RFID finds its place

Take a look at the average Joe's key chain, and you're apt to see radio frequency identification (RFID) technology hard at work. Have one of those sensors for buying gas at the pump or an access card to get past security at your apartment complex? Those are prime examples of RFID. So is the

Yet RFID tags, smart memory chips with tiny radio antennas used to transmit information in real time for identification and tracking purposes, have remained stuck in niche markets, despite being around for more than a decade. But the tide may be about to turn. Technology advances, standard-setting activities and falling prices are converging on what many believe will be the application that brings RFID into a huge market: supply chain management. Soon, RFID may finally have what it takes to replace bar code technology as a more effective means of tracking products from manufacturing through distribution, say proponents.

But that remains to be proven. Significant barriers remain for RFID in the supply chain. Chief among them is cost. Some say the magic price point where RFID will take off is below 5 cents a tag. Prices today range from 50 cents to more than a couple of dollars, depending on the technology. The devices that read the tags can cost up to $1,000, and most industry watchers believe that the effective price point should be around a couple of hundred dollars. Enthusiastic suppliers will have to prove that these prices can come down as volumes ramp up.

Goodbye, bar codes?

RFID tags are similar to bar codes, in that each involves an identifying code, which a reader then interprets for tracking purposes. But bar codes have limitations that RFID tags can overcome. Bar code scanners have to see the bar code in order to read it, and typically a person must physically scan each individual bar code. In addition, if a bar code is ripped, dirty or missing, there is no way to scan, and thus identify, the item. In comparison, RFID employs wireless radio frequencies to transmit data to readers within a certain distance. There are three RFID ranges: low-frequency (125-kilohertz or 134-Khz) tags, which require a distance of 1 foot or less from the reader; high-frequency (13.56-megahertz) tags, which have to be in the vicinity of 3 feet; and new ultrahigh-frequency (UHF) tags, which operate at frequencies ranging from 300 MHz to 1 gigahertz and have ranges from 10 to 20 feet.

To date, most RFID applications have used low-frequency or high-frequency tags, not UHF. But supply chain applications will need the longer range that UHF provides. Already, retail giants such as Wal-Mart Stores Inc. and Target have launched pilots to test UHF RFID's aptitude in the supply chain, in some cases as a replacement for bar code systems.

In addition, a consortium of RFID vendors and potential customers called the Auto-ID Center is pushing an Electronic Product Code (EPC) standard to enable the technology's application in the supply chain. The center has made significant headway in its efforts to create an open network for tracking products throughout the supply chain, prompting the first substantial orders for RFID tags targeted at supply chain applications. Late last year, the Gillette Co. committed to purchase 500 million RFID tags. Retailer United Colors of Benetton recently ordered 1.5 million tags to keep tabs on garments for its 5,000 stores.

Healthy growth

Even without supply chain applications, the market for RFID tags, readers, software and services is expected to grow at a compounded annual rate of 22.6% from 2002 to 2007, according to Venture Development Corp., a Natick, MA, market research firm. (See chart, this page.) Shipments of transmitters and readers alone will grow from $703 million in 2002 to nearly $2 billion by 2007, says the firm. These estimates don't include sales of RFID products based on the EPC standard, because most are still in the pilot stage, says Michael Liard, senior RFID analyst at VDC. But RFID promoters say current numbers are just the tip of the iceberg. If you consider all the places in a supply chain in which an RFID tag can be used—on pallets and cases in the warehouse, all the way through tracking individual items stocked in stores—orders for tags may easily reach tens or hundreds of billions of units annually. And demand for RFID readers, although not as prolific, will also rise. (The readers interpret the information stored on tags and relay it either to handheld wireless devices or, when systems are integrated, to software such as enterprise resource planning applications. The number of readers required will vary widely, depending on the application.)

Established vendors such as the RFID division of Dallas-based Texas Instruments Inc. as well as start-ups such as Matrics Inc. and Alien Technology Corp. are gearing up for a big boom. "This is the kickoff year," says Tom Coyle, vice president of supply chain solutions, at Matrics, Columbia, MD. "People have been waiting for robust performing technology but also for prices to come down and for standards to come to maturity. Up until six months ago, it was not evident that the technology could do the job."

Many are betting that the Auto-ID Center's EPC standard will help overcome those problems. The three-year-old organization, headquartered at the Massachusetts Institute of Technology in Cambridge, MA, is designing its EPC network and standards based on the input of 87 member companies, including leading consumer packaged goods manufacturers such as P&G and Gillette. The Auto-ID Center's specification details the EPC, which would supplant a bar code to identify a unique item. The EPC employs a header and three sets of data so a tag can identify, for example, a specific can of soda (stock keeping unit #X, U.S. can of Coca Cola) rather than just a product category (Diet Coke in cans). For more details on the standard, see http://www.autoidcenter.org/aboutthetech_indepthlook.asp .

Although the specification favors UHF—which, because of its longer range, is best suited for supply chain applications—it also has provisions for the popular 13.56-MHz tags to accommodate certain applications. To keep down the cost of the tags, the specification calls for a read-only, passive RFID tag, which requires no extra battery and would store only a unique EPC identifier. The standard also specifies a network infrastructure that would link the limited information on the tags with more-detailed product and supply chain data stored in a Web database.

Problems with standards and cost

The EPC standard could also enable use of RFID across global supply chains of different companies (referred to as an open loop system), Auto-ID backers contend. Currently deployed RFID systems are proprietary and work only within the user's own facilities and supply chain (a closed loop system). Yet there are significant barriers to EPC's being adopted as a worldwide standard. For example, in the United States, the primary UHF frequency is 915 MHz, but it's a different frequency in Europe. And Japan doesn't even use the UHF band.

Nevertheless, the Auto-ID Center's work has galvanized the RFID industry, says Tom Pounds, vice president of marketing and business development, at Alien, Morgan Hill, CA. By getting users involved in the standards-setting process, the group has been able to get consensus faster than traditional standards-setting bodies, Pounds says, while getting to the heart of some of the more salient issues associated with RFID, such as price. "End users have been able to specify what they want, and at the top of their list is low-cost tags," he says.

Driving the price point of RFID tags down to that magic 5-cent level has been the goal for Alien. The company has invested in a patented manufacturing and packaging process called fluidic self-assembly that, the company claims, greatly reduces costs. Potential RFID customers have taken note: Gillette's order last November for 500 million tags from Alien is the biggest RFID sale to date. Some are skeptical, however, of Alien's ability to meet its production and pricing goals. Although Alien will not divulge the per-tag price in the Gillette contract, it has publicly stated that its goal is to get the price down to 5 cents or less per tag. Some fear that the company is setting unrealistic expectations that could hurt RFID's acceptance in the short term as potential customers hold off deployments until prices take that dramatic drop. "Focusing the industry on low-cost chips is bogus," says Peter Abell, director of global retail research at AMR Research Inc., Boston. "If you're going to put an RFID tag on a pack of gum, it needs to be 2 cents or less. But for clothing and consumer electronics goods, even a 20-cent tag to help automate warranty processes and prevent theft delivers a substantial business benefit."

In May another startup, Tel Aviv-based Smartcode Corp., announced it also had a patented manufacturing process that would bring the costs of RFID tags down. Aimed specifically at supply-chain applications, the process could produce tags at a cost of five to 10 cents in volumes of at least a billion tags, claims the company. The Smartcode tags will support the EPC standard.

Indeed, experts say electronics OEMs should actively embrace the technology for their own supply chain operations, because many of the products they build and ship, such as DVD players and PCs, are priced high enough to warrant an RFID tag, even at current tag prices.

"Knowing where a product is throughout the entire supply chain can reduce costs, cut down on gray market diversion and counterfeiting and aid in inventory control and item tracking. The applications are endless," says VDC's Liard. These supply chain applications may open the floodgates for the RFID market. "But we need to see more of these supply chain pilots turning into full-scale rollouts to really get the market rocking and rolling."

Alien's Pounds admits that reaching the below-5-cent price point depends solely on volume orders, such as the one with Gillette, and calls the pricing on the Gillette deal "very favorable." But others should not construe the deal as an indication that the tags are at that price point today, he says. "The reality of the Gillette deal is that a major company stepped up and made a big commitment to RFID and the Auto-ID Center's execution. And what we've said in taking the large order is that we're going to get there."

Tag-team deployment

Gillette plans to deploy the Alien RFID tags over the next three years in field tests and later, real applications—all designed to help Gillette keep products on the shelves when and where consumers want to buy them, says Paul Fox, director of global external relations for Gillette, Boston. In the United States alone, nearly $70 billion is lost in the retail sector due to products not found on shelves or lost in the supply chain, he explains. "Unless you do a physical audit, you're not going to find the missing products," Fox says. "We became interested in the Auto-ID technology because it can bring transparency and accuracy to the supply chain."

As one of the sponsors and a founding member of the Auto-ID Center, Gillette participated in the first field trials for EPC technology 18 months ago, initially tracking pallets and then cases of its razors with participating companies such as Wal-Mart and drugstore chain CVS. The third field trial, tracking products at an item level, has just begun and should end late in the third quarter. Apart from the Auto-ID Center trials, Gillette has other plans for RFID. It's testing an intelligent shelf with partners Wal-Mart and United Kingdom retailer Tesco in a couple of stores. In this application, shelves are equipped with readers that monitor the RFID-tagged items. The readers will send a signal to staffers to restock when the shelf is nearly empty. In addition, RFID readers in a store's stockroom will monitor inventory and automatically reorder the needed items. Using specialized software, an intelligent shelf can analyze restocking patterns, alerting store employees to an unusual pattern that might indicate theft. RFID also is being tested in Gillette's Ft. Devens, MA-based packaging center to track a product within the company's own closed-loop supply chain, Fox says.

Frequency foibles

P&G, another sponsor of the Auto-ID Center, is involved in the group trials but has not yet made a significant RFID order. The company plans to continue pilots through next year and ramp up deployment in 2005, says Paul Rieger, associate director of supply chain innovation for P&G, Cincinnati. A nagging issue is figuring out which frequencies work best for different types of packaging. For example, low-frequency tags are less expensive than UHF, use less power and are better able to penetrate nonmetallic substances. But UHF offers a better range and higher data transfer rates. "One of the things we are using field tests for is to determine what's the best frequency and technology for different form factors," Rieger says. "We're still in the investigating phase and not ready to make a sizable commitment, but we're encouraged that Gillette did."

Some companies aren't waiting for these problems to be solved before applying RFID to their supply chains. TI-RFID Systems, for one, says it's shipped more than 200 million RFID tags over the last decade for a variety of applications, including ones in the supply chain. Unlike Alien's and Matrics' tags and some of the later RFID technology based on UHF, TI-RFID's offerings are primarily in the frequency ranges of 13.56 MHz and below. The bulk of its sales are in automotive, access-control and wireless commerce applications, including the well-known ExxonMobil SpeedPass. The company has yet to embrace UHF or the Auto-ID Center EPC standards, because, it says, there are still too many unresolved issues related to frequency and standards that get in the way of shipping real products. "We have to make money with products today, not somewhere in the future," says Bill Allen, marketing manager for TI-RFID, Plano, TX. "We're doing that today, showing profitability and growth."

For example, TI-RFID products are already used to track pallets and monitor goods at the carton level, where rock-bottom pricing isn't as much an issue. London-based retailer Marks & Spencer plc has deployed TI-RFID technology in place of bar codes to track reusable trays, dollies and roll cages used throughout its refrigerated foods supply chain. Since it started, the company has seen an 80% reduction in the read time of the tags, compared to older bar code technology. It has also cut administration costs and, because of the better tracking of reusable trays, is able to get goods that have a limited shelf life to customers faster. Although interested in the Auto-ID Center EPC technology for item-level tracking, Marks & Spencer believes that the 13.56-MHz RFID products fill the bill for warehouse logistics, according to Keith Mahoney, the retailer's logistics controller, foods.

Executives at Tagsys , an RFID systems company in Ft. Washington, PA, that has partnered with Philips Semiconductors on EPC-compatible products, believes that initial supply chain applications will be similar to the Marks & Spencer vision: companies using the technology to track items in their own closed-loop supply chains, explains Alastair McArthur, Tagsys' chief technology officer. "It will be some years before companies such as Gillette use the technology in their warehouse to improve their own productivity and some time after that before we see RFID rolled out to every store Gillette supplies," McArthur says.

Even Gillette, the company most publicly and financially committed to RFID, would have to agree. Successful trials are one thing, but what it really comes down to is whether RFID technology can handle the tough work of dealing with real supply chain problems. Says Fox, "Do we know that it works in the lab? Yes. But can it work throughout a packaging center or in a real-world retail environment? That's what we're going to find out this year."

Is your supply chain using RFID? Tell us why at feedback@eb.reedbusiness.com .

Beth Stackpole is a freelance writer living in Newbury, MA. She can be reached at bstack@stackpolepartners.com .