RFIDs High Cost Deters Businesses

News Analysis: RFID adoption is lacking, as companies are hurdled by the technology's high tag costs and low ROI.

The bottom line for suppliers at last weeks RFID World conference in Dallas: Implementing RFID is a necessary evil, but it doesnt come cheap.

Consumer products companies that have already jumped into the fray with radio-frequency identification pilot projects to comply with Wal-Mart Stores and the Department of Defense mandates say cost is still the primary reason RFID hasnt become commonplace.

Among the hurdles that remain more than a year after Wal-Marts top 100 suppliers began using RFID tags: a lack of international standards that help to drive costs down (the next generation of standards, or Gen 2, is helping in this respect); the relatively high cost of RFID tags; the lack of ROI (return on investment) models; and the need to upgrade infrastructure to support RFID.

/zimages/4/28571.gifClick here to read more about products designed to spur Gen 2 adoption.

"I guarantee theres pain. Its a difficult conversation to the CFO [chief financial officer]: I want to increase the cost of a carton by 35 cents when its only valued at $1," said Jim McMasters, senior vice president of IT at Tandy Brands Accessories, in Arlington, Texas, which participated in Wal-Marts RFID pilots. "How do you justify the cost of the tags? Thats pain."

McMasters is not alone. After about 30 RFID pilots stretching over a nine-year period, DHL Worldwide Express is looking at implementing an RFID infrastructure, said Bob Berg, senior business systems manager and RFID manager at DHL, in Scottsdale, Ariz. The problem: The tags are expensive, and DHL will supply tags to customers to encourage adoption.

Price points for tags run between 25 and 30 cents each, according to Venture Development analyst Michael Liard.

Meanwhile, Forrester Research predicts tag costs will fall, but only at a 9 percent clip.

And while the cost of readers is not an issue yet, that will change when companies add hundreds of readers on a network, said Liard in Natick, Mass.

Another huge consideration is the cost of implementing an RFID infrastructure.

An RFID infrastructure requires a number of elements, not the least of which are tags and readers. To back up the process change required to make RFID viable, infrastructure hardware and software are required as well. That can include additional servers, databases, middleware and applications.

The middleware and application layers need to support a number of critical components, such as device management, data collection, data management and integration with back-end systems, collaboration with partners and customers, and integration with data synchronization networks, according to a report by Forrester.

Taken as a whole, implementing an RFID infrastructure is a six-figure project, according to analysts and customers. "Changing your warehouse management system to fit RFID is a very, very big project," said McMasters. "The challenge is you have to upgrade what you have without exposing your company to unnecessary risk."

As a result, the business-case spending on RFID is a raw guess, according to McMasters. "I just know its the right thing to do," he said.

/zimages/4/28571.gifMicrosoft says it is developing an RFID infrastructure that will affordably handle device management, event management, integration and application development. Click here to read more.

Despite the costs, users and analysts agree that a business case for RFID can be realized if real-time RFID information becomes part of a companys underlying business processes. Likewise, when companies can find other uses for RFID besides meeting partner mandates, there is value. Tandy Brands, for example, is looking at plugging the data it receives from Wal-Mart, of Bentonville, Ark., back into its back-end systems to get better forecasting results.

Apparel company VF, which has already wrung about all the efficiency it can out of its distribution center processes, is looking at how long it takes its products to get to the retail floor, to maximize efficiencies as well as cost savings.

DHL will look to gain major efficiencies with asset and perishables management.

Carolyn Walton, vice president of IS at Wal-Mart, said companies cant assume RFID is a one-time project. "Do not let your management assume its the only time you are going to request funding," said Walton. "RFID is not a flash in the pan."

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