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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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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