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Finding the Value
Retailers are driving RFID adoption but suppliers stand to gain from the web-enabled technology as well.
To proponents of radio frequency identification technology, the benefits of RFID are clear: increased visibility in the status of shipments, faster processing of goods as they pass through distribution points, and reduced labor costs as automated identification takes the place of barcode-scanning warehouse workers.
That’s why Wal-Mart Stores Inc., Best Buy Co. Inc. and other organizations within the retail industry are pushing forward their own RFID projects, pulling hundreds of companies along with them. “If we have more accurate inventory, we can take safety stock out and provide information on product demand to manufacturers earlier and faster,” says Paul Freeman, program director for RFID for Best Buy. “So manufacturers can stop making products that consumers don’t want and make more of the ones they do want. The goal is to have more of what consumers are looking for when they come into our stores.”
Best Buy and other leading retailers have set mandates that require their largest suppliers to begin shipping all cases and pallets with RFID tags into retail distribution centers, where retailers’ RFID readers will capture RFID product data and make it available to authorized managers and trading partners over a private network, such as a corporate intranet, or over the Internet. Best Buy, which Freeman says is planning to make RFID data available through the EPC Network on the Internet, is requiring about 20% of its suppliers, or those responsible for about 80% of its business, to begin shipping with RFID tags by May 2007, followed by smaller suppliers in May 2008. Wal-Mart is requiring its largest 100 suppliers to begin shipping with RFID tags this month, followed by second-tier suppliers a year later.
The mandate-setters are basing their goals for RFID on its ability to go beyond the product identification capabilities of the long-ubiquitous barcode. While essentially both license plates that identify products, barcodes and RFID tags differ in that the latter can channel additional information like where a product has been and where it’s supposed to go, which helps increase accuracy and speed of shipments, says Beth Enslow, vice president of enterprise research for Aberdeen Group. So a sole dockworker at a retailer’s distribution center or logistics managers at a retailer or supplier, for example, can immediately verify on a computer screen that individual containers are traveling the correct route and take corrective steps if they aren’t.
Wal-Mart, already operating on low margins, operates on a large enough scale that it can gain significant percentage cost reductions by using RFID to save a single employee’s salary per distribution center, says Aberdeen analyst Paula Rosenblum.
Slap and ship
But the business case for the mandate-setters’ trading partners-and others including suppliers’ suppliers and other retailers-is more difficult to ascertain, raising doubts on how quickly RFID will develop in the retail industry. Suppliers must absorb the cost of tags, which range from about 25 cents to $1 or more, depending on volume and the complexity of the tags themselves. “The tag eats the profit margin on every box it’s placed on, so there are some suppliers who may no longer be able to sell to Wal-Mart,” says Tom Ryan, principal of West Chicago, Ill.-based TKR Consulting.
Aberdeen notes that suppliers also incur the expense of printing and attaching tags, which can range from $15,000 per tagging station to $150,000 per shipping facility. In theory, suppliers should be able to sell more products over the long haul as they and their retail partners do a better job of getting products on store shelves to match demand, but it can take a while for that to build an ROI on top of RFID costs, experts say.
But a lot of manufacturers haven’t even explored RFID yet to see how it could improve operations, hence the mandates, Freeman says. He notes that one of Best Buy’s computer suppliers says it takes more than 250 scans of component barcodes to make a single PC. “RFID can speed that up,” he says.
Many suppliers are moving to keep their mandating authority happy and their costs at a minimum by taking the “slap-and-ship” approach-tagging cases and pallets to provide Wal-Mart and others the data they need, but putting off further projects to extend RFID into additional operations. But these additional projects, experts say, can bring real value to suppliers as well as retailers.
By integrating RFID data with a company’s warehouse management and transportation management systems, for instance, suppliers as well as retailers can improve the processing of returned or recalled goods, the sorting and locating of cartons in a warehouse, and the management of trucks lined up in the yards outside of warehouses. And by monitoring RFID data to show the time and route distance of particular shipments, a supplier can monitor the performance of carriers, Ryan says.
To make a broader business case for RFID, suppliers as well as retailers should also take a hard look at different types of product SKUs to determine which can add value to an RFID system in the near term. While high-margin products like pharmaceuticals or consumer electronics could achieve faster ROI by avoiding stock-outs, it’s harder to make the case for low-margin products like T-shirts, experts say.
Yet using and tracking RFID presents a challenge in itself for many companies. “RFID generates an enormous amount of data, but the real challenge is not in generating data, it’s in finding a nugget of data and sending it to the right person to act on it,” says Pamela Klym, segment manager for retail industry at IBM Software.
IBM’s RFID premises server installed at a warehouse, for example, will collect RFID data from readers and forward it to an RFID enterprise integration server, which forwards it to the appropriate application-a warehouse management system, for example, that can be accessed by logistics and merchandise managers who need to know the status of shipments flowing into and out of a retailer’s distribution center. Although Klym declines to reveal a price for such infrastructure, noting that it can vary widely, she notes that IBM is trying to price it so that it’s affordable by even small companies.