With technical issues largely resolved, the big retailers are now pushing ahead with RFID. Experts say that the investment will pay off in the long term through better on-shelf availability. But many suppliers are unconvinced about the business case for the technology, says Elaine Watson

Don’t get hung up on read rates, tag standards and frequency bands, delegates to a spate of RFID conferences this time last year were told. Technical issues will be resolved, said the experts: just think strategically about where this technology could take your business.

A year later, most of the technical issues surrounding RFID have, indeed, been resolved, and Tesco, Wal-Mart, Metro and M&S are all sufficiently convinced to be embarking on full-scale roll-outs. For many suppliers, however, the business case remains frustratingly elusive. Like most consultants, John Davison at Gartner G2 believes RFID could transform the supply chain. “Most suppliers recognise the potential,” he says. “But is there a business case at the moment for most of them? No.”

The typical response to these concerns is that suppliers must find ways to use RFID in their own supply chains to change their business processes, instead of simply slapping and shipping cases as they leave the factory or depot because Wal-Mart tells them to, says PA Consulting head of retail Alistair Charatan.

“But what if your own supply chain is already pretty efficient? And what if you don’t want to engineer major changes to the way you produce and distribute your goods, because your current set-up is the most efficient way of servicing the 90% of your customers who do not want RFID-tagged product?

“Suppliers with modern facilities are already providing retailers with accurate orders and exceptionally high service levels. RFID may give them an edge, but enough to provide a return on the investment? I’m not so sure.”

And it’s not just the cost of tags (currently retailing between 20c and 60c a time), or the readers that suppliers have to worry about, he adds. “There’s also the software enabling your warehouse-management system to process your own data and what’s coming back from the retailers, the means to store the data, and training your staff to use it.”

Judging by a survey by Intermec last year, the bare minimum is what many suppliers are doing, with only 54% of those asked to comply with a mandate from Wal-Mart or Metro spending extra cash to fully integrate the use of RFID. “In the short term,” says Charatan, “suppliers are simply replacing one highly efficient system [barcodes] with another one that adds speed and labour savings, but no extra functionality.”

Indeed, most experts accept that labour costs will probably increase in the short term with any RFID implementation because suppliers will have to separate
stock destined for customers wanting RFID tags at a factory or at a distribution centre, which means unloading pallets in order to tag cases and rebuilding them again just for the benefit of a handful of customers.

While suppliers would ideally tag goods straight off the production line to get the most benefit, many factories are not equipped to apply RFID tags at the same rate as barcode labels and may have to use separate equipment. So, in practice, slapping and shipping at a depot is the most likely scenario for many, says Deloitte’s head of European consumer business, Lawrence Hutter. “This will generate inefficiencies and may have to be outsourced to third parties such as logistics companies.” These companies would consolidate and tag goods for one retailer from several suppliers.

And given that many third-party logistics companies are even more sceptical about RFID than manufacturers, suppliers cannot expect their 3PLs to take the lead, according to a report from research firm Analytiqa.

However, suppliers should not lose sight of the ultimate prize: better availability on-shelf, which could more than pay back their investment, says Hutter. The question is whether this can be achieved through pallet and case-level tagging, or whether it will only come through tagging individual items - something not commercially viable on low-margin groceries unless tag prices plummet.

Leading manufacturers are quietly confident, however. Peter Jordan, director of international B2B strategy at Kraft, a key participant in Metro’s Future Store initiative in Rheinberg, claims case and dolly tagging can deliver a step change in availability - provided retailers change the way they receive and process goods in-store.

RFID scanning of rollcages as they are wheeled into store backrooms and then re-scanning the empty packaging when it returns from the shopfloor can provide an accurate picture both of bookstock and what is on the shelf when data is measured against EPoS sales, says Jordan. “You don’t need smart shelves and item-level tagging for this. But you do need to change the way you do things in the store.”

RFID has also helped retailers pinpoint replenishment problems, says Nigel Bagley head of customer e-business at Unilever. “Our research shows that cases of some products go back and forth from the backroom to the shopfloor two or three times on a dolly, which is highly inefficient and suggests that the replenishment cycle for that product is not working.” Scanning dollies and packaging as they come back off the shopfloor would identify where this is happening and allow the retailer to specifically target these products, he says.

Similarly, through item-level tagging trials on CDs and DVDs, Tesco has identified when peak purchasing times for these products are and designed more appropriate replenishment cycles and staffing patterns.

Several suppliers have already generated a return on their investment, says BT Auto-ID Services marketing director Geoffrey Barraclough. “The key is whether you are moving goods in reusable trays with RFID tags embedded in them, or if you are tagging cardboard cases with disposable tags. “Obviously, on reusable crates, the business case is far more compelling, because there isn’t the ongoing cost of buying tags.”

M&S supplier Worldwide Fruit, for example, has eliminated £159,000 of annual losses by using RFID-tagged crates to cut picking and despatch errors and eliminate date life-related rejections, which easily offset the one-off costs of readers and software.

The question will be how effectively retailers and suppliers can use the torrent of data generated by RFID, say the experts. After all, providing suppliers with real-time updates of what has left the backroom at a Wal-Mart store in Dallas is only beneficial if they have systems to use this information to their advantage, says SAP consultant Ian Scott, who has been working with Metro on its RFID project in Rheinberg: “The critical issue is what information is relevant and how it should be presented to staff so that they can deal with it. The rest [of the data generated by tags] is just noise.”

The True Cost
>> The bill for compliance


Tech consultant Incucomm says Wal-Mart suppliers have spent an average of $500,000 to comply with a mandate to RFID-tag cases and pallets shipped to three Wal-Mart RDCs in Texas. It’s a lot of money - but not the millions that some researchers such as Forrester originally feared.

It all adds up…
The kit:

Tags - 20c-60c for class 1, generation 2 tags
Tag readers - minimum of $1,000
Tag printers -several thousand dollars a time
Middleware - $25,000+

The extras:

Aside from the basic cost of buying tags, readers, printers and software, there are also a multitude of other costs, which will vary depending on the scale of the RFID deployment. These include R&D, infrastructure, consultancy fees, training costs, extra labour and EPCglobal subscription fees, which vary by turnover of company - organisations turning over $1-10bn have to pay $75,000.

Blazing the trail>>how the retailers and major suppliers are pushing forward

Marks and Spencer - M&S depots in Crewe, Cumbernauld, Faversham, Hemel Hempstead and Thatcham will take RFID-tagged plastic trays by the end of March. Item-level trial on men’s suits, shirts and ties also under way in nine stores.

Tesco - Installing readers from ADT across 35 depots and 1,300 store backrooms for tagging of high-value goods on reusable plastic totes between depots and stores. Has not yet issued mandate on case-level tagging to suppliers, but set to shortly. Working on trials with key suppliers across several categories and rolling out item-level trials on CDs and DVDs from two to 10 stores following successful trials.

Metro - Trialled pallet, case and item-level tagging at Future store in Rheinberg and set up innovation centre in Neuss. Has been using RFID with suppliers including Unilever, Nestlé, P&G, Gillette, Johnson & Johnson and Kraft in 13 stores and nine distribution centres since November 2004. Now in roll-out phase with 20+ suppliers, moving from pallets to cases in the autumn, with 300 suppliers expected to be on board by January 2006. Claims to have seen significant improvements on speed-of-goods-receipt process as depots and read rates up to 99%.

Wal-Mart - Readers installed at 104 Wal-Mart stores and 36 Sam’s Club warehouse clubs at backroom receiving docks, trash compactors and doors between the store backroom and the shopfloor.

Monitors EPoS data against stock wheeled on to shopfloor to get accurate picture of what is on shelf. Is rolling out handheld readers, which beep when staff get close to items that need picking from the backroom, to 140 stores this year. Shares data from all read points with suppliers via its Retail Link web portal.

Ninety-four suppliers shipped tagged product to Wal-Mart by January 31 and more have started this month. Read rates understood to top 98%. Aims to RFID-enable 600 Wal-Mart and Sam’s Club stores and 12 distribution centres by year-end, with second wave of 200 suppliers to come on board in January 2006.

Albertson’s - Preparing to start pilot in Dallas/Fort Worth with several stores and selected suppliers.

Unilever - Involved in several retail trials plus internal trials in Brazil and Germany using RFID to track pallets at depots and monitor temperature on ice creams. In talks with Tesco but no trials yet.

Kraft - Tagging cases and pallets for Wal-Mart and pallets for Metro. Tested item-level tagging and smart shelves on Philadelphia cheese at Metro’s Rheinberg store. Nothing happening in UK yet.

Gillette - Tags cases for Wal-Mart at depot in Illinois and launched pilot to tag cases of Venus razors at source in a packaging facility in Massachusetts. Studying how best to make use of real-time data feeds from Wal-Mart via Retail Link.

Kimberly-Clark - Does case-level tagging for Wal-Mart and pallet-level tagging for Metro, and in talks with Tesco. Running a trial with a raw materials supplier and a series of internal tests at a research facility at one of its depots in Wisconsin. Claims to have achieved encouraging results on using RFID for asset management, optimising product flow and automated replenishment.

Energizer - Working with Exel to apply RFID tags to pallets and cases of 20 SKUs at four warehouses. Has said it would like to form a co-operative with other Exel customers to pool purchases and get volume discounts on tags.