RFID: Hit or Myth?

Radio waves may be the next big thing in tracking goods. But before you rush in, make sure you understand their realities. Here's a Baseline guide for measuring the frequencies of near-future retailing. Get the facts.

Procter & Gamble markets some of the biggest brands in store aisles across the country, from Crest toothpaste to Pantene shampoo to Charmin toilet paper. To date, the company hasnt begun to figure out the physics—or the business case—of radio waves and how they can help move its products more efficiently to retail outlets. But thats about to change.

Procter & Gamble will be busy in the first months of 2004 determining how radio-frequency identification systems work. As one of Wal-Marts top 100 suppliers, Procter & Gamble faces a January 2005 deadline to place tags containing chips and tiny antennae on the cases and pallets of household products shipped to the worlds largest retailer. "We expect to be testing and learning with several pilots starting in the first half," says Milan Turk, Jr., director of global consumer e-business at Procter & Gamble.

Procter & Gambles plan is to start with two test programs at undisclosed locations. One will focus on identifying where it might earn a return on installing these systems, Turk says. The second will concentrate on identifying technical pitfalls.

The first pilot will focus on a paper product, perhaps Bounty towels, since paper doesnt block radio waves. The second will include shampoo, since liquid can affect the ability of radio waves to reach the chips and pull out the numbers that identify a pallets contents. Future pilots will include other products.

Experts say other consumer-goods giants, such as Unilever and Gillette, are taking a similar approach.

"A lot of companies will soon be moving in fast-pilot mode," says Bruce Hudson, an analyst at Meta Group in Stamford, Conn. "And there may not be a business case. Its a leap of faith."

But before you take that leap it may help to dispel a few myths.

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MYTH 1: There is No ROI for RFID
The "slap-and-ship" crowd views Wal-Marts mandate as simply a cost of doing business.

These are companies that plan to place radio tags on their cases and pallets for Wal-Marts benefit alone. They dont presently plan to build their own data-tracking systems to take advantage of the potential efficiencies of the tags.

These suppliers claim there are no clear financial benefits to be had. But a business case can be made. (See "RFID: An Offer You Cant Refuse," Workbook, p. 82.)

First step: Figure out how well existing systems perform. Calculate how often your products are out-of-stock in warehouses and retail outlets, how much revenue is lost to shrinkage, what the proper levels of safety stocks are. Then, look for areas of improvement. For P&Gs Turk, the payoff may be the abilities to selectively recall batches of drugs and to improve monitoring of expiration dates.

"The potential for RFID is total supply-chain visibility," says Simon Langford, manager of global RFID strategies for Wal–Mart. "At the retail level, [RFID would] reduce inventory counting. [Wal-Mart could do] faster receiving and shipping because were not having to stop and scan."

Even with such benefits as theft reduction, reduced labor costs and less inventory in the pipeline, Hudson says suppliers goal for the first three years should be to minimize losses from complying with Wal-Marts mandate. Most notably, the tags themselves remain expensive. In the absence of industry-wide standards—which have yet to be agreed upon—there arent a lot of vendors producing the tags approved by Wal-Mart. Meanwhile, its unclear that the ones who are—Intermec, Alien Technology and Matrics—can manufacture tags in the volumes needed to cut costs.

Langford says tags currently run between 15 cents and 65 cents each, well above the goal of 5 cents. That could change as larger players enter the market. Texas Instruments, which pioneered the use of low-frequency tags on cattle and high-frequency tags used by drivers to pay highway tolls, plans to begin commercial production of the tags endorsed by Wal-Mart as early as March, says Bill Allen, marketing and communications manager for TI.

Then theres all the systems integration and process reengineering to truly utilize data picked up by radio waves. Only efficient companies will benefit. "RFID can make a good process better, but it isnt going to make a bad process good," says Hudson.

Next Page: Myth 2, wide adoption.