September 1, 2005
technology review | The Promise of RFID

All that glitters ...

all that glitters ...

Some see gold in those tiny data-rich RFID tags. Others worry that RFID is just another over-hyped technology.

By John R. Johnson

The last time the nation found itself in the grip of gold fever, it was the early months of 1849. Hordes of forty-niners were migrating west to make their fortune mining gold in the California hills. By the time the rush had ended, some 15 years later, a few lucky ones had struck it rich. But the majority ended up toiling in the dusty hills and panning in the frigid streams with little or no reward for their trouble.

Fast forward to 2005, another era of gold fever. This time around the dreams involve not nuggets and gold dust but the rich trove of data to be mined via a much-hyped technology: radio-frequency identification (RFID).

But amid the frenzy, there's a deep undercurrent of doubt about how widespread the benefits will be. For some—retailers come to mind—RFID may represent the mother lode, a rich vein that yields both productivity gains and increased profits. But for the suppliers who have to pay for the technology, the benefits are not so clear cut. Even as they continue investing in readers and tags, manufacturers—particularly manufacturers of consumer packaged goods (CPGs)—wonder if they'll ever unlock the real value of RFID.

The next generation
In the midst of all this turmoil a new generation of RFID technology has emerged. When the standard for the new technology, known as Generation 2, was ratified late last year, the announcement met with great enthusiasm. It's not hard to see why. Technology built to the EPC Gen 2 standard, the newest and most advanced of the RFID specifications for the UHF band centered around 900 MHz, promises tremendous improvements over the current technology. For example, read rates are expected to improve to between 1,000 to 2,000 tags per second, a huge gain over existing read rates of about 200 tags per second. Tag performance will also improve, although there is some debate as to just how much. And better memory is expected to result in quicker tag programming.

Gen 2 technology tags and readers became available in limited quantities in June, and many retailers and consumer packaged goods manufacturers are currently testing the technology. CPG giant Kimberly Clark, for example, began testing Gen 2 products in early July at its RFID research lab in Wisconsin.

Early reports out of Kimberly Clark sound encouraging: "Generation 2 RFID hardware has advanced greatly over the past few months, providing increased ranges in reading product tags, as well as a more consistent read rate for pallets and cases," reports Mike O'Shea, director of Kimberly-Clark's Auto-ID Sensing Technologies.

That should come as good news for the industry, because it appears that Gen 2 technology will be around a while. "Gen 2 technology will have an impact because for the first time we have technology available that we know will have a long life span," says Beth Enslow, vice president of enterprise research for the Aberdeen Group. "Obviously Gen 1 technology was fine in pilots, but companies really needed to know from a production standpoint that they were investing in technology that has a longer life span, and that's what Gen 2 gives us."

That's not to say that Gen 2 technology will change the entire game, however. Many continue to entertain doubts about the magnitude of improvements that might be possible with Gen 2. Enslow, for one, is not convinced that it will deliver an impressive return on investment (ROI). "For a typical consumer goods supplier to the retail community," she says, "I'm still going to be scratching my head for a number of years to see where the ROI is."

AMR Research analyst Kara Romanow also remains skeptical. "I don't know if Gen 2 will make much of a difference," says Romanow,who reports that most CPG execs are still leery of making major investments in RFID technology. "Before they even are willing to discuss the potential promise or what the potential ROI might be, they all want to tell you what the problems are, and that the problems haven't gone away."

Hold the peanut butter
In the meantime, some manufacturers appear to be rethinking how they'll use RFID. Romanow predicts that in time, supply chain executives will concentrate more on how RFID can fix distinct business problems, as opposed to what she calls the "peanut butter approach" that has users smearing "RFID tags on all products, all the time."

"I'm starting to see a subtle shift away from the tag-everything-all-the-time mentality to a very specific focus on a very specific business pain that can be uniquely addressed by this technology," she says.

Early indications are that Romanow is onto something. The focus on massive RFID tag rollouts is starting to slowly shift to the item level, which represents a 180-degree turn from the direction RFID technology seemed headed just 18 months ago. Item-level tagging has long been considered too expensive for the majority of consumer packaged goods. However, it's being roundly embraced by the pharmaceutical industry and the electronics sector, where individual items carry high price tags and where RFID holds particular promise for deterring theft and counterfeiting.

Another sweet spot for RFID technology is any product with a short shelf life, such as a DVD. DVD manufacturers are considering short-term tagging for their products, but maybe just for the first two weeks after they're released, since the majority of new releases are purchased within that period. "Manufacturers and retailers cannot afford an out-of-stock in the first two weeks," notes Romanow. "After that period they don't need to tag them, but during that two-week time frame, they had better know where the movies are."

Aside from electronics makers, Romanow is starting to see interest from manufacturers of high-end sporting goods and expensive accessories like shoes, watches and handbags. "Again, those are generally [highly perishable] fashion items, so tagging doesn't have to occur forever," says Romanow.

Missed opportunities
Though it's often overlooked, another area in which RFID promises to benefit CPG manufacturers is in the promotional aspect of their business. Right now, promotions are a hit-or-miss proposition. Though manufacturers spend 20 percent of revenues on trade promotions on average, they have no assurances that the display cases carrying the promotional items ever make it out of the back room and onto the retail floor. One large company told Romanow the items make it to the floor only 60 percent of the time. "So 40 percent of the time they're spending all this money on a promotion, and the products are not where they're supposed to be," she says. "Think about how the effectiveness of that promotion could be improved by utilizing RFID tags."

But it appears that CPG manufacturers will have to wait for the biggest potential payoff from RFID. That will only come when retailers agree to accept RFID reads at the retailer's DC as proof of delivery. The instantaneous payment and improved cash flow for the manufacturer would go a long way toward justifying RFID, not to mention having proof of delivery that 100 items were delivered, not 80 as the retailer claims, which results in charge-backs to the manufacturer.

"That would provide 100 percent ROI for all of them," says Romanow, "but the retailers are just unwilling to talk about that. Remember, a lot of these business opportunities assume that you've got 100-percent read rates."

What lies ahead
At the Retail Systems Convention in May, one CPG executive talked about gaining the ability to see his company's product inside the retailer's domain each time a reader picks up the tag. In today's environment, a bar-code system with an advance shipping notice is received at the incoming side of a retail distribution center, which triggers a financial transaction.

"Tomorrow, there is the possibility of a dynamic financial transaction model, because you are seeing the tag all over the place beyond just what you record today from a bar-code basis," says Enu Waktola, EPC retail supply chain marketing manager at Texas Instruments RFid Systems. "This is the opportunity in terms of what types of applications could be used for RFID. End users are just learning to pick up these kinds of things based on the information they're seeing in their pilots. So things are moving in a positive direction in the sense that there is not as much discussion in the United States about tag costs, but increasing discussions about what else can I do with the technology?"

About the Author

John R. Johnson
John Johnson joined the DC Velocity team in March 2004. A veteran business journalist, John has over a dozen years of experience covering the supply chain field, including time as chief editor of Warehousing Management. In addition, he has covered the venture capital community and previously was a sports reporter covering professional and collegiate sports in the Boston area. John served as senior editor and chief editor of DC Velocity until April 2008.

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