Pinpoint Control

Tiny chips may revolutionize all areas of supply-chain management

A breakthrough technology -- about the size of a grain of sugar and the cost of a piece of candy -- promises to revolutionize supply-chain management, letting companies track products from the early stages of manufacturing until they're plucked from store shelves, and every point in between. Radio-frequency identification tags incorporating tiny microchips are approaching a price point that could vault them from the realm of specialty applications into mainstream manufacturing, distribution, and retail environments. A Who's Who of consumer-goods companies and retailers, including Procter & Gamble, Target, Unilever, and Wal-Mart, are poised to use the devices.

When applied to pallets, cases, or even individual items, RFID tags can give suppliers, manufacturers, distributors, and retailers unprecedented control over inventory, shipping, and other logistics. The real-time data generated by the tags as products move along a route could help businesses make faster decisions, increasing efficiency and productivity in many areas, including how invoices and payments are handled. For instance, when a loaded pallet enters a retailer's warehouse, the RFID tag's signal could trigger an electronic payment to the shipper, rendering invoices obsolete, says Simon Ellis, supply-chain futurist at Unilever.

The concept has been around for decades, but its application has been held back in part by the expense of the tags, which ranges from just under $1 to $20. Now the potential cost has dropped to about a nickel, as sponsors of the commercially funded Auto-ID Center at Massachusetts Institute of Technology have figured out ways to produce cheap chips in quantity based on developing standards. "You need volume," says Kevin Ashton, executive director of the Auto-ID Center. "If you produce them in the billions, it'll cost as little as 5 cents." Ashton unveiled one of the first of the low-cost tags, just manufactured by Alien Technology Corp., last week at InformationWeek's Fall Conference in Tucson, Ariz.

With businesses lining up behind the effort, large-scale production may not be far off. Since the Auto-ID Center was founded three years ago, membership has grown to 67. In addition to the four companies mentioned above, sponsors include Coca-Cola, the Department of Defense, Kraft, Johnson & Johnson, and Pfizer. If Procter & Gamble fully embraced the concept, it alone could account for about 2 billion chips a year, according to a story to appear in the October issue of Optimize magazine, InformationWeek's sister publication.

Large retailers such as Wal-Mart will create a cascade of demand for RFID tags and the hardware and software needed to use them if those companies push business partners to adopt the technology for improved supply-chain coordination. "If they deploy RFID and show good results, it will really open up the market," Frost and Sullivan analyst Deepak Shetty says.

Depending on the outcome of an upcoming test, Home Depot Inc. says it could eventually put RFID tags on all of the 50,000 products it sells. If that happens, the home-improvement chain envisions asking manufacturers and distributors to join the initiative, says VP of IS Gary Cochran. The pilot program entails putting RFID tags on special-order goods in Boston-area stores so they can be located easily when a customer comes for them, Cochran says.

Unilever is conducting a three-phase trial of RFID technology, based on the Auto-ID Center's developing standard, that involves testing the tags on pallets, cases of goods, and eventually individual items. Unilever also participated in a trial with grocer Safeway Inc., completed a few months ago in England. "I could very easily see us investing in some pallet-level applications late next year or early in 2004," Ellis says.

What's needed for full-scale rollouts, in addition to the RFID tags, are scanners that work with the tags and services for businesses that need integration help, Ellis says. The Auto-ID Center is slated to publish a complete standard in the second half of next year. "If this technology is going to deliver the benefits, it's going to require a common approach, and that's not what we have today," Ellis says.

Unilever is working with pallet rental company CHEP International to develop reusable shipping pallets with built-in RFID tags and with RedPrairie Corp. on applications for warehouse management that work with RFID tags. But there's more to do. Unilever hasn't yet tested how RFID data will be managed across its SAP applications or how new data sources will affect its databases. "It's still not entirely clear how the whole system is going to work," Ellis says.

Vendors also need to figure out how their systems will process the massive amounts of data potentially produced by RFID technology. "You're looking at very large amounts of transactions and data measured in the tens or hundreds of terabytes," says Jon Chorley, senior director of development for Oracle's inventory- and warehouse-management products. Oracle, SAP, and others are enhancing their apps to support RFID.

One potential benefit of the technology, the ability to track items after they're purchased, could make it easier for manufacturers to recall defective products or provide services. For instance, a "sprayable" RFID tag being developed by NASA's Marshall Space Flight Center and due commercially in three to five years could be used by automakers to monitor parts on assembly lines and, later, to service those parts, says Fred Schramm, manager of high-risk research at Marshall. Yet such capabilities could trigger a backlash from consumers worried about having their movements tracked or intrusive profiling and marketing. Experts say the devices, which transmit signals short distances to RFID readers, can be turned off, so that shouldn't happen. Still, because of potential privacy concerns, Unilever isn't ready to use the tags on individual products. "We would have to have a much clearer idea of what consumers think," Ellis says.

And cost remains an issue for some. A 5-cent RFID tag "isn't cost effective for gum," says Jeff Martin, director of Wm. Wrigley Jr. Co.'s Global Center of Excellence. "Even at the box or pallet level, it's just not in our future right now," (see story, "New Wrigley Flavor: SAP"). To be practical for some retail applications, RFID tags need to drop to a penny or less, says Christian Knoll, VP for global supply-chain management with SAP.

Others, however, aren't waiting. Old Dominion Freight Line Inc. is using RFID tags on 12,000 pieces of trucking equipment to control inventory in its freight yard, track shipments, and monitor employee productivity. The result: a one-year payback. "It saves clerical time and helps us manage yard time," says David Congdon, president and chief operating officer.

As the cost of RFID tags drops from dollars to pennies, more business-technology professionals will begin to get out the scratch pads to assess when and where to use the devices. "It's easy to get wrapped up in the cost of the chip," Unilever's Ellis says. "Ultimately, it's a function of what you save."

-- With John Foley, Robin Gareiss, Mary Hayes, and Cheryl Rosen

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