Management Accounting

Making Waves

Tiny RFID chips generate lots of data, but will they help companies move more merchandise?
John McPartlinMay 17, 2005

Has any technology in recent memory been so hyped and, at the same time, so controversial as radio-frequency identification (RFID)? One moment it’s a miracle cure that will streamline the supply chain, eliminate theft and waste, and essentially solve every logistics problem known to man. But at the same time, it has been portrayed as a buggy, expensive, privacy-devouring monster being forced upon Corporate America by an implausible and wicked cabal: major retailers and the Department of Defense.

In January, when the deadline for the first phase of Wal-Mart’s RFID compliance program met with only partial success, the vultures started to descend with a vengeance. Wal-Mart had been both the biggest cheerleader and the most demanding coach, pushing its suppliers to affix a new generation of tiny radio tags to their products so that they could be tracked from the assembly line right into consumers’ homes. Critics contended that companies slapped the bare minimum of tags needed on products to get Wal-Mart off their backs, while anonymous sources bewailed that there was no cost justification for investing in RFID at the moment, and they resented being bullied into the technology.

Anyone listening to all this negativity would be tempted to dismiss RFID as yet one more bleeding-edge technology years away from practical use. But cut through the clutter of complaints, and you’ll find hundreds of companies successfully using RFID in everyday business. In fact, you’ve probably been using it yourself in everything from your office security badge to your ExxonMobil Speedpass to, for you runners, the timing chip attached to your footwear.

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“Many RFID success stories have not gotten a whole lot of attention,” says Beth Enslow, vice president of enterprise research at Aberdeen Group. “Companies have been turned off by the hype and all the talk of the Wal-Mart project, and that could result in them missing the ways that RFID can create value for them.”

It’s not that RFID doesn’t have its challenges: the cost of the chips, the lack of standardization for the chips and the machines that read the data on them, the challenge of analyzing the vast amounts of data that RFID will produce, and the privacy concerns of consumers all demand attention. But so much is happening in the world of RFID that 2005 will almost certainly be the year in which most, if not all, of these impediments will be eliminated.

How They Work

RFID sprang from the minds of the MIT Auto-ID Center staff in 1999 as a replacement for the common bar code. More sophisticated than bar codes, RFID tags (sometimes called chips) are like little radio towers or transponders that send out information to a reader, or “interrogator.” Active RFID tags have tiny batteries in them, while passive tags must usually be “awakened” by a tag reader in order to send information. Active tags can store and send more information at a greater distance than passive versions.

One advantage that RFID tags have over bar codes is that they don’t have to be in the line of sight to be read. Anyone who has purchased groceries in the past 20 years knows full well that bar codes must be directly scanned by a laser, a process that can be thrown off by moisture or other contaminants. Products to which RFID tags have been affixed can be read at a distance, even through crates or other packing materials. The tags and readers can exchange everything from a simple price check to reams of information about where that product has been and where it is going next.

Another advantage of RFID tags is that, unlike one-size-fits-all bar codes, each item in a given carton or shipment can be tagged with information that pertains only to it, so that manufacturers, distributors, transportation companies, retailers, and marketers can track individual units across every step of the supply chain.

Market-research firm IDC projects that RFID spending in the retail supply chain will grow from just $91.5 million in 2003 to nearly $1.3 billion in 2008. Another market-research firm, In-Stat Inc., expects revenues from the sale of RFID tags and related technology to reach $2.8 billion by 2009. Some of the heavyweight companies already experimenting with RFID include Johnson & Johnson, Campbell Soup, Gillette, Dell, Texas Instruments, Exxon, Kellogg, Kraft, Hewlett-Packard, Nestlé Purina, Abercrombie & Fitch, Procter & Gamble, and Unilever.

Major manufacturers, particularly in the consumer-goods market, face intense pressure from Wal-Mart, Target, Albertson’s, and others to get on the RFID bandwagon. But for many other companies, it’s more of a chicken-or-egg game: manufacturers are waiting to
see how many retailers install RFID-reading equipment before they invest heavily in RFID tags, while retailers are holding off on such investments until enough of their suppliers start shipping tagged goods.

“RFID is like the telephone,” explains Al Delattre, managing partner of the electronics and high-tech practice at Accenture. “The value multiplies as more people use it. The value of one telephone is extremely limited. With two you can communicate with someone else. Add a third and you can have a conference call.” Make them ubiquitous, and soon you can’t imagine life without them—for better and worse.

Consumer-goods company Kimberly-Clark Corp. has been a pioneer in RFID, and has dedicated an extensive 5,000-square-foot R&D facility to studying its benefits and testing the equipment. “At some point, we’ve evaluated the readers and tags of almost every manufacturer in the RFID arena,” says Mike O’Shea, Kimberly-Clark’s director of corporate AutoID/RFID strategies and technology. In fact, the first RFID tag ever scanned by Wal-Mart was on a case of the company’s Scott paper towels.

O’Shea also co-chairs a group that addresses end-user business requirements as part of the effort to drive greater acceptance of the Electronic Product Code, a next-generation form of product identification. He says the sticky points of RFID that have helped many companies “rationalize their level of involvement with” (that is, ignore) the technology are quickly being eliminated, and it’s time for business leaders to think about how RFID can do more than just streamline the supply chain.

“It’s not the RFID technology that’s important,” he says. “It’s the reengineering of business processes that will deliver value. Companies need to decompose their business processes and rebuild them to take advantage of the data that RFID generates. Just putting tags on cases isn’t the answer.”

Cost Considerations

Even though the cost of an RFID tag has plunged from more than $10 several years ago to between 25 cents (for passive tags) and about $5 (for active tags), that can certainly add up, particularly for low-cost goods that, even tagless, offer razor-thin margins. Add 25 cents to the cost of a tube of toothpaste that retails for $1.89 and you can see why companies will need plenty of convincing about the value of tracking it in more detail than before.

“The economies are not yet there for some commodities at the per-unit level,” says Delattre. In fact, executives at consumer-goods company Unilever Inc. have already stated that they don’t see RFID tags on individual products becoming practical until the cost per tag drops below 3 cents, and they don’t see this happening for another six years or so.

Although his company makes items that are far pricier than a tube of toothpaste, the price of the tags is still a big consideration for Pacific Cycle Inc.’s director of IS, Ed Matthews. “The cost per tag is now about 35 cents for us,” he says. “It began at 45 cents, then jumped to 75 cents at one point when there was a shortage, and has now come down.” To that cost must be added the 25-cents-per-tag labor expense for inserting the tags into the plastic covering on bicycle owners’ manuals at the company’s distribution center.

The Madison, Wisconsin-based maker of Schwinn and Mongoose bicycles began an RFID pilot program last spring and put the system to its first real test during the holiday season by monitoring its bikes as they rolled from distribution centers to Wal-Mart stores. “We have positioned ourselves so that in a year or two, when the prices of the chips come down, we will be way ahead of the curve. The pilot helped us find how long it takes products to move through the distribution process as well as where we needed changes. So overall, it was a successful start.”

Kimberly-Clark’s O’Shea says the recent ratification of a new global protocol for RFID chips should allow more manufacturers to enter into the chip business, and this will drastically bring chip costs down during the next couple of years. But investments in “class-one,” or existing RFID technology, will not be in vain, he says.

“The readers and the software are all upgradable and will work in the next-generation product,” he says. “There will be enhancements, but none of the existing technology needs to be tossed.” One sticking point, however, is the matter of intellectual property: while RFID began as a cooperative effort, at least one company that holds key patents is demanding royalties and has brought suit against a competitor. How that affects chip prices and, by extension, the uptake of RFID in general remains to be seen.

Assuming that chip costs drop, manufacturers of small goods such as toothpaste and bar soap should be able to place RFID chips into product packaging instead of just on pallets and shipping containers, O’Shea says. This, combined with an investment on the retail side in RFID readers that can be used to create “smart shelves,” will allow a product to be truly tracked from the factory straight to the store shelf and checkout line. “The further upstream we can embed the technology, the better off everyone will be,” O’Shea says.

Beyond the price of the chips and the gear that reads them, cost may well be a factor in another way: doing something useful with the vast amount of information that will come from RFID systems will almost certainly require additional investments in storage, data analysis, and other technologies. By some estimates, Wal-Mart alone will generate more than seven terabytes of information (about the equivalent of three academic research libraries) a day once its RFID program is fully up and running.

Software as Middleman

O’Shea admits the data challenges can be a little off-putting. “Creating serialized data is like drinking water out of a fire hose,” he says. “The real opportunities are in identifying that data and developing the tools that let you filter the data and make it something you can use.”

Software companies are rushing to fill that gap. “Middleware technology will play a crucial role,” says Aberdeen’s Enslow. “You don’t want to keep and read data from every tag that makes its way through your supply chain. You have to decide what’s important and what’s redundant. Luckily, now you can buy middleware RFID software from everyone.”

Indeed, major software players such as IBM, SAP, Oracle, Hewlett-Packard, Sun, and SAS Institute, and most companies in the business-intelligence/analytics/data-warehouse markets have either released or are about to release software packages that will help companies cope with all this RFID data. IBM recently announced that it will hire 1,000 employees and spend $250 million by 2010 to develop and promote new RFID applications. Enslow suggests that a combination of several multilayered solutions for collecting, managing, and manipulating the data will likely be the approach for most large companies dealing with the RFID information flood.

Another solution for companies that feel overwhelmed will be to turn to a managed-services firm to handle the management, archiving, filtering, and integration of RFID data, much as companies now turn to outside vendors to manage product catalog data or EDI. “If you wanted to share information across your supply chain with your logistics suppliers, banks, retailers, and dealers,” says Enslow, “then a managed-services provider would be a great way to give everyone a protected view of only the data they need to see in whatever format that is most appropriate for them.”

Privacy Concerns

The final hurdle that RFID will confront this year is potentially the most vexing: consumer perception. While it might be great for manufacturers and retailers to track products from the factory floor all the way into your bathroom, do you really want someone to know how many tissues you use in a week? Some privacy advocates warn that RFID tags could be scanned from outside a consumer’s home, allowing marketers (or others) to compile all sorts of personal information or even track a person’s comings and goings by the candy bar in his or her jacket pocket.

Already more than 30 privacy groups have come out against RFID, and their protests get louder every time the technology reaches a new milestone. The protests have been particularly vocal in Europe, but proposed legislation that would restrict the use of RFID in states including California and Utah has already cast a chill over some companies’ RFID strategies.

O’Shea and others maintain that such concerns are overblown. “As consumers have the opportunities to become better informed about RFID, its limitations, how it is being used, and the value it can bring to all, they can form more-accurate impressions about RFID,” he says.

Pacific Cycle’s Matthews says his company made a conscious choice to place its RFID tags on the plastic covering of its owners’ manuals rather than on the bikes themselves to avoid such privacy concerns. Down the road, the company will probably hang the tags on the bikes or use temporary wheel inserts rather than permanently chipping each item, he says.

“It would be useful to get the tags built into the bikes, to help with returns and things like that,” he says. “Privacy concerns may be over the top, but the perception is out there, and sometimes perception is reality and you have to deal with it.”

Both perception and reality are likely to change quickly for RFID this year, with the next milestone expected to be a geographic expansion of the Wal-Mart test (which initially involved only selected sites in Texas and Oklahoma). CFOs who have not yet tuned into RFID had better devote some bandwidth to the issue sooner rather than later.

John McPartlin is a New York-based writer and former editor of NetGuide magazine.

Rally ‘Round the Tag

Don’t work at Wal-Mart or deal with the Pentagon? That doesn’t mean RFID will remain an exotic concept for long. Here are more RFID applications either in use or coming soon:

Many hospitals are experimenting with RFID tags in patient bracelets. Besides containing important medical information, these tags can help track patients as they work their way through the hospital. Doctors and nurses may also be chipped at some point so they can be located quickly in an emergency. Some schools even use them to track students, but that has touched off privacy concerns.

New- and used-car dealers are using RFID to manage the inventory of cars on their lots. The tags will alert managers whenever a car enters or leaves the lot and when a particular model is in short supply.

Law firms, libraries, and research centers are using RFID tags to track the movement of documents, files, and books within the company, especially sensitive material with restricted access.

Sporting events, particularly marathons and auto racing, are becoming increasingly RFID-friendly, to gather the most accurate win, place, and show information possible.

In one of the more exotic pilot programs, the University of California announced in January that it would be inserting bar codes and RFID tags into cadavers used for research on campus to avoid the illegal selling of the corpses for profit. —J.McP.