The RFID bandwagon is shifting into overdrive, but not everyone in manufacturing is jumping aboard.
Radio-frequency identification technology involves tags and readers that track goods through the supply chain, enabling tighter inventory control and real-time product routing to meet ever-changing consumer demands. The tags are tiny radio transponders attached to pallets and cases of packaged goods. Each tag has a unique tracking number (known as an electronic product code, or EPC). The readers receive radio signals from the tags and, if instructed, pass the information to computer networks.
Most manufacturers had moderate to limited interest in RFID until Wal-Mart Stores Inc. early last year bet its supply chain on the emerging technology. Under a mandate from the $244 billion retail chain, Wal-Mart expects its top 100 suppliers to deliver RFID-tagged products by next year.
At first glance, thats good news for manufacturers. In the CPG (consumer packaged goods) manufacturing sector, RFID can improve demand forecasts by 10 to 20 percent, slash inventory levels by 10 to 30 percent and increase sales by 1 to 2 percent, according to Accenture Ltd., the New York-based management consultancy.
“RFID systems that are implemented correctly will deliver enormous cost savings,” said Steve Halliday, president of High Tech Aid, a Gibsonia, Pa., consulting company that specializes in RFID solutions. “We have seen some recent cases where the return on investment has been four to six months for some fairly large systems.”
Still, the road to RFID has plenty of potholes. Much like the PC industry in the mid-1980s, todays RFID involves a hodgepodge of hardware, software and network connectivity that must be configured on a case-by-case basis. Even proponents like Accenture concede RFIDs weak points.
“Each project practically requires a custom solution,” says Lyle Ginsburg, managing partner of technology innovation in Accentures Global Products Operating Group. “The big lesson for those who are just getting into this space is very clear: RFID is far from a turnkey solution.”
Call for Help
Call for Help
Accenture and many other solutions providers are more than happy to help manufacturers sort through the RFID market. Roughly 72 percent of solutions providers consider RFID a major business opportunity, and more than half say their customers are requesting RFID integration services, according to a mid-2003 survey conducted by Texas Instruments Inc.s RFID organization, known as TI-RFID Systems.
Such demand is fueling aggressive market speculation. Wireless Data Research Group, of San Mateo, Calif., for example, predicts RFID hardware, software and services will triple from $1 billion in 2003 to $3 billion in 2007.
But reaching these heights wont be easy—or painless. Wal-Marts RFID mandate could cost a typical CPG manufacturer $13 million to $23 million in IT costs, according to AMR Research Inc., of Boston. The hefty price tag includes $5 million to $10 million for tags and readers and $8 million to $13 million on systems integration.
Wal-Mart attempted to downplay RFIDs costs during a meeting with partners last November, but theres no denying that manufacturers are proceeding cautiously. Indeed, only 18 percent of manufacturers currently use RFID, and 70 percent have no plans to deploy RFID in the next six months, according to Nucleus Research Inc.
“Over the long term, we expect RFID technology to provide significant business benefits to the manufacturing industry,” said Nucleus analyst Barry Mason, in Wellesley, Mass. “RFID will reduce stock-outs, labor costs, theft and inventory levels. But without new processes and systems in place, manufacturers arent prepared to handle real-time RFID data streams from thousands of parts and unfinished goods.”
A.T. Kearney Inc., of Chicago, holds a similar view. The division of Electronic Data Systems Corp. says RFID can save retailers 5 percent on inventory costs and 7.5 percent on warehouse labor, but manufacturers may wind up footing the bill for such benefits. A.T. Kearney drew that conclusion after examining RFIDs impact at a grocery manufacturer and an over-the-counter drug manufacturer. Each manufacturer, averaging about $5 billion in annual sales, will likely take a $155 million cash-flow hit over a 10-year period to pay for the RFID tags and readers.
Privacy concerns also threaten to slow RFIDs progress. An activist group, known as Consumers Against Supermarket Privacy Invasion and Numbering, has lobbied against RFID because the technology may track a products every movement—from manufacturer to retailer to consumer. Tesco Ltd. (Britains largest retailer) and The Gillette Co. came under fire in mid-2003 when Tesco stocked Gillette razors with RFID tags as part of a limited test. CASPIAN vowed to organize a boycott against Gillette products, but the effort didnt affect Gillettes sales.
Testing the Waters
Testing the Waters
Instead of blanketing the supply chain with RFID, some manufacturers are embracing the technology on a smaller scale. Many of Accentures recent projects involve “four walls” RFID, meaning that manufacturers can track products within a specific building but not across the globe. In one example, RFID readers prevent forklifts from placing the wrong materials into a mechanical mixer. “The system halts the forklift if the tagged materials arent supposed to enter the mixer,” said Accentures Ginsburg. “This application applies to practically any manufacturing environment where goods have to reach their proper destination.”
International Paper Co., of Stamford, Conn., recently activated a similar tracking system in its Texarkana, Texas, warehouse. The system transmits routing instructions to forklift operators in real time using RFID. Each roll of paper in the factory has a unique RFID tag from Matrics Inc., of Columbia, Md.
The system could find its way to additional manufacturers rapidly. Thats because International Paper recently partnered with Esync Inc., a Toledo, Ohio, consulting company, to jointly market RFID integration services. Under terms of the partnership, Esync and International Papers Smart Packaging Group will develop and market RFID systems to both companies customers, according to a spokesman for Esync. Sources say International Paper hopes revenue from the Esync relationship offsets internal RFID rollout costs.
In a similar partnership, Ford Motor Co. and WhereNet Corp. are developing and marketing a wireless RFID system that allows workers to request tagged parts on the fly. WhereNet, based in Santa Clara, Calif., previously partnered with Siemens AG to design a wireless tracking system for a BMW manufacturing plant in Dingolfing, Germany.
But RFID still isnt quite ready for prime time. “For now, most manufacturers are piloting, piloting and piloting some more,” said John Thorn, general manager of Checkpoint Systems Inc.s Supply Chain & Brand Solutions Group, in Thorofare, N.J. “Its all about learning how this technology works for the application and understanding scope of enterprise re-engineering.”
Thorn expects extended pilots to be under way in a year, and limited production rollouts by mid-2005.
Even Wal-Mart, RFIDs most outspoken proponent, doesnt expect CPG manufacturers to ride the bandwagon before next year.
Joseph C. Panettieri ([email protected]) is editorial director of the New York Institute of Technology. He has covered Silicon Valley since 1992.