Article

Who gains, who loses, from RFID's growing presence in the marketplace?

Knowledge@Wharton

In April 2004, Wal-Mart announced a pilot program that would require its top 100 suppliers to be RFID compliant -- attaching Radio Frequency Identification tags on cases and pallets destined for Wal-Mart stores and Sam's Club locations in the Dallas/Fort Worth area -- by January 2005. Showing just how much clout Wal-Mart has, the retailer is boasting 100% compliance, although it won't know until next month whether the system has led to increased efficiencies.

 

 "If it wasn't for Wal-Mart, we would not be having this conversation," said Badri Devalla, principal architect with Infosys, a global consulting and information technology services company, who spoke about the future of RFID technology at a recent Wharton Emerging Technologies conference. While the technology has definitely come into its own, said Devalla -- pointing out that the automotive industry

    Requires Free Membership to View

and the Department of Defense have been exploring RFID for the past few years -- it took a giant like Wal-Mart to bring it to the consumer goods sector. "Initially suppliers were scrambling to comply. Now many are stepping back and asking the million-dollar question: 'Is this just a sunk cost, or can we find a way to benefit from it?'"

Interestingly, while it may be considered one of the hottest technologies around, RFID is fairly old. It was invented in 1948 by Harry Stockman, but until the late 1990s it was essentially a technology waiting for an infrastructure, said Devalla. Its three components include the tag (a digital memory chip with integrated transponder), a reader (senses the presence of tags, receives and processes tag-level data) and a host computer (aggregates data from tag readers and passes RFID data via middleware to core business systems). Before powerful enterprise-wide computing, there was nothing to do with the information, so there was no reason to collect it. "After Y2K and the full sweep of enterprise software, we found fertile space for new kinds of data," said Devalla.

He predicts that the next three to six months will be critical, as a consolidation of technology vendors and software vendors takes place. "It's similar to the Internet boom," said one of Devalla's colleagues, Sajjad Jaffer. "Everyone is watching to see who is going to make the next leap." With standards fairly well in place -- the EPCglobal Network has established the standards and software for RFID technology -- suppliers are freed up to explore what Devalla calls true "green-field" technology.

No Cow Left Behind

Clients who want to go further than the "slap and ship" approach, said Devalla, are looking at it in two ways: closed-loop strategies (focusing within the company) and supply chain strategies (more collaborative efforts, possibly including packaging suppliers, contract manufacturers, third-party logistics players and retailers). Internal closed-loop systems are an easy starting point because companies can avoid issues with industry standards and synchronization with exterior partners. The options for using the technology, he added, are unlimited. Infosys, for example, is using RFID technology to track laptops at its many offices around the world. Automotive companies are using RFID technologies within manufacturing plants to track specific parts. The Department of Defense is currently using RFID technology in Iraq to track the movement of armored vehicles and mobile attack units. And the USDA is pushing to give every cow in the U.S. its own unique ID number, to be tracked and monitored through RFID technology, in order to more easily trace diseases back to the originating farm.

Moving out to the supply chain makes using RFID technology slightly more complicated, but that is where great gains can be made, according to Devalla, who pointed out that the current Wal-Mart mandate covers only the shipment part of the retail-supplier value chain. (Essentially, suppliers are required to have an RFID tag on every pallet arriving at Wal-Mart stores.) The "holy grail" of RFID technology will be the ability to track and monitor every product part at each stage in the manufacturing process. This could include parts from around the world, assembled in China, packaged in Japan, shipped through Europe, and distributed throughout the U.S. At every point along that chain, said Devalla, there is opportunity for the process to break down, for errors to happen. Setting up RFID technology to track and monitor the entire process is essentially the next "killer app."

But the killer app will need some killer processes in order to make use of the information. Morris Cohen, co-director of the Fishman-Davidson Center for Service and Operations Management, says he's impressed with what RFID can do, particularly when it comes to visibility within the supply chain. Research indicates there is a surprising level of error in inventory records, he notes, so anything that can tell us more about what's actually in stores and warehouses has to be valuable. Yet information alone cannot solve supply chain problems. He points to the package goods industry. You may have 100 perishable items on a store shelf; some are two days old, some are 10, and some are 14. It would be good to know the age and expiration of each item, he explains, but we don't have systems in place to make good use of that information. "The people promoting the technology are talking about how valuable it is to know all of this information and have it in real time. We can swim in the data, but knowing it may not be sufficient in the long run." Just having better information is worth something, he adds, but "figuring out what to do with it should be worth even more."

Professor of operations and information management Gerard Cachon is equally realistic about RFID in the supply chain, yet cautions against a mad rush toward an apparent "silver bullet" to supply chain problems. "I think the hope and expectation among many people is that being able to track every unit of inventory in every location of the supply chain will somehow magically make inventory management go to the next level," said Cachon. But based on his own research into sharing information in the supply chain, more information does not necessarily buy one a whole lot. What does buy a lot, he found, is reduced lead times.

Order processing, for example, is a key component of the lead time. In the 1980s, a retailer would send a fax or a letter with its purchase order to the supplier; the supplier would then key in the order and send it to the warehouse, which would then pick the items to be loaded onto a truck. After that, the process progressed to electronic data interchange technology, which allowed orders to be transmitted electronically. Now we have more information than ever, but that doesn't necessarily translate to what's most important in order processing -- speed.

"Information technology can tell us where the product is in the supply chain," noted Cachon, "but it's really hard to take advantage of that information. You don't have to be smarter; you have to be faster." If you can shave the order time from two days to one, he noted, that will have a real impact. "I'm viewing RFID as an ability to speed the flow of information through the supply chain, similar to what electronic data interchange did. And to the extent that it [RFID] can do that, it will improve inventory performance in a supply chain."

Intelligent Shirts

While the RFID tags are being used primarily at the pallet level, at least for the Wal-Mart pilot, other retailers have taken the next step and tagged individual items. British retailer Marks & Spencer began experimenting with RFID in April 2003 when it tagged all of its men's suits, shirts and ties at one of its stores. A year later, the retailer expanded its suit-tagging trial to nine stores and recently announced it would expand this trial to 53 stores starting in the spring of 2006. RFID is helping the retailer keep track of in-store inventory to ensure that a full range of sizes is available to its customers at all times. In response to customer feedback, the company is providing "explanatory leaflets," available in all the stores in which the tagged items are sold.

In addition to describing the tag's purpose, the leaflet also states --reflecting the kinds of concerns expressed by customers -- that the "Intelligent Label," as M&S calls them:

  • does not contain a battery, is completely harmless and can be thrown away after purchase
  • will not be scanned at the checkout and that therefore no link will be made between the garment information held by the tag and the customer's details
  • will not need to be retained by the customer to obtain a refund or to return the garment.

Wal-Mart's stated policy regarding privacy, which is available on its web site, focuses more on specific concerns about personal privacy. The statement reads, in part: "We are only focused on using RFID in such a way that it would benefit the customer by providing better product availability. The RFID tags that are used at Wal-Mart do not collect additional data about consumers or their purchases. The tags will contain a product code and a serial number unique to the tagged item, but will not contain any information about a consumer. Wal-Mart is not looking at RFID technology to track customers but rather to serve them by enhancing its supply chain process."

This does not mean that Wal-Mart is ruling out item-level tagging. In its April 30, 2004, press release announcing the pilot, it left the door wide open to moving the tags closer to the consumer. "We can certainly understand and appreciate consumer concern about privacy," said Linda Dillman, executive vice president and CIO. "That is why we want our customers to know that RFID tags will not contain nor collect any additional data about consumers. In fact, in the foreseeable future, there won't even be any RFID readers on our stores' main sales floors. However, down the road there are so many possibilities to improve the shopping experience that we hope customers will actually share our enthusiasm about EPCs (electronic product codes)," she continued. "As we look forward five, ten years, we see the possibility of offering expedited returns, quicker warranty processing and other ways to minimize waiting in lines. There are also positive product recall implications and a critical ability to combat counterfeit pharmaceuticals."

Privacy Concerns

According to Dillman, the kind of consumer uncertainly around RFID technology is similar to the kinds of fears that came with the introduction of bar codes into Wal-Mart's stores in the late 1980s. Her sense of calm, however, is not necessarily shared by consumer groups, many of which are vocalizing their concerns about ways the technology could threaten privacy and civil liberties. Consumers Against Supermarket Privacy Invasion and Numbering (CASPIAN) is among the most outspoken groups, calling for strict regulation of RFID usage at the item level.

In November 2004, CASPIAN, along with the American Civil Liberties Union, the Electronic Frontier Foundation, the Electronic Privacy Information Center and others issued a position statement calling for a halt to item-level tagging until formal technology assessment can take place. They are proposing federal labeling legislation, the RFID Right to Know Act, which would require complete disclosures on any consumer products containing RFID devices. Until these protections are in place, CASPIAN is encouraging consumers to vote with their pocketbooks, leading a boycott of Gillette and other companies employing item-level tagging and supporting the worldwide boycott of Tesco, a British retailer that uses RFID tagging. The group's slogan for the boycott: "Don't let Tesco spy on you!"

While personal privacy is at the heart of the privacy issue on the retail side, Cachon added that there are some potential positive outcomes of companies monitoring one another's behavior. This kind of transparency, he said, could add to new and more creative contracting between companies. He points to revenue-sharing contracts, where a supplier charges a flat fee -- essentially the wholesale price -- plus negotiates a usage fee, as a potential role for RFID. In the movie rental industry, for example, a company might sell 1,000 tapes to a video store chain at a base price, and then collect a fee based on number of rentals. You may have a situation where the video store chain claims to have rented a movie 3,000 times, but the film distributor feels that number is more likely around 30,000. "Disputes can arise when you have no way of monitoring the activity. With RFID, there's the potential to monitor more easily," he said.

Moving Forward

Meanwhile, the potential uses of RFID appear to be growing. A March 7, 2005, New York Times article reports on the airline industry's interest in using the technology to keep track of luggage, specifically to cut down on the number of lost bags. The only catch is that individual airlines must invest "tens of millions of dollars to adopt RFID luggage tracking."

One development that Infosys' Jaffer does not expect is indiscriminate launching of RFID programs just to see where they may lead. "I think there's a healthy skepticism here," he said. "If you look at the pattern of technology development in the 1990s, we saw companies trying to produce the coolest toaster/telephone combination simply because the technology was available," he joked. The novelty factor of RFID is being outweighed by the costs of entry and concerns about the real business value. "Companies looking at RFID need to ask: 'How does this make me a market leader in my space?' We believe that the business value considerations far outweigh the short-term gains of compliance to a retailer mandate," he said, adding that RFID should be part of a company's five- to ten-year strategy.

 


To read more articles like this one, visit Knowledge@Wharton, an online source for business analysis, information and research.

All materials copyright © 2005 of the Wharton School of the University of Pennsylvania.


There are Comments. Add yours.

 
TIP: Want to include a code block in your comment? Use <pre> or <code> tags around the desired text. Ex: <code>insert code</code>

REGISTER or login:

Forgot Password?
By submitting you agree to receive email from TechTarget and its partners. If you reside outside of the United States, you consent to having your personal data transferred to and processed in the United States. Privacy
Sort by: OldestNewest

Forgot Password?

No problem! Submit your e-mail address below. We'll send you an email containing your password.

Your password has been sent to: