Rush to RFID or Wait for Proven Benefits?

Are you rushing to meet Wal-Mart's deadline or waiting for proven payback on RFID?

By Jack Neff, Business Editor

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They may not have been eager, and the technology may still have kinks, but almost all of Wal-Mart Stores' top 100 suppliers are participating in the giant retailer's first rollout of radio frequency identification (RFID) technology in Texas, which began this month.

And while payback for participation may be years ahead -- or even never come at all -- for many food companies, few if any can afford to ignore RFID. Not only is Wal-Mart testing RFID in the Dallas area, but rivals Target and Albertson's are piggybacking on the Wal-Mart effort by rolling out their own tests there. More broadly, the U.S. Dept. of Defense, European retailers Tesco and Metro and at least two more major U.S. retailers are preparing their own RFID rollouts, according to executives familiar with the matter.

Wal-Mart says 98 of its top 100 suppliers nationally are meeting the January deadline to have RFID on cases and pallets destined for three north Texas distribution centers. Two are working out snags that will prevent them from meeting the deadline. But another 38 suppliers have volunteered to get in on the first wave of compliance.

Wal-Mart clearly loves nothing more than an eager volunteer â€" especially when such consulting firms as A.T. Kearney Inc. and AMR Research and even the Grocery Manufacturers of America (GMA), an original backer of the RFID movement, contend return on investment will be hard to deliver.

But to help dispel any doubts, Wal-Mart has held up as a shining example Beaver Street Fisheries, a Jacksonville, Fla., seafood distributor, which volunteered to join the initial Texas rollout two months early in November. Privately held Beaver Street doesn't disclose sales, but suffice to say it does not rank among Wal-Mart's top 100. Even so, Howard Stockdale, chief information officer of the company, said in a statement, "We believe RFID offers an opportunity to fine tune our processes, and we've made a decision to aggressively pursue this technology. Participating in Wal-Mart's initiative is part of this strategy."

"Beaver Street provides a textbook example of how to approach this technology," says Carolyn Walton, vice president of Wal-Mart's Information Systems Division in charge of RFID implementation. "They got into the game early. They put together a team to see how RFID could benefit their own business. And they developed an implementation plan that was aggressive but achievable."

Stockdale says RFID has led to a re-engineering process that will make the company, which imports seafood from 50 countries, more competitive.

Some RFID tags are about the size of the letters on a penny, while others are embedded in 'slap and ship' box labels.

Aren't you efficient enough?

The textbook, however, may not be on the syllabus of many larger food companies. Beaver Street is an exception to the rule for much of the food industry for two reasons. As a smaller, privately held company, it hasn't already been through waves of internal efficiency improvements. And as a shipper of a relatively high-value product (seafood), the cost of RFID tags as a percentage of sales (19 to 60 cents apiece, not counting cost of infrastructure, software and consulting to track them) is considerably less than for makers of most food products.

"More progressive [food and other packaged-goods manufacturers] have spent the past several years on supply-chain efficiency efforts â€" installing warehouse management systems, labor-scheduling and inventory-control systems," said A.T. Kearney in a recent report. "For the manufacturers, the incremental value of RFID/EPC [electronic product code] case tagging is minimal."

Manufacturers of products that have significant problems with counterfeiting and theft, such as drugs, electronics, apparel and smaller, high-value personal care products, stand to gain the most from RFID, said the report. Most food manufacturers stand to gain little.

Another recent report by A.T. Kearney and IBM, prepared for the GMA, reviewed results for 24 unnamed large North American packaged-goods manufacturers. It concluded: "Widespread adoption of EPC/RFID is unlikely to occur until the industry addresses the unfavorable economics and unequal distribution of costs and benefits for manufacturers."

But Wal-Mart's Walton says: "We sincerely believe there is ROI for any company willing to approach this technology as a way to improve their own business and not just a way to meet our milestone."

Beyond ‘slap and ship'

"I'm not sure it's just about mandates," Simon Ellis, supply-chain futurist and top RFID implementation official for Unilever, said in a recent Consumer Goods Technology conference. "I think it's also about what it means internally for our business."

Unilever has been participating in the Wal-Mart pilot since May, installing RFID capability in two distribution centers in Texas and planning to install RFID capability in one factory in 2005.

So far, Unilever has only adopted the relatively easy "slap and ship" capability, in which tags are applied post-production in distribution centers, rather than during production. "That's largely because that capability doesn't yet exist," Ellis said, "but that will change in 2005."

He doesn't believe the slap-and-ship method most manufacturers are currently using to comply with the Wal-Mart mandate will provide a meaningful look at the ROI of RFID. "I think you need to run your pilot back into your supply chain, and that involves cost," Ellis says. "Up to now it's involved a technology that largely did not exist, but that is changing."

One key technological change coming in mid-2005 will be the adoption of so-called "generation two" tag technology, which will involve creating a common global standard for tags and expansion from two to nine tag manufacturers. That should help drive down costs, says Mike O'Shea, director of RFID strategies and technologies for Kimberly-Clark Corp., which became the first Wal-Mart vendor to ship cases and pallets using the tags last April.

British logistics provider Tibbett & Britten moves RFID-tagged cases bound for grocer Sainsbury through a portal designed to read the tags.

Unilever's experience indicates the cost of tags will be the key driver of total costs, and bringing that cost down will be critical in determining whether manufacturers make or lose money on the technology, Ellis concludes. "I think 2005 will be a critical year in terms of how generation two technology really does perform."

The current realities for Unilever, which began shipping cases with RFID tags to Wal-Mart in May, "are high costs, immature standards, lack of end-user awareness," Ellis says. "We are not able to read 100 percent of cases or pallets. The products that we make have a lot of liquids and metals that make it hard to get even close to that. But I think these are barriers we will overcome. The question is how do you manage through that period?

"Over time, I think you'll get to the point where there are a large number of categories where there will be sensible economics [behind adopting RFID]," Ellis continues. "I do think it's likely there will be certain categories where the [business case for doing RFID] will always be elusive. Most of the people believe that, from a total [consumer packaged goods] supply-chain model perspective, there's probably a business case here."

Ultimately: Data synchronization

Ellis sees three basic strategies for food companies deciding how to cope with the implementation of RFID: being on the "leading, bleeding edge," being a "fast follower" or being a slow follower. "I think all three strategies have merit, and depending on where a company sees themselves and their strategy for technology and supply chain will tell them what to do," he says. Smaller companies that generally don't take the lead in technology and don't have high-value products are probably best served by waiting for tag costs to come down, he believes.

"I think it's a little dangerous to only put this in the lap of customer mandate," Ellis continues. "Even though we may be hard-pressed to see it now, there may be some really compelling reasons internally that may emerge. We view it as enormously important for us to be operationally familiar with the technology. I don't believe in the long run the technology is going to generate differential advantage in the space, but it's clearly the thing we all need to come to grips with."

While RFID tag costs should decline, thus saving money for a company that waits to adopt the technology, there also are some key drawbacks to waiting, says O'Shea. One of the problems is that technical help for companies implementing RFID is becoming scarce.

Ultimately, Ellis says he doesn't believe RFID technology itself will generate competitive advantage for any company. "But I think the advantage will be in the way we use the data and manage business process change," he says. "Understanding what we can do differently will be critical."

"It does take some concerted effort, so it's not something I would recommend small companies go out and spend a lot of time on," adds Ralph Drayer, principal in the Cincinnati-based consulting firm Supply Chain Insights and former chief logistics officer at Procter & Gamble Co. "Overall, even though this is moving slower than a lot of people anticipated, there's a lot more involved in this, particularly when you re-engineer your business processes to take advantage of the technology. It's one thing to slap it on shipping containers and meet a customer's requirement. It's another to utilize this technology to really change how you do things."

The key for most companies to get ready for RFID isn't necessarily to hop on that bandwagon, but to re-examine another industry supply chain issue that "quite frankly was the subject of a lot of yawns a few years ago," Drayer says. That issue is data synchronization. That's the process by which food companies and their retail customers match their data, eliminating non-standard or obsolete data and product codes. "Without synchronizing your data," Drayer says, "you're not going to be ready when the [time to do RFID] does come."
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