The Real Story on RFID: 5 Questions for 6 Experts
RFID experts answer your questions about compliance, ROI, costs, and implementation.
Mention RFID these days, and it's usually Wal-Mart and the Department of Defense (DoD) that spring to mind. However, Target, Home Depot, Lowe's, Tesco supermarkets, Marks & Spencer, and Boeing are all in the middle of RFID evaluation projects as well. And they have every incentive to push ahead.
Wal-Mart expects to save up to $8 billion through RFID technology, and as a result is positioning RFID with consumers as something that "helps us keep our costs down—which translates into the everyday low prices you enjoy at our stores."
But what about RFID's impact on manufacturers and distributors? What, realistically, can they expect to spend? To gain? Will they ever see ROI?
To find out, Inbound Logistics polled some top integrators, standards developers, and market analysts. These experts have seen new technologies come and go, and have implemented dozens of RFID systems. Here, they offer the wisdom of experience, and solid answers to common questions asked by businesses considering RFID implementation.
1 . What's the least I have to do to comply?
"Companies have focused on reader and tag costs, and the least expensive route to compliance, when the more important question is, what do they stand to gain by additional intelligence capability?" says Dan Mullen, president, AIM Inc. "The total price may be more, but so will the ROI."
Companies can choose from several levels of RFID implementation, including:
- Slap and ship—affixing a tag at the dock door.
- Using a third-party logistics provider to ensure compliance.
- Automatically on the production line.
- Manually on the production line.
"Slap and ship is the least costly investment, and sometimes that makes the most sense," says Steve Banker of ARC Advisory Group. "But it is a case-by-case decision. Eventually, companies need to ask, at what volume does it make sense to move implementation from the warehouse to the factory? Are they wasting labor on the shipping dock with slap and ship?"
A simple measure companies can use to decide the appropriate level of implementation is the volume of case shipments being sent to RFID-compliant trading partners, advises John Sidell, principal and co-founder of Esync.
"If a supplier ships 30 truckloads a day to Wal-Mart, that calls for a more robust use of technology," he says. "But if the shipping volume is a pallet and a half per week, does it make sense to automate what a temporary employee can do in a few hours per week?"
Larger companies trying to comply with Wal-Mart mandates aren't restricting themselves to slap and ship. "They're looking instead at business process improvement, and how the technology can be applied early on in their processes at the systems level," says Erik Michielsen, ABI Research. These companies are looking at processes or weak points that can be improved with RFID.
"Tags and readers thrown on at the dock door may suffice initially, but it's better to understand how the technology and the data it collects can provide an information-driven competitive edge as RFID deployments scale," Michielsen says.
2. When, if ever, will I see ROI?
ARC's Banker does not foresee any short-term ROI for suppliers. "In the long term, companies need to be willing to re-engineer their processes to improve the ROI," he says.
"A recent study shows that 95 percent of suppliers to Wal-Mart don't expect ROI in less than two years. Many don't think they'll see ROI in four or five years, and some aren't sure they ever will."
Banker does foresee long-term ROI from warehousing efficiencies, reductions in inventory, better in-stock position at the store level, and lower transportation costs.
"The problem is that many of these ROI buckets won't kick in until the technology matures—and cumulatively, they may not come close to giving suppliers a decent ROI," he explains.
ABI's Michielsen advises that ROI is feasible, but hard-earned. "RFID users must look at how process improvement affect not only their internal logistics system, but also external partner systems," he says.
ABI looks at 3PLs as an excellent test case of process improvements and competitive advantage. "3PLs won't use RFID technology for just one client, they'll use it for all their clients, gaining an edge over 3PLs not using the technology," Michielsen explains. "RFID-enabled 3PLs will focus on throughput benefits—such as fewer touches on boxes, and changes to material handling systems in warehouses."
ROI may also be found through improved demand visibility. "AMR's benchmarking research proves that better demand visibility means better perfect order performance by a 2-to-1 margin," says AMR Research Vice President Kevin O'Marah.
"If supplier forecasts are 5 percent more accurate because of RFID, the supplier should see a 10-percent higher perfect order performance. Whether RFID can do this more effectively than bar codes remains to be seen."
The initial investment required to become RFID-compliant is also a concern. "The investment depends in part on the degree of automation," says Banker. "Many customers are adding conveyors in their shipping areas to automate the reading process. Multiply that investment across a network of 10 warehouses, and it gets very expensive.
"Some analysts cite initial investment figures ranging from $200,000 to millions, but $1 million is about right," he adds. AMR Research predicts far higher costs for larger consumer product goods (CPG) manufacturers—some $13 million to $23 million for a typical CPG manufacturer shipping 50 million cases per year.
3. Can we implement RFID ourselves?
With 3PL-assisted implementation carrying price tags of $1 million to $23 million, some companies are tempted to select software and hardware and self-implement. But none of the experts advise it.
"At this stage in the evolution of the technology it seems foolish not to bring in outside expertise," says AMR's O'Marah. "The technology is new, the process of building it into supply chain practices is new, and the payback is unclear.
"Only after a full generation of deployment will general availability of hardware, software, and data standards be evolved enough for companies to embark on RFID as an off-the-shelf routine purchase."
Integrators are available, but "beware of the cowboys," advises Michielsen.
"Everyone who was an ERP implementer or a process consultant is now an RFID consultant," he says. "There is value in getting outside help, but companies must make sure it is qualified, and appropriate for the task at hand."
Michielsen says small companies in particular must be careful, as it is harder for them to survive a failure than large companies.
Certification for integrators is evolving. "We foresee a near-term shortage of qualified system integrators, and we recognize the need to build out the integrator community, says AIM's Mullen. "They're the key element of the RFID industry."
As announced in November 2004, AIM and the Computing Technology Industry Association (CompTIA) are jointly developing a vendor-neutral, multi-dimensional certification program for RFID. More than one dozen companies and government agencies are participating to hammer out certification requirements.
Enterprise vendors are fast becoming a key integration resource. For example, Sun Microsystems opened a testing facility in Scotland in early 2004; SAP assists its users with data capture and integration; and Manhattan Associates launched an RFID-in-a-box initiative to support RFID pilots.
Michielsen recommends education before integration, software, or hardware selection.
"Each company must educate itself on market basics," he says. "By attending conferences, collecting marketing materials, making phone calls, and visiting test centers, potential users can better understand how the technology fits their own environment, and externally, how it ties into the ePC Global Network." (The ePC Global Network is a set of technologies enabling immediate, automatic identification and sharing of information on items in the supply chain.)
"Then, depending on company size and internal technical capabilities, decision-makers will better recognize the appropriate vendors and integrators," Michielsen adds.
EPC Global Inc. is itself a source of education. Subscribers receive implementation support—training, certification, and compliance programs—through member organizations.
"Last year was called 'The Year of the Pilot,' and 2005 will be 'The Year of the Integrator,'" says Michielsen. "In the past two years integrators have increasingly focused on RFID education and staffing.
"Some of those early integration efforts were learning experiences, but now that the technology is better defined, we'll see more timely and complex implementations, along with higher expectations on the part of mandating companies."
4. Will I have to buy a bank of servers and hire more people to handle all this data?
Not likely, say the experts. Some early adopters have upgraded their infrastructure, but not all.
"A common misperception is that RFID will bring in a sea of data, but that is not the reality," says Christine Overby, senior analyst, Forrester Research. "The only data users really need is for business insight—the needles in the haystack."
RFID will give users a lot of shipping and receiving data. "But decision-makers don't need to worry about every single electronic product code sent or received," Overby says, "only the ones that go late to customers, or go out of stock."
Some out-of-stocks matter more than others. Consumer electronics products, for example, have an incredibly high margin, so out of stock matters more than with commodity products.
Mullen says users will welcome the additional data as they become more comfortable with collecting and sorting it.
"With this additional intelligence, companies can understand where products are moving, how they're being handled, where they're being sold—and can be a little smarter about where and when product is needed," he says.
"Within a facility, on the micro level, manufacturers can understand how their products are built, and the sticking points in manufacturing and processing."
Some early adopters in consumer goods manufacturing are not just complying with Wal-Mart, but looking to use RFID internally.
Manufacturers may envision tagged candy bars, but in fact, Wal-Mart and the DoD both call for tags only on the case and pallet level.
Some retailers are asking for robust tags of larger codes, which seems unlikely: a more robust tag would command a higher price, when at present, the focus on achieving a 5-cent tag will likely keep the technology to a read-only tag of fixed memory.
For distributors, RFID allows for unique identifiers that barcodes and UPCs could not, such as:
- Date of manufacture
- Time spent in transit
- Location of distribution center holding the item
- Selling price
- Expiration date
- Last date of service
- Warranty period
5. How long can I get by without it?
"Indefinitely," says AMR's O'Marah, "especially if vendors are willing to shift sales to smaller retailers that won't deploy RFID for a more than a decade.
"If, however, Wal-Mart is a key customer, the holdout period may be zero," he adds. Wal-Mart expects 100 percent compliance among its vendors by early 2007.
Those early adopters getting by with slap-and-ship compliance are playing a waiting game while the technology, standards, and mandates are fleshed out. The reluctance is understandable, says Michielsen, "but the waiting game will end in 2005.
"In 2004, EPC standards and international standards were being resolved, and they've become progressively more aligned," he adds. "Tag-reading software companies went through multiple product releases in 2004, which increased performance, decreased cost, and brought a better understanding of unique requirements across vertical markets."
Banker polled 20 Wal-Mart vendors and found the retailer to be surprisingly flexible about compliance, negotiating individually with vendors taking part in its pilot. And the pilot itself is more contained than was expected. But experts predict Wal-Mart's patience will not last beyond 2005.
As further proof of the inevitable, "Tag and reader vendors are expecting large orders in 2005, from the retailers and the DoD in particular," says Michielsen. "Once that infrastructure is in place, small companies will have less leeway in late 2005, because Wal-Mart and DoD will progressively use RFID experience and understanding to scale implementations."
A prevailing concern is that the tags and readers simply won't be available, which has proven true for the Wal-Mart pilot.
Overby, however, does not see the issue of tag quantity as a workable reason to avoid compliance. "If there aren't enough tags, then the pace of adoptions will change. But I doubt that will happen—the tag market will be there if the business case is there," she says.
O'Marah agrees. "There will definitely be enough tags, provided the time horizon is long enough," he says. "Tag suppliers will add capacity to meet demand. The issue will be temporary shortfalls of supply as new capacity comes on stream." AMR forecasts the RFID market will triple, to about $4 billion, by 2008.
Supplies of the required Gen2 tags have been tight, pending ratification of standards. At present, only two companies, Alien Technologies and Symbol Technologies, have ready supplies, but Philips Semiconductor and Texas Instruments will begin production of Gen2 chips in Q2 or Q3 this year.
Experts agree the cost of tags and readers will not allow manufacturers to avoid compliance. Tags now cost less than 50 cents each, and sometimes less than 10 cents when purchased in bulk. Experts disagree on the time frame for the much-anticipated "nickel tag," ranging in estimates from two to 10 years.
The cost of readers—currently between $300 and $1,000 each—is expected to shrink to less than half those figures within two years. Overall, RFID is still an expenditure, but for small- and mid-sized companies—or those simply averse to the quirks and costs of early adoption—lower-cost options are available.
"One option is to take goods through a 3PL consolidator and share the expense of RFID tagging with other manufacturers," says Banker. "This method can lift the burden of having to come up to speed technologically."
Overby sees Wal-Mart's push as an opportunity for industry overall.
"Wal-Mart deserves credit for getting its suppliers to think ahead, and getting tag and sensor vendors to innovate and lower the cost of ownership," she says. "The fact Wal-Mart is starting small in a pilot of its top 100 vendors, or that it has scaled back the pilot's scope, should not be perceived as a failure.
"This is a revolutionary technology. It will take time—maybe five to seven years—for a complete rollout," she adds.
The secret to RFID success seems to be avoiding panic. Standards are emerging, and equipment costs shrinking. ROI is elusive in the short term, but just as barcode evolved from a compliance into a vital process asset, so, too, will RFID.
And as with barcode, less obvious means of ROI from using RFID will be revealed—for example, the technology's unique identification capabilities make counterfeiting more difficult, which allows manufacturers to maintain control and quality of brand image.
Users need not begin shopping for equipment or integrators just yet, but should begin educating themselves immediately. The experts agree—RFID can be either an expensive cost of doing business, or an opportunity for ROI and competitive edge. It is up to the user to decide.