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."
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