Delivering the goods: RFID conveys a sharp signal to the supply chain world to come.

"I think the industry has sold itself on a program that offers so little return that it simply won't be worth the trouble and expense."

--Midwest grocery chain executive discussing the potential of bar codes in 1975

NO DOUBT YOU HAVE HEARD ABOUT THE RADIO-frequency identification tagging

programs that recently went live for both Wal-Mart and the United States Department of Defense, heralding the arrival of an important, innovative, and disruptive technology. And the momentum is accelerating as Target, Albertsons, Best Buy, Tesco, and Metro launch or expand RFID programs--introducing hundreds more suppliers to RFID.

This may be surprising to the casual observer. The prevailing wisdom among technology pundits seems to be that RFID is costly, cannot possibly have a near-term return on investment, and is just a Wal-Mart pet project with an uncertain future. Reality suggests otherwise. Wireless, automatic identification of goods can deliver tremendous supply chain benefits.

The train has left the station

Whether RFID will be adopted is no longer in question. Wal-Mart Chief Information Officer Linda Dillman, who spoke about the company's program at the annual National Retail Federation Conference in January, confirmed that 57 of the company's suppliers are now shipping RFID-tagged items. That number is expected to grow to 137 over the next few months and to more than 300 in early 2006. Wal-Mart itself has outfitted 104 stores, 36 Sam's Clubs, and three distribution centers, and those numbers will grow substantially in 2005.

This may seem like a tentative start if you are not familiar with the companies that are now tagging items for Wal-Mart: Colgate-Palmolive, Gillette, Kraft, PepsiCo, and many other global consumer products companies are the leading participants. And each has plans to expand shipment volumes to Wal-Mart this year. Many others will begin shipping tagged cases and pallets to Target in June. A recent study by the National Retail Federation found that more than 100 U.S. retailers were planning to deploy RFID capabilities in 2005.

While most of the attention is focused on supply chain tracking applications similar to those championed by Wal-Mart and Target, scores of companies have been using RFID to streamline and improve manufacturing operations for years. Questions include where RFID technology will first be expanded and how quickly will it move into new application areas.

RFID is more widely used today than most people think. Recent commercial applications include security access cards and work-in-process tracking in manufacturing. On the consumer application front, many people are familiar with the ExxonMobile Speedpass and the automated toll collection systems such as EZ-pass--both RFID-based. In the 1990s, the U.S. Army began experimenting with battery-powered tags to track the contents of shipping containers of supplies for troops stationed overseas. Today, every container shipped to Afghanistan and Iraq includes an RFID tag that helps improve the military's ability to track inventory.

Early RFID applications typically relied on either low- or high-frequency tags with limited reading range and speed or very expensive battery-powered tags. Around 2000, a number of leading retailers and consumer goods manufacturers began investing in the development of ultra-high-frequency RFID technology. UHF was attractive because it provided the potential for longer reading ranges, faster reading speeds, and low cost. These were all requirements for employing RFID to automate supply chain applications. MIT's Auto-ID Center (now Auto-ID Labs of EPCglobal) spearheaded research and industry trials that became the foundation of Wal-Mart's, Target's, and the Department of Defense's tagging initiatives. With the introduction of more investment and production volumes, costs have declined significantly, providing sounder value propositions for RFID's use.

A word about benefits

Business benefits from RFID fall into three categories: efficiency, security, and marketing. And it seems that the benefits of RFID will largely be realized in that order. Efficiency benefits are the most obvious. Keeping better track of goods and assets has been an ongoing goal of many organizations for years.

Security or anti-theft benefits are an important goal for many companies. Large manufacturers of branded products and pharmaceuticals have faced challenges for years from theft, counterfeiting, tampering, and diversion that have a material impact on their bottom line. RFID's ability to assign unique identifiers and track them in an automated fashion makes the technology ideal for addressing many product security and theft concerns.

RFID also has attractive capabilities from a marketing standpoint. Retailers are enthusiastic about the ability to monitor purchases and entice cross-selling. High-end retailers such as Prada and Marks and Spencer have shown early promise in applying RFID for marketing purposes, but this is likely to be the least active RFID application area over the next three years.

That brings us back to efficiency. The business case for RFID today lies in supply chain efficiency gains.

The curse of singulation

The bar code was a wonderful invention. It revolutionized inventory management and handling. Think back to the days before bar coding. Inventory handling comprised two activities: counting and recording. First, you counted the number of each type of inventory, and then you recorded it on a ledger. This process was repeated at receiving, shipping, and various other stops along the supply chain. However, the recording process was cumbersome and fraught with error. Physically writing down the inventory was time consuming, and humans--being human--made data recording errors. They transposed numbers, wrote information on the wrong lines, and created erroneous data.

The lasting impact of bar codes was automating the recording process. It saved time--a lot of time. It reduced data recording errors. It made inventory tracking economical at more stages of the supply chain. The efficiency gains improved throughput and reduced manpower requirements. Entire supply chains were adapted to the technology. You can see its impact today very clearly in most high-volume product handling environments by counting the places that business processes stop. Yes, stop, and then start again.

The fact is that bar codes still require the counting process of singulation. Bar codes require you to count by pointing a bar code reader instead of your finger at a product, but the counting continues nonetheless, and it usually requires a process stop to achieve the optical read singulation. While operators of bar code-enabled supply chains often cite their efficiency and accuracy, they typically cannot eliminate that one- to four-second lag required for a successful read. When you handle several million or several hundred million products on a regular basis, those seconds add up. The bottom line is that manpower is required to execute the counting process and the stops constrain throughput.

A food manufacturer I visited recently is a good example. It manufactures perishable products that must be shipped to the right location the first time or they will likely be disposed of unsold because of their limited shelf life. This company must also track its products closely for health and safety reasons. To address these issues, every time a case is picked in the warehouse, it is scanned individually, significantly slowing the picking process.

After the cases are built into a pallet and stretch-wrapped, they proceed to shipping for placement on a truck. As the forklift driver pulls into the dock door, he stops, steps off of the forklift, and scans the bar code representing the dock door and the bar code on the pallet before placing the pallet in the truck for shipping. The process takes four to 10 seconds for each pallet. While the procedure provides quality control and greater inventory visibility, it is a significant bottleneck in a high throughput operation. When you consider that some warehouses will scan bar codes up to 25 times between inbound receiving and outbound shipping, you start to understand the magnitude of the constraint that traditional bar codes often impose.

RFID applications championed by Wal-Mart, Target, and the DoD automate the counting process, thereby eliminating the stops currently designed into most supply chain work flow. Nick Tsougas from the DoD's Automatic Identification Technology Office calls this "hands-off data capture."

So what happens when the counting process is automated? First, you eliminate process stops for singulating bar codes. Second, it becomes more economical to track goods at more locations, both within and outside of your facilities. Once you are tracking goods effortlessly, then you're building on the efficiency gains and can begin to benefit from better visibility of inventory location within the supply chain and where loss may be occurring.

Near-term and long-term efficiency

Do not expect most Wal-Mart or Target suppliers to show a one-year return on their RFID investment. Similar to the adoption of bar codes, the benefit is derived from greater use throughout operations--eliminating all of those counting activities--that will lead to manpower reduction and greater throughput from existing facilities. While bar codes became a great enabler of supply chain efficiency over the past three decades, operational efficiency in other areas has caught up to the point that bar code reads often represent the bottleneck in many material handling activities. Bar codes will continue to be used for the next several years, but as RFID is employed more widely, it will eliminate the bar code reading bottlenecks and enable further efficiency gains throughout the supply chain.

Best Buy is requiring 20 percent of its suppliers (which are responsible for 80 percent of its business) to begin shipping with RFID tags by May 2007. Its smaller suppliers must meet a May 2008 deadline.

Drug counterfeiting may cost the pharmaceutical industry more than $30 billion annually, a key reason the FDA published its Compliance Policy Guide for implementing RFID feasibility studies and pilot programs. Acting FDA Commissioner Lester Crawford, Ph.D., said the FDA had one goal: "To increase the safety of medications consumers receive by creating the capacity to track a drug from the manufacturer all the way to the pharmacy."

The United Kingdom-based company is postponing use of RFID technology on cases and pallets. Colin Cobain, Tesco's IT director, told Computerworld in January, "Suppliers haven't really figured out their business cases within their operations yet, and we don't want to add costs to the supply chain because at the end of the day, customers will pay it."

The U.S. Army now has $100 million invested in RFID technology, according to Army Brig. Gen. Charles W. Fletcher Jr., the commanding general of the Military Surface Deployment and Distribution Command in Alexandria, Va.

"We believe that over the next two to five years, we will see a move from smart containers to smart cargo in smart containers," said Target's global security strategies manager Caroline Landwehr at an RFID seminar last December. As a charter member of the Customs-Trade Partnership Against Terrorism, Target ran a test with ADT Security Services to track tagged cartons of goods from a manufacturing facility in the Philippines to a deconsolidation point in the United States.

According to a study by Incu-comm, about 3 percent to 6 percent of the 137 firms targeted by Wal-Mart plan to resist its mandate on RFID deployment. The study also estimated that median spending per vendor was approximately $200,000.

RELATED ARTICLE: DATA-DRIVEN RESEARCH

Researchers at the University of Missouri-Rolla are examining ways to put all the data that can be collected from RFID tags to good use.

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Can Saygin, Ph.D., assistant professor of engineering management and systems engineering, and Jagannathan Sarangapani, Ph.D., associate professor of electrical and computer engineering, believe that companies inundated with data from RFID tags will not know how to handle it.

"Everybody's putting on those tags because of mandates by the Department of Defense and Wal-Mart," says Saygin. "But companies don't know what to do with the data because the tags are going to tell you they are there every split second. If you start storing the data, you're going to need a lot of memory and capability to process the data and make sound decisions."

The researchers are examining how RFID can be used on the shop floor to ensure part availability and in the supply chain. They have a $268,000 grant from the Air Force Research Laboratory through UMR's Center for Aerospace Manufacturing Technologies in cooperation with Boeing to develop data-collection models that are integrated with decision making, manufacturing execution and control systems, and network simulation tools. One focus for Boeing is clarifying information from tags on time- and temperature-sensitive materials.

RELATED ARTICLE: IIE CHAPTER BENEFIT

The Material Handling Institute of America is offering IIE chapters free copies of a three-part, 30-minute multimedia presentation on RFID. The DVD features an explanation of the technology and how it works, companies that are leading the implementation initiative, and the rationale behind its seemingly sudden demand. The presentation includes interviews with leading early adopters of the technology such as International Paper, Beaver Street Fisheries, Jacksonville International Airport, and Wal-Mart.

Chapter presidents and program chairs can contact Cassie Edwards at (704) 676-1190 or cedwards@mhia.org to obtain copies.

RELATED ARTICLE: BAR CODES ARE FOREVER

And other observations from a supply chain aficionado

Pay no attention to the enthusiasts behind the curtain. RFID has a long way to go before it's as profitable as it could be, according to John Hamilton, Ph.D., associate director of the Consortium for Supply Chain Management. The Consortium, part of St. Louis University John Cook School of Business, works with companies as diverse as Boeing, Anheuser-Busch, Energizer, and Purina to train and educate about supply chain technologies--the most recent being RFID.

In this interview, Hamilton dispels fears about privacy rights, predicts who will foot the bill, and explains why RFID tags and bar codes will co-exist for many years to come.

IE: What do you expect to happen with RFID now?

Hamilton: I think it's going to be a long, long process to bring RFID to full implementation with the view that either the Department of Defense or Wal-Mart or Target has. People are questioning what Wal-Mart really accomplishes with what they're currently doing because it can be done probably more cost effectively with bar coding. But the point is that's not where they're going. You have to start somewhere. You have to understand that they're going down to the product level .... It's not a short-term issue. The costs today are going to come down dramatically as the volume increases.

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IE: What are some things the Consortium is working on?

Hamilton: One of the things that some of our membership is wrestling with--and they're looking a little bit farther ahead--is that clearly there are going to be customers who are not going to require RFID. And let's presume that the cost of RFID doesn't go down to the point where it's cost effective to put it on every single package (and it's probably not going to get to that point) .... For example, a beer manufacturer who is putting the beer in cases as it comes off the production line. How easy is that going to be to change that from a continuous process to now say, "OK, I have a run that I have to make that requires packaging that has RFID already in the package--to get away from the slap-and-ship stuff." Is that production process going to be capable of doing that, and, if not, how do you address it? Those are some business issues.

IE: Will bar codes ultimately be eliminated?

Hamilton: No, because they are so inexpensive. There are just going to be some products that are not going to lend themselves to any incremental cost. What could drive it would be if you have a Wal-Mart that says, "To put your product in my store, you're going to have to have an RFID tag."

Now what we can't see with any great precision yet is what will be the cost of RFID in the future. It's not going to approach [the cost of] just some paint or some ink going on a carton, but it's going to come down significantly. It's just a matter of how low does it go. I think of things like the inexpensive ballpoint pens and things like that. The margins are so narrow that to go from a bar-coded item to an RFID item--I'm not sure it's feasible.

IE: Is the uproar over personal privacy impediments warranted?

Hamilton: I'm not insensitive to it, but I think it's overstated. There's an awful lot of tracking that goes on today. Look at the number of people now that use debit cards when they go to the grocery store. They already have that, so they could track that John Hamilton buys razor blades every three months and what kind of razor blades.

Most of the things on the privacy side, it's a concern, but I don't think it's a real concern as it relates to the normal sale of a product down to the individual level. What I'd like to know as a manufacturer is who's buying my product, why are they buying the product, what's the best distribution source for them to take advantage of that product. It's really a very esoteric need to get down to say what did Susie buy, when did she buy it, and why did she buy it. I don't see that as much of an issue for the retailers and manufacturers.

IE: Various news outlets have reported that Wal-Mart ended up being a bit more flexible than originally stated about the deadline for its suppliers becoming RFID compliant.

Hamilton: I believe they are. It's a goal rather than an absolute, and I think that's going to be the same with Target and Best Buy and the rest of them as they come in. What I've seen from the IT side of things was the CIO said they were working with people to help them resolve problems. And they clearly are.

IE: What supposed advantage of the technology may be too good to be true?

Hamilton: One of the things that's alluded to is that by going to an RFID technology, you will no longer have to worry about out-of-stock conditions--with the implication being if you're a manufacturer and you have a 2 percent out-of-stock situation in Store A, that if you can eliminate that 2 percent with RFID that your revenues are going to go up by 2 percent. It kind of makes sense with one exception: If Susie goes to the store and they don't have Sara Lee, and she wants Sara Lee, she's going to go somewhere else. So that if [they] had it in Store A, you're going to buy it from Store A, so that store's sales are going to go up, but you're not going to go buy two Sara Lee cakes.

Theoretically, you'd say if there's a 4 percent out-of-stock nationally, then if there's no out-of-stock situations, we ought to see a 4 percent increase in revenues nationally, and I don't believe [you can say that]. You're going to seek internal efficiencies. If you're a manufacturer, you need to find a way--how can I take advantage of RFID to better run my business in my part of the supply chain in addition to having to meet the mandate of a Target or a Best Buy or a Wal-Mart?

IE: Any additional comments?

Hamilton: One of the things that I was asked in another article was who is going to pay for all this. Well this time around, obviously, if I have a contract with Wal-Mart and they say I have to do it, well I'm kind of stuck. But as contracts come up for renewal, if I'm Sara Lee and whoever the competitor is for Sara Lee, they're going to build that cost--whatever it takes to do RFID--into the cost of the product. Everybody's not going to absorb all of this cost.

--Monica Elliott

RELATED ARTICLE: SAFE MOVES FOR UPS

After speaking with Bob Nonneman, industrial engineering manager of UPS's corporate engineering group, for a few minutes, it is clear why he is the director of UPS's RFID initiative. He is thoughtful and patient with his responses, so it follows that he would be the same way with his work.

The industrial engineering team was brought in to evaluate passive tag technology in 2001, according to Nonneman: "Our senior vice president of engineering felt that it was a technology that we needed to monitor and become involved with because it potentially had a beneficial and/or disruptive role in the supply chain processes that we used within the company, so we really needed to gain a better understanding."

UPS is basing its RFID strategy on four pillars: helping customers, testing technology for internal use, investing in technological knowledge, and formulating global standards. The company has run pilot programs on its vehicles, reusable containers, and aircraft containers.

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"Our main focus today is on providing our supply chain customers a complete solution to RFID to help them meet the needs of their trading partners. So if I look at where my 2005 investment is, it's in helping our supply chain develop and pilot and complete that solution--bring it to market. We're in the latter phases of that right now," says Nonneman.

Like many companies considering RFID, UPS recognizes that it will be hard pressed to find a return on investment at today's price points. According to a company statement, the 10-cent tag will not take RFID into mainstream supply chain applications, and further technology breakthroughs will have to cause tag costs to drop before they replace bar codes.

"And it's also the maturity of the technology," observes Nonneman. "It's where some of the bar code and laser technology was 10 or 15 years ago. It's on a very fast evolutionary path, but that in itself is sometimes disruptive because things change so much. So we're trying to understand where we can make some small investments and look at it in operational settings and really understand how it's going to be able to augment our bar code systems today."

Stability in this new realm of logistics took a great leap forward in January when EPCglobal finalized the second-generation passive tag specification--which, upon approval by the International Organization for Standardization, will be the international standard. Nonneman says there will be a migration late this year and in early 2006 to the Gen 2 products, which is why several companies have postponed fully embracing the technology.

UPS's efforts to stay ahead of the curve on what Nonneman believes will be a long road to progress and profit appear promising. "I think we're in what they call the trough of disillusionment right now, and people are realizing what some of the shortcomings are and how much improvement is still necessary in the technology and in our learning to be able to apply it correctly. There is certainly some work to move forward and to move these initiatives into positive ROI areas and improve business processes, but I'm confident we can get there."

--Monica Elliott

Bret Kinsella is vice president of operations and marketing for Odin Technologies, an RFID implementation services company. He has 14 years' experience as general manager of supply chain services at Sapient, in product and industry marketing at Formation Systems, and in supply chain strategy at Accenture. Kinsella holds a B.S. in economics from the University of Pennsylvania's Wharton School and an M.B.A. from UCLA.