Logistically Speaking: Aww, geez, not another RFID article

Aww, geez, not another RFID article

It's kind of early to be making year-end predictions already, but here's one that is absolutely guaranteed to come true: By December 2004, you will be so sick of reading about radio frequency identification (RFID) that you'll start thinking back fondly to the relatively low-key way Y2K compliance was shoved down your throat.

But make no mistake about it — the push toward RFID launched by Wal-Mart Stores Inc. and other major retailers, as well as a parallel initiative from the Department of Defense, is not just flavor-of-the-month hype. It's a major undertaking that will involve thousands of companies over the next couple of years, and ultimately every company that ships products.

For those who came in late, Wal-Mart wants its top 100 suppliers to go live with RFID tags on all cases and pallets by January 1, 2005. As noted in our cover story this month, “going live” for the near-term is focused on three distribution centers in the Dallas area. By the end of 2006, the retail giant expects all of its suppliers to be on board with case- and pallet-level tagging.

By virtue of its being first out of the gate, as well as being the biggest company in the world, Wal-Mart is seen as the driving force behind RFID, although the DOD is running a close second. The DOD has also embraced Wal-Mart's January 1, 2005 deadline. Other major retailers, both in the U.S. and overseas — notably, Target, Home Depot, Albertson's, CVS, Tesco and Metro — have jumped on the runaway RFID bandwagon, though some of their initiatives are lacking in specifics.

In any event, the expectation is that by no later than the spring of 2005, virtually every major consumer packaged goods manufacturer will be shipping RFID-tagged cases and pallets to their biggest retail customers. Given the number of companies involved, the market for RFID tags, readers, compatible software applications and, inevitably, consulting services is projected to be huge. Venture Data Corp. predicts the market will top $2 billion by 2005, representing near-term annual growth of 37%.

With so many companies having a major stake in this game, then, it shouldn't come as much of a surprise that things aren't progressing quite as smoothly as planned. Christine Spivey Overby, senior analyst with Forrester, puts it quite bluntly: “Wal-Mart's clout does not change the laws of physics. There's no business case right now for RFID, at least in the next 12 months.”

A major hurdle suppliers have to overcome is the sheer cost of the technology. According to Overby, a typical Wal-Mart supplier might have to spend as much as $9 million on tags, hardware, software and related services. “But there are also other cost items that are a little counter-intuitive,” she notes, pointing to the cost of adding warehouse labor to put all the tags onto cases and pallets. “A lot of people talk about RFID as a way to cut labor out of the equation — in our model there's additional labor,” Overby says.

The picture gets even murkier the closer you look at Forrester's model. For instance, the payback for RFID tags is widely assumed to kick in once the price-per-tag drops below a nickel (current prices range from 25 cents to $1.00 per tag). However, if Forrester's research is accurate, it could be another eight years before the tags drop to 5 cents.

Forget about the cost of the tags, adds Michael Liard, senior RFID analyst with Venture Data. “It's the cost of RFID system infrastructure that causes sticker shock among senior level executives and IT managers. Roughly two-thirds to three-quarters of the total RFID investment may be attributed to infrastructure costs.”

To their credit, Wal-Mart and the DOD are spending a lot of time educating their suppliers — in public forums and in private meetings — and are chief advocates for the development and adoption of industry-wide RFID standards. In all likelihood it will be the EPC UHF Generation 2 standard that is adopted, since it meets the basic requirements for retailers and the DOD, as well as conforms to international standards.

But to return to the main point, we need to ask — does RFID actually work as promised? The question is largely unanswered.

Forrester's Overby suggests that Wal-Mart rethink its January 2005 deadline “because RFID simply can't be done the way they've been asking for it to be done.” Postponement of the deadline by Wal-Mart or the DOD doesn't seem likely, though. Alan Estevez, assistant undersecretary of defense for supply chain integration at the DOD, emphatically says, “We are not looking at any measure of leniency.”

So right now, the best answer — maybe the only answer — is to stay up-to-date and educated about RFID. If your business relies at all on shipments to major retailers or the DOD, you can't afford not to make the transition to RFID.

Dave Blanchard
editor-in-chief

Logistics Today logo
May, 2004

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