April 1, 2006
special report | RFID: The Next Generation

A calculated risk

a calculated risk

For the rest of the world, complying with Wal-Mart's RFID mandate was challenge enough. So why did TI raise the bar?

By John R. Johnson

By the time his turn rolled around, Tom Shields had heard an earful about RFID. Almost none of the reports were favorable. It's costly and unreliable, warned those who had gone before him. The benefits to suppliers have been oversold, he was cautioned. And the return on investment? He'd better be patient. He'd probably find himself measuring the ROI not in months, but in years. bypass the first generation of RFID technology and go directly to the For the rest of the world, complying with Wal-Mart's RFID mandate was challenge enough. So why did TI raise the bar?

But those reports didn't discourage Shields, who is the RFID program manager for Texas Instruments' Educational & Productivity Solutions (E&PS) unit. Whenever the talk turned to RFID (radio-frequency identification) and its legendarily elusive ROI, he just smiled to himself. Shields had spent a lot of time thinking things through, and he was confident that his team's experience would be different. For one thing, his RFID project would be no slap- and-ship affair. Nor would it be aimed strictly at complying with Wal-Mart's mandate. Instead, the TI division would integrate RFID tags into its internal operations from the start. And it would use the data generated by the tags to solve business problems and streamline operations.

The TI division set a few other ambitious goals for itself as well. It would not just meet the January 2006 deadline for shipping RFID-tagged cases and pallets to Wal-Mart; it would beat it. It would also upstage everyone else where technology was concerned. Shields' group wouldn't waste its time with the tags everybody else was using. Their plan was to second generation (Gen 2).

This was at once a bold step and a calculated risk. Although Gen 2 technology offers significant advantages over the first generation (greater speed and improved accuracy, among them), no one had successfully used it yet on Wal- Mart-bound shipments. And there was no guarantee that the TI division, which makes high-end graphing, scientific and financial calculators, would be able to do it either.

Rocky start
In fact, the project got off to a less than auspicious start. In the early days, the RFID team faced the challenge of planning around a completely untried and untested technology. At the time, the only Gen 2 equipment available was still in the beta stage. No one knew exactly what the final product would look like or what its capabilities might be. Nor did they know exactly when it would be commercially available. Fortunately for the team, those questions were quickly resolved after the Gen 2 standards were ratified in late 2004.

Immature technology wasn't the only problem the E&PS division faced. Although RFID tags were already in use by the time TI began its tests, many of the tags' properties were still unknown. For example, nobody knew whether RFID tags could withstand the shrink-wrapping process, in which temperatures soar to nearly 300 degrees, says Shields. "No one in the industry could tell us for sure if an RFID tag would survive [a trip] through a shrink wrap machine."

A few tests provided the answer. Shields' research team discovered that despite their exposure to 300-degree heat, the tags never exceeded 150 degrees in temperature. Tests also confirmed that their trip through the shrink-wrap machine left them unharmed. Every one of the tags remained readable afterward.

It may have started out with some disadvantages, but the TI division also went into the project with some factors in its favor. For one thing, it could call on the expertise of its sister division, Texas Instruments RFid Systems, which manufactures RFID tags and inlays. For another, it had time on its side. As a second-tier Wal-Mart supplier, the E&PS unit escaped the January 2005 RFID compliance deadline. It would have until January 2006 to comply with the RFID mandate.

In the end, Shields' confidence proved to be justified. In late December, well ahead of Wal-Mart's deadline for its second-tier suppliers, TI shipped 12 different SKUs bearing Gen 2 tags from its distribution center in Alliance, Texas, to Wal-Mart DCs in Alabama, Arkansas, Oklahoma, Louisiana and Texas. With those shipments, it became the first consumer packaged goods (CPG) manufacturer to ship Gen 2- tagged cases and pallets to Wal-Mart, handily beating even the titans of the CPG industry like Procter & Gamble and Kimberly-Clark.

Out of the gate
This wasn't about being the first to use Gen 2 technology, of course. It was about using RFID technology intelligently and with an eye toward the future. Though slapping Gen 1 tags onto its cartons would have been far easier, the TI managers figured they'd be wasting their time. For one thing, Gen 2 technology is a global standard. TI, which has customers in Europe, would have to adopt it sooner or later. For another, TI believes that sometime in the next 12 months, retail heavyweights like Target, Best Buy, and, yes, Wal-Mart will ask suppliers to begin switching over to Gen 2 tags.

"We pretty much came out of the gate knowing we wanted to be Gen 2 compliant," says Shields. "We wanted to make investments that were flexible and agile, so we wouldn't have to re-invest in the technology down the road." TI, he reports, is now ready to replicate the system in place at the Alliance DC when its European and other domestic customers come on line.

Compliance issues aside, TI expects to benefit from RFID technology in its internal operations. For example, the E&PS division believes data generated by the tags will help prevent stock-outs, particularly during the busy back-to-school selling season, when demand for calculators peaks. "Back-toschool is our Christmas time for educational items," says Keith Hodnett, vice president at Texas Instruments and supply chain manager for the E&PS unit. Real-time sales data would alert the company if inventories began to dip, giving it time to rush replenishments to stores.

RFID technology will also enable TI to track the cardboard display units it ships to retail stores to stimulate sales. Starting this summer, those displays will arrive bearing RFID tags, allowing TI to monitor their whereabouts and gather valuable data on retail sales patterns. "We'll get the data points back on when they are stocking and disposing [of] those units, which is [information] we haven't had before," says Hodnett. "So we [will have] some new data that will help us better understand cycle times, from the time we build and ship that display, to the time [the retailers] actually use it on the floor."

A technology for all seasons
Those are just the supply chain-related benefits. TI has already identified several non supply chain-related applications for the RFID tags as well. "We recognize that this technology brings more to the table than just increased supply chain visibility," says Shields. "We have identified other pockets of opportunity where we can apply this technology ..."

For example, the company plans to use RFID tags to track the hundreds of laptops and PDAs issued to employees. Right now, the company conducts an audit of these electronic assets once a year, says Shields. Converting to RFID tags will eliminate the need to send employees out to catalog every piece of equipment, he notes. "It's a great benefit to be able to track them automatically with RFID."

Beyond that, the company believes RFID will improve security. TI plans to extend RFID tracking to include calculators in the pre-production phase and for controlling access to its facilities. TI already uses badges to monitor entries and exits, says Shields. Adding RFID chips would be a relatively simple matter.

The benefits seem clear enough, but what about the legendarily elusive ROI? In truth, the TI division doesn't expect to see a return on its RFID investment right away. "We did some analysis that showed it would take two or three years to get the return back," says Hodnett, "but that did- n't discourage us."

Hodnett's apparent lack of concern is easily explained. TI carried out its RFID project on a shoestring budget. The company set aside just $500,000 for its initial investment in hardware, software, consulting services and integration. That figure also includes the first 50,000 RFID tags that TI used in its project.

Even that modest sum turned out to be more than the division needed. Hodnett reports that the project came in under budget. He says he also expects that ongoing investments will be minimal.

What's ahead?
As for those ongoing investments, it appears that at least part of the money will go toward the purchase of mountains of tags. Hodnett estimates that TI will use 250,000 RFID tags this year, which will cover any new retail mandates the company receives. If Target and Best Buy begin asking suppliers to use Gen 2 tags, as TI expects, it will be ready. The TI division is also discussing RFID pilots with several European retailers.

Farther down the road, TI plans to use Gen 2 RFID technology on its products from cradle to grave. By embedding tags in individual items, it will be able to track products in the pre-production stage. Those same tags will help deter theft once the products hit store shelves (most of these calculators sell for $100 or more).

Eventually, RFID tags may continue to play a role long after the calculators leave the retail store. Tags would enable the manufacturer to monitor returns and assure the environmentally safe disposal of its calculators. "As we roll this down to the item level, we have the opportunity to see products from cradle to grave," says Hodnett. "We're not there yet, but we've got a clear vision for it."

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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