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What’s Your Frequency?
Some say it’s only a matter of time before radio frequency technology impacts all products dealt with by wholesale distributors.
By Lisa White
Radio frequency identification, or RFID, was brought into the retail spotlight recently by none other than Wal-Mart. This behemoth put forth a mandate stating that, by 2006, the company would only do business with suppliers utilizing RFID. Since this declaration would have a direct effect on approximately 85,000 companies, it is no wonder that many experts predict a bright future for this emerging technology.
That’s not to say that the merits of RFID are newly founded. According to Bill Allen, marketing and communications manager for Dallas, TX-based Texas Instruments’ RFID Systems, his company entered into this segment 15 years ago and has since sold nearly 400 million transponders. "The first application for RFID was tagging livestock for tracing and tracking. This emerged out of Europe due to the Mad Cow Disease scare, where data needed a better tracking capability," he explains. "Then, about 10 years ago, our company worked with Ford Motors to create an anti-theft device for cars. We developed the immobilizer technology with an RFID transponder in the car key and a reader in the car’s steering column. If the proper key isn’t used, the car is immobilized and won’t start."
Most recently, says Allen, RFID technology was expanded to help develop Mobil’s Speedpass. This small device is used by more than six million people to pay for gas and purchase items at a station’s store. Even McDonald’s now has adopted it in many of its restaurants as a form of payment, though some locations are not yet equipped to accept credit cards.
It has only been in the last year or so that RFID has become a big player on the retail scene, with Wal-Mart and the U.S. Department of Defense issuing mandates for its widespread use. "When Wal-Mart announced they were going to adopt RFID at the case and pallet level, it changed the dynamic of the RFID industry," says Allen. Now, we’re looking at the Holy Grail, which is the supply chain."
How does it work? RFID transponders or tags, typically attached to plastic pallets or cases, contain detailed information on what’s on the pallet or in the case, where it came from and where it’s going. The readers interrogate these tags, extracting the needed information, which is then sent to a database.
Benefits of RFID
Experts agree that, when it comes to benefits, RFID is hard to beat. "About 20 percent of the things you do with RFID you can’t do with any other technology," says Brian Blackmarr, president of RFID Systems in Dallas, TX. The company offers RFID Edge, a program used for RFID within the supply chain.
The main benefits of this technology primarily lie in inventory management, says Randy Dunn, national sales and marketing director for ADT in Boca Raton, FL. "This is the whole notion of having visibility into how much inventory there is, where it is, how it is being sold, how it is flying off the shelves and integrating all that so trading partners have more visibility into real time data," he explains.
This technology is particularly crucial to the wholesale distribution industry. "In this industry, revenues are growing but earnings are not, so there is a need for more up to date technology, in addition to more innovation in reducing costs and getting more quality information," says Dunn. "When deployed properly, RFID will offer these benefits to distributors."
With this technology, it also is possible to cut out much of the paper work and labor involved with trading partners, says Mike Liard, RFID analyst for Venture Development Corporation in Natick, MA. "For example, say a company ships cheese using track tags on pallets and cases. With RFID, it can provide shipping notice with all product serial numbers so the receiver knows in advance what the shipment consists of. From a distribution standpoint, especially from shipping and receiving, RFID offers an 85 percent labor reduction. That’s why Wal-Mart is initiating this activity; its tests have shown labor is greatly reduced," he says.
In terms of ancillary benefits, Dunn says distributors can reduce their level of safety stock with this technology because they would have more insight into the demand curve. "Because RFID data is in real time, distributors can make better decisions and control inventory more easily. Product is moved faster with fewer mistakes and increased customer satisfaction. There is a whole layer of support in supply chains that deal with inefficiencies. Better information will be beneficial by reducing those errors," he explains.
Pam Stegeman, vice president, supply chain and technology for the Grocery Manufacturers of America (GMA) in Washington, DC, says RFID is particularly beneficial to businesses offering high-end products. "Companies that offer products that are of high value or that have a high theft or counterfeit rate [such as tobacco] will benefit more financially early on from RFID [due to its tracking capabilities]. In addition, companies with high value products that have a high turnover rate have a lot to gain from this technology," she says.
European companies have already been reaping the rewards offered by RFID. Allen cites a case study of department store Marks and Spencer in the UK, which has adopted the RFID application in its chilled foods category. "The chain determined they wanted to reduce touch labor with their chilled food, which is a low margin item. After adopting RFID by instituting nearly four million transponders in trays of chilled food, Marks and Spencer reduced touch labor by 80 percent." He provides other examples of success, including a UK lingerie e-tailer that increased its pick accuracy to 99 percent after implementing an RFID program.
Analysts agree that RFID promises a host of benefits, but the market is still in its infancy as far as the supply chain is concerned. "Right now, most of it is a test. However, there promises to be a great deal of benefits in using chips in cases and pallets as far as tracking items," says Liard. He sees RFID’s future more in the warehouse and not at the store level. "A lot is happening in the distribution centers. RFID streamlines business systems and the supply chain. A lot more data is available with RFID than with bar codes."
Implementation Challenges
Experts say before jumping on the RFID bandwagon, it is important to determine what goals need to be achieved.
Allen advises that companies interested in adopting this new technology must first do pilots and tests beforehand. "We have found companies that investigate RFID and pilot it pick some sort of ‘pain’ point. This would be an issue or difficulty where RFID is identified as something that can help. It may be the pick, pack, ship process or tagging cartons and pallets or movement through transportation where a company has problems," he explains.
As for instituting this technology, the obligations are dependent on the company and what it’s trying to accomplish. "In terms of equipment, it can vary from a few readers at the dock doors to smart shelving systems within a warehouse. Financially, companies may invest between just a few thousand dollars to several hundred thousand dollars, depending on how extensive the setup will be," says Allen.
Erik Michielsen, senior analyst at Allied Business Intelligence, Oyster Bay, NY, estimates the cost of an RFID setup to be between $250,000 to $300,000 for a 75,000- square-foot distribution center. "This includes readers, printers, labels, reader software, middle ware and potentially any kind of enterprise software or integration services for readers, software and enterprise software." He says this amount can grow or shrink, depending on the cost of the tags. "The tag cost is the main variable. A distributor may need one million or 10 million tags, depending on their size and volume."
But many say the costs are redeemable. "Marks and Spencer determined that its 10-year cost of an RFID system was going to be 1/10 the cost of the bar code solution that they initially installed. They will enjoy a good ROI (return on investment) on that implementation, even though the RFID tags cost 50 cents each and a bar code label cost a penny. This is because of the increased efficiencies and benefits of RFID," says Allen.
Experts say the importance of research on the front-end cannot be overstated. For this reason, GMA assists its interested members in understanding RFID. "We look at helping members benefit from a business standpoint and figuring out the possible return on investment with this technology," says Stegeman. "We recommend that companies appoint a project leader for this, someone who is in charge of looking at RFID from a technology standpoint and who is up-to-date with what’s going on. Then, if possible, we like to recommend that our members form a cross-functional team. This is not something all team members spend all their time on, but we get others involved so that different functions of the company understand what’s going on and evaluate it as things progress. It is important that the company knows where it wants to go and that all parts of the company have the necessary information. This contributes to a smart investment and strategic planning."
The Future of RFID
Although the promises of RFID loom large, Allen says it will take some time for this technology to achieve the same level of growth as bar codes. "Because of the promise and ROI people are getting from RFID, one would assume it would eventually have a higher market penetration than bar codes because there are more applications it can be used for," he says, adding that, by the end of the decade, he predicts the industry will be looking at item level, as opposed to case or pallet level, RFID tagging.
Michielsen says it will be important to watch what is happening with Wal-Mart to see how the future of RFID plays out. "I predict we’ll see this market explode from 2005 to 2009," he says.
Although he doesn’t see RFID’s future on the same scale as bar codes, Liard sees these two technologies working in tandem. "We need to remove the mindset of bar codes versus RFID. Bar code obligations are significant, and I don’t see RFID replacing that. Yes, RFID will benefit Wal-Mart, but what does this mean for distributors and manufacturers?" he says.
GMA’s Stegeman predicts the effects of RFID will be widespread. "I think this technology is going to eventually have a great effect on the supply chain, and not just grocery or consumer products, but also for the automobile and electronics industries to reduce cost and ensure products are where they need to be when consumers need them," she says, adding that tracking product costs in the supply chain are a wasted cost. "The more we can get wasted cost out of the system, the better off consumers will be."
With the Wal-Mart initiative and newer technologies, many predict that RFID will become more sophisticated and more affordable to the masses. "The recent mandates with this technology have turned RFID into a problem looking for a solution and created a true market for RFID products, services and support," says Dunn. As a result, he predicts this technology will become better, faster and cheaper.
"I recently read that supply chain costs are the Number Two cost factor beyond the cost of production of the product itself. Supply chain costs last year were estimated to be $3 trillion for the whole world. If RFID can reduce that by one third, that is a trillion dollars that can be passed on to the business world," says Allen.
Lisa White is a freelance writer based in Lake in the Hills, IL. She is the former managing editor of Deli Business.
RFID Frequencies
According to Bill Allen, marketing and communications manager for Dallas, TX-based Texas Instruments, radio frequency technology (RFID) offers three frequency ranges. Low frequency operates in the 135-kilohertz range, high frequency operates at 13.56 megahertz and UHF, the newest entry into RFID, works at 900 megahertz.
In terms of distances, both high and low frequencies operate at a maximum distance of 4 feet, while UHF can operate at up to 20 feet.
But higher doesn’t necessarily mean better. "Each frequency has its strengths and weaknesses," explains Allen. For instance, UHF doesn’t work well in liquid environments, such as on a milk carton.
Says Allen, "We see an ongoing market for all three frequencies in RFID, although for the supply chain and distributors, UHF is preferred."
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