RFID tag before arriving at the store. A Motorola reader captures data from the tags at the stores' receiving docks, and that data goes into an inventory management system. American Apparel stockrooms have what's called a "fill station"--PCs where employees check the inventory system to see what's needed on the store floor, and where they record what they're taking out to put on display by tapping the touch screen. A wall-mounted RFID reader located on the path between the stockroom and the store floor checks to see if employees are actually carrying out what they tapped into the inventory system.

chart: Biggest RFID DealsThe RFID tags are removed at the point of sale, where another reader alerts the inventory system that a small peach T-shirt has been sold, and prompts employees to bring another onto the floor. Sales at stores with the RFID systems are 14% higher on average than those without RFID systems, says RFID director Zander Livingston, in a recent report. Staff levels at those stores are 20% to 30% lower than in other stores because employees don't have to spend five or more hours a day doing manual inventory checks. Stockroom inventory in RFID-enabled stores is down by 15%, Livingston says.

"There are a lot of lessons here," says Jack Farrell, VP and GM of the RFID division at Avery Dennison. RFID's growth has been similar to that of the cellular phone and bar-code industries, Farrell says. Initial enthusiasm spurred high expectations for rapid growth and quick success, followed by subsequent disappointment. In the end, he says, though it took decades, cell phones and bar codes fulfilled their potential.

Farrell sees the technology is better positioned than ever, since the many niche approaches and applications speak to innovation and real results, not suppliers meeting a mandate. "We've moved from a compliance-driven market to an innovation-driven market, and that's very encouraging," Farrell says. "It's going to spur industry growth going forward."

Like Wal-Mart and American Apparel, other companies will find innovative ways to incorporate RFID into supply chains to meet targeted needs of their businesses. It may not be the sweeping, industry-wide adoption Wal-Mart first envisioned, but rather steady steps toward useful goals.

Mary Hayes Weier has been with InformationWeek since 1994, most recently reporting on enterprise software, RFID, business intelligence, and cloud computing.

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