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Rich , and retailers , get richer
There's a good reason for some suppliers to be more enthusiastic about RFID than others, notes A.T. Kearney. Suppliers of high-value items such as drugs, electronics and cosmetics will get far more benefit from RFID , such as reduction of theft , at far less relative cost than will food processors, the report notes. Not surprisingly, among the biggest backers of RFID in the consumer packaged goods world have been P&G, Gillette Co. and Kodak, makers of higher-ticket, higher-margin products.
Most food companies, notes A.T. Kearney, already have highly efficient supply chains, so they won't see significant net benefits from RFID. Yet their costs will exceed those borne by makers of higher-ticket items.
A grocery products manufacturer with sales of $5 billion will require 221 million tags for all pallets and cases produced annually. That would mean $33 million a year just for chips alone at the current 15-cent price, falling to $11 million if prices fall to 5 cents. By contrast, an over-the-counter drug manufacturer of the same size would see annual costs of only $2.2 million initially and $700,000 later.
The primary investment for retailers will be up front, amounting to $400,000 per distribution center and $100,000 per store, plus systems integration costs of $35-40 million. Yet retailers stand to see far more benefit than even manufacturers of higher-ticket items, according to the report, ranging from less labor cost to fewer sales lost to out-of-stocks and less theft.
Meanwhile, Wal-Mart has told suppliers it won't pay extra to defray RFID costs, says Kara Romanow, analyst with AMR Research, Cambridge, Mass. And under the Robinson-Patman Act, manufacturers will likely be prohibited from charging other retailers for something Wal-Mart gets for free.
In short, RFID appears likely to shift margins from manufacturers to retailers and from food processors to makers of higher-margin products.
There may be something of a Robin Hood effect, however, within the food industry. While bigger food companies with advanced supply chain management systems won't see that much internal cost savings from their RFID investment, smaller companies with less-advanced systems may see bigger savings, according to the Kearney report. Smaller companies also will pay less for RFID chips, since Wal-Mart doesn't expect suppliers smaller than the top 100 to tag cases until 2006, by which time tag prices should fall by as much as 67 percent.
Hype yields to confusion
Not since the Internet has a technology been so breathlessly hyped as RFID, whose skeptics view the initials as standing for "Ripe For Interminable Discussion." Perhaps not surprisingly, some of the same people have been doing the hyping this time around. Forrester, known for touting the Internet in the 1990s, has been among the loudest cheerleaders for RFID. Forrester and other poetic backers of the technology bill it as the linchpin of "The Extended Internet" or "The Internet of Things."
However, the technology apparently still has a ways to go. It's still impossible to read RFID signals through liquids and metal , eliminating practical use for much of the food and beverage industry at this point, according to Romanow. And powerful as it is, Wal-Mart may have trouble overcoming the laws of physics and the limitations of current RFID technology. Wal-Mart said it expects 100 percent accuracy in read rates on RFID chips, but recent tests have shown accuracy rates of only 80-90 percent, she says.
By narrowing the initial RFID rollout to 150 stores in Texas, Wal-Mart may have done more to help itself than its suppliers, who may have trouble sorting products headed to other places. Romanow recommends manufacturers initially should use cross-docking facilities in or near the three Texas distribution centers to break down pallets and apply tags.
The Kearney report says suppliers may have to tag products bound for all retailers at the plant level once Wal-Mart requires full national RFID compliance, because breaking down pallets at the warehouse level to tag only Wal-Mart cases is likely to prove too costly.
Still, while Wal-Mart was short on practical details in its November meeting with top suppliers, which Romanow likens to "a pep rally for RFID," she sees positive signs the giant retailer is becoming more flexible. One is that Wal-Mart dropped a requirement that RFID signals on each case be readable when the cases are still on the pallet, which should at least temporarily overcome the problems of reading signals through metal and liquids.
"There were signs of pragmatism," she says. "But some shifts were too subtle for many attendees to interpret as such."
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