Beaver Street Fisheries is the prototypical manual-labor shop. Tons of clams, lobster, alligator, octopus and other exotica, from coastal waters in over 50 countries—hard-won catches of hard-edged fishermen and hunters—roll in and out of the Jacksonville, Fla.-based companys distribution site every day, to be carried by trucks, planes and ships to customers around the world. Beaver Streets more than 400 workers orchestrate a huge and noisy assembly line producing pallets of individually wrapped items for retailers, such as Wal-Mart Stores Inc., and bulk shipments for restaurants. Until recently, very little about Beaver Streets operation gave off the slightest whiff of high technology.
That changed last year, when Wal-Mart issued a much-publicized mandate requiring that by January 2005, its 100 biggest suppliers place radio-frequency identification (RFID) tags on most cases and pallets shipped to three of its Dallas-area warehouses.
To find out how Wal-Marts RFID project in Texas is going so far, click here.
Beaver Street, with $500 million in annual sales, is hardly on Wal-Marts A-list, but that didnt stop CIO Howard Stockdale from trying to meet the retailers demand sooner rather than later. As he saw it, the mandate provided Beaver Street with a huge opportunity to cozy up to a customer with more shelf space and deeper pockets than anyone else—and to get there before the competition.
So far the strategy is working. Beaver Street has already spent upward of $75,000 to build a beta system that will test inventory management using RFID equipment. Electronic readers stationed at loading and receiving docks in Jacksonville scan incoming deliveries and outgoing shipments for RFID tags that identify the contents of pallets and then send the data to Beaver Streets ERP program. Once perfected, the system will produce detailed, up-to-the- second reports about which items are in-house and which orders are on their way to retailers.
The system is still experimental, but Beaver Street is racing to have it fully running by next year, perhaps even by Wal-Marts deadline. Its efforts have caught the attention of the giant retailer, which regularly invites Beaver Street executives to its RFID brainstorming sessions, where they get to rub shoulders with such supplier superstars as Procter & Gamble Co., Kraft Foods Inc., Unilever and Kimberly-Clark Corp.
“We want to nurture and grow our business with Wal-Mart, and one way to do that is to prove that a medium-size business like ours can be just as innovative as a big, wealthy company,” says Stockdale. “We also can automate manual tasks with RFID and deliver greater velocity through the supply chain and better inventory management by always knowing where our shipments are.”
If ever there was a cant-miss, high-return technology, radio-frequency identification would seem to fit the bill. The successor to bar codes, RFID tags—which allow goods to be tracked via an electronic product code, or EPC—boast a stream of enthusiastic and powerful backers. The Pentagon, Boeing Co. and the Food and Drug Administration, among others, have all joined with Wal-Mart to put the heat on their suppliers to begin tagging products with chip-based identifiers that send data via UHF waves to computerized readers 10, 12 or even dozens of feet away.
Remarkable claims have been made for RFID.
Studies maintain that goods with RFID tags can move through distribution centers ten times faster than those with bar codes, and still be read accurately. Report after report predicts revenue increases of as much as 10 percent, thanks to more efficient stocking, and a big drop in inventory expenses for companies adopting RFID.
Not so fast.
Despite the hype and the pressure, most companies have been taking little more than baby steps toward adopting electronic tagging. For most businesses, RFID is too expensive, doesnt work well enough (the accuracy of some readers is well below 90 percent), suffers from a lack of standards, and requires a resource-heavy overhaul of supply chain, logistics and manufacturing processes and systems before a worthwhile payoff can be toted up.
That said, as Beaver Street demonstrates, it may be a mistake for companies to put RFID on the back burner for too long.
“There is no business case for tagging everything today,” says Christopher Boone, program manager for U.S. vertical-industry research at technology analysts IDC.
“RFID has the potential to be a revolution in the supply chain, but not yet. Ten years may be a bit aggressive for RFID to be ubiquitous. It will be closer to 15 years—half as much time as it took bar codes. Still, its such a sure shot that nows the time for ramping up—or at least to take ramping up seriously—and not the time for ignoring it completely.”
Initially, Wal-Marts primary goal is to see how well its RFID readers and computers can monitor incoming shipments for order accuracy and track the movement of products out of the distribution centers and into its stores. The company hopes that this level of product visibility will reduce theft and help keep tabs on inventory, without having to manually scan bar codes constantly during the operation. Eventually, Wal-Mart wants to have RFID tags on every item in its supply chain (not just on pallets and cases), so that it can follow products from warehouse to store shelf. That would allow the company, it hopes, to replenish items more quickly than Wal-Mart is able to do now. And its already pretty quick.
A study by consultants A.T. Kearney Inc. found that a retailer with an RFID system throughout its organization could expect a one-time cash savings of about 5 percent of total inventory, thanks to improved customer-demand forecasting; an annual reduction in store and warehouse labor expenses of 7.5 percent; and a yearly recurring gain of $700,000 per $1 billion in annual sales thanks to fewer out-of-stock items and less theft. All told, according to Kearney, a retailer with a wall-to-wall RFID system—which includes readers downloading actionable information, literally by the second, into middleware connected to networked corporate databases—could save 32 cents on every sales dollar. Not a bad return, considering that most big retailers net margins arent much better than 3 percent.
Eventually, suppliers should achieve significant benefits as well. Thanks to erratic forecasting and a lack of precise information, out-of-stocks of the top 2,000 items sold in retail outlets are estimated to average about 10 percent currently. If real-time RFID data diminishes out-of-stocks by even 50 percent, as is expected, suppliers could realize “a revenue gain of 5 percent that most companies would kill for,” says Larry Kellam, former director of supply-chain innovation at Procter & Gamble (where he was an EPC pioneer), and currently the principal at the Kellam Group, an RFID consultancy.
The return from RFID would be much higher, however, if the cost of the technology were lower. To a large degree, the inflated expenses associated with setting up an RFID system are responsible for the technologys lukewarm reception—and a prime reason why companies are moving gingerly into adoption of the technology. “The challenge for companies is how to offset the expense,” says Mark Roberti, editor of RFID Journal. “And unless a company has a very targeted, carefully drawn up and highly discrete application with a built-in ROI, theres no easy answer for this yet.”
A large supplier could pay as much as $9 million in the first year to comply with Wal-Marts narrow regional mandate, with about 80 percent of that going to the electronic tags for upwards of 16 million cases and pallets, according to Forrester Research Inc. The next highest expense involves the readers for scanning the EPCs as the products leave the manufacturers distribution centers, and, surprisingly, the additional labor costs for manual tagging—automated tagging and embedding RFID in packaging material is far from perfected.
Currently, tags cost anywhere from 20 cents to 40 cents each, depending on volume purchased and the quality of the tags. “If youre shipping a high-margin product, thats a negligible amount, but if youre shipping tomato paste, where the margin on a case may be 20 cents, adding a 40-cent tag turns your product into a losing venture,” says Dave Douglas, executive vice president for products and strategy at ConnecTerra Inc., a maker of RFID middleware.
Thats why most large consumer-goods companies are minimizing their financial exposure by not going beyond Wal-Marts requirement that they use RFID tags in the Dallas area. For even the biggest Wal-Mart suppliers, such as P&G, this will limit tagging to just 5 percent or so of their cases and pallets. VF Corp., maker of Lee and Wrangler jeans, among other consumer products, illustrates the wait-and-see response of suppliers to Wal-Marts initiative. Most of VFs shipments to Wal-Mart are so-called multi-SKU boxes, which means that each box contains a variety of products in different sizes, colors and styles. Tagging these boxes is like slapping the label “building” on a house; it sheds no light on whats inside. Consequently, unable to justify RFID tagging of pallets and cases, “VF knows that it will just have to accept Wal-Mart compliance as a cost of doing business, with no payback,” says Roberti.
VFs gains from RFID will come only when the price of the tags drops low enough to let the company tag every item it makes as the product is being manufactured, says Jim Jackson, VFs RFID project manager. When that happens, VF will be able, theoretically, to track products from plants in Asia through the “black hole” that items enter when they leave overseas factories and are placed on ships bound for the U.S., and then follow them as theyre packed in cases and sent to distribution points, warehouses and stores. As retailers install shelf readers, VF could eavesdrop on sales activities at stores, thereby gaining a much richer idea of the specific color and size of items that are running low and need replenishment. That type of visible supply-chain application will be cost-effective and viable only when EPC tag prices slip to about 5 cents each, RFID experts say. And thats not expected until 2006, at the earliest.
But that also assumes that all the other critical RFID constraints will have been addressed by then. The accuracy of RFID systems is still well below the 99.9 percent rate that is required before they can be trusted to replace bar codes. The key problem is that with current technology, the tags have to be placed in just the right locations on boxes and individual items in order for readers to detect them. On top of that, RFID signals can be disrupted by metal, which reflects radio waves, and by water, which absorbs them. If 48 cases of Evian are stacked on a pallet, its still unlikely that a case in the middle will be identified. And since most readers are programmed to scan their environments constantly—often as frequently as every five minutes, or less—to report on current inventory or the presence of new assets, inconsistent results would paint such a confusing picture of a warehouse that it could turn a supply chain into a Tower of Babel.
Meanwhile, the readers, tag signals and middleware for translating RFID data into accurate and useable information that can be delivered to corporate ERP systems will lag as long as EPC standards remain in limbo.
Currently, all hardware and software is designed around one of two different RFID data syntax protocols, Class 0 and Class 1. Recently, some readers and middleware have been developed that decode both signal classes, but even RFID proponents view this as an interim and somewhat unreliable solution.
“This industry needs standards desperately,” says Mike Sheriff, CEO of Dallas-based X-Change Corp., an RFID systems integrator.
“Well only build the large user base that will allow us to deliver affordable technology, by eliminating the fear that if you use a certain type of tag it may not be able to be read by someone upstream or downstream in the supply chain. The lack of standards defeats the purpose of RFID, which is transparency, not opaqueness.”
EPCglobal—a joint venture of the international supply-chain standards organization EAN International and the Uniform Code Council, its North American counterpart—is considering four proposals for so-called Generation 2 RFID standards that will finally ensure that all equipment and software is built around one set of rules. The organization says it will choose a protocol, which it promises will be backwards compatible with Class 0 and Class 1 tags, by the end of this year.
Thats good news, but it still leaves open the question of when EPCglobal will finish work on a much more intractable problem: developing an EPC network that will permit password-protected access via the Web to RFID data anywhere in a companys supply chain—an essential component for widespread acceptance of RFID. The Coca-Cola Co. could, for instance, query the EPC network for the specific location of all cans of soda with the special Santa Claus promotion that were shipped out in November. Coke could then alert retailers to put the cans on the shelves, thus avoiding the cost of throwing out the inventory because it was buried through the Christmas season in store warehouses under other cases of Coke. Its unlikely, however, that a fully formed EPC network will debut before 2006, and it may not arrive until as late as 2007.
With all of these obstacles, the most prevalent supply-chain RFID application currently in use is “slap-and-ship,” and its the technique adopted by most of the Wal-Mart top 100 suppliers. This involves merely putting a tag on cases and pallets just as they are about to leave the warehouse. Electronic readers at the suppliers loading dock will scan these shipments and produce a list of the products included in the order. This “ship notice” will be e-mailed to Wal-Mart, whose own RFID readers will examine the incoming shipment and compare it against the suppliers documentation.
Although its a relatively primitive application, even slap-and-ship has some potential benefits for suppliers. Order payment should be speeded up, because the shipment will be logged in immediately when it arrives at the distribution point and is scanned by the RFID readers. And chargebacks, in which retailers pay only a portion of a bill because they claim not to have received the whole shipment, should be cut back, because automated RFID systems will have verified the order at both ends of the transaction.
“By starting in this limited way, suppliers get a reasonably low-cost vehicle to evaluate the potential impact of RFID on their business processes without spending tens of millions on revamping their whole supply chain,” says Kellam. “During this stage—the learning-curve stage—companies can determine how RFID data can be integrated into their enterprise applications and into their warehouse and factory infrastructures.”
Moreover, the tentative steps taken by large suppliers should turn out to be a boon for small and midsize companies.
Instead of having to compete against big initiatives driven by a stable technology, smaller manufacturers and distributors can also begin to assess nascent RFID systems on the cheap, and that should better prepare them to participate in the gains from RFID, along with their larger rivals, when automated EPC-based supply chains become prevalent.
That, of course, will have to wait a few years.
Until then, the most successful RFID applications are likely to remain very targeted, “closed-loop” efforts that operate solely within a single facility or company operation and dont require transmitting data among business partners or even business units. (
In July, the airline carrier, Delta, began a 24-month program to embed invisible RFID tags in all labels placed on baggage sent on domestic flights.
Readers at check-in counters, on conveyer belts where the bags are sorted, and at aircraft cargo compartments will continuously monitor the whereabouts of every bag. This should all but eliminate the problem of misdirected bags, because an inventory of the planes cargo before takeoff, based on RFID data, will determine if the right luggage made it into the hold. And if a bag is loaded onto the wrong plane, Delta will be able to locate it instantly, without the huge labor costs currently incurred in tracking down lost luggage.
This project—among the first full-scale airline RFID implementations—is slated to cost between $15 million and $25 million and is expected to be operational by 2007. Thats a small price to pay, as Delta sees it.
U.S. carriers currently mishandle about one bag for every 250 pieces of luggage they carry, and Delta spends about $100 million a year in labor, delivery and other overhead costs to find and return lost items to their owners.
Delta estimates that the technology will soon pay for itself.
“Weve reached the end of the improvements in baggage handling that we can accomplish without new technology,” says Delta spokesman Reid Davis. “Any way you look at it, the RFID system is a great investment.”
Its unusual to hear “great investment” and “RFID” spoken in the same breath. But most technology experts argue that it wont be long before ROI and RFID will be synonymous. The question, they say, is when, not if. But the only certain answer, is not now.