March 1, 2007
special report | RFID: The Next Generation

Not your standard mandate

not your standard mandate

When it comes to consumer electronics, size doesn't matter. RFID tags are ready and waiting to be embedded in everything from iPods to refrigerators.

By John R. Johnson

Remember the days when consumer goods manufacturers wanted nothing to do with RFID technology? They winced as they spent millions of dollars to comply with RFID mandates from retailers like Wal-Mart, convinced they were getting little, if anything, in return.

They watched with dismay as tests to determine the best place to locate RFID tags on metallic products or packages containing liquids—both trouble spots for the technology—dragged on and on. All the while, they grumbled that the retailers would see all the benefits, while they got stuck with the bill.

That was yesterday. As the technology matures, more manufacturers are jumping on the RFID bandwagon. For evidence, you need look no further than the push by a group of consumer electronics manufacturers to establish a set of international standards for RFID, with the goal of embedding tags into all kinds of electronics—from cell phones and MP3 players to large electronic appliances like refrigerators and dishwashers.

The Star Wars-like future when your refrigerator automatically senses when you're out of milk and reorders it for you is still a long way off. But the day when you can access the RFID tag on your fridge to simplify warranty issues and service calls may be closer than you think.

"The initiative is gaining a lot of momentum," says Ian Robertson, the former RFID guru at Hewlett Packard who left HP in 2005 to join EPC Global, where he now serves as global industry development director and Asia regional director. "We're working with the industry to make sure it has a clear understanding of where it can benefit from EPC Global standards. We're really looking at things from an entire process point of view. It's not just about the manufacturer or the retailer.We can't forget the consumer, because they are the most important part of the chain."

In fact, Robertson is quick to note that manufacturers have specifically requested that EPC Global avoid making the standards manufacturer-centric. They're convinced that if the technology is to truly take off, the retail world and consumers must benefit too.

Laying the groundwork
Meetings have been under way for several months, the most recent of which was held in Seoul, Korea, in December.Much of the research is being headed up by Robertson, who says the ultimate goal of forming an electronics industry action group (IAG) within EPC Global is still in the exploratory stage. Robertson is currently meeting individually with manufacturers and retailers in Europe, and he expects to convene another meeting in Europe in mid-May before an official proposal to form an industry action group is presented to EPC Global.

"This is much more than a track and trace initiative," says Robertson. "If it was track and trace, then we'd have no need to form a group because it is very well covered by existing groups in EPC Global."

A formal set of guidelines in the form of international standards would help manufacturers to better manage products from cradle to grave, and also to improve manufacturing processes. Retailers would gain from better product availability and supply chain visibility. Manufacturers in Europe are aggressively pursuing the idea, since they are required by law to dispose of products when they reach the end of their life cycle. Among other things, RFID would enable manufacturers to determine what parts have been incorporated into each appliance and how to dispose of them properly.

Robertson says it normally takes 12 to 18 months to get to the point where an IAG proposal is ready to be presented to EPC Global. He says that could happen following the May meeting.

Boost for retailers
The adoption of international standards would also help electronics retailers. Best Buy, for example, is on record as saying that RFID has improved everything from the retailer's product forecasting to on-shelf availability (which has soared from the mid-80s to 93 percent).

In fact, Best Buy has begun to move beyond case and pallet tagging to the tagging of individual items like DVDs, CDs and videogames. Best Buy CEO Robert Willett told attendees at the Entertainment Supply Chain Academy's annual conference last summer that it is already testing item-level tagging at its pilot store.

"We are enabling our product shelves to become 'smart shelves,'" said Willett. "There is obviously a cost, but we believe that the reduction in customer disappoint per visit will more than offset any cost over time, and it will also help fight piracy."

Applying RFID tags to individual DVDs, CDs and videogames can boost sales by preventing stock-outs, which is particularly crucial in the days immediately following an item's launch. With DVDs, for example, up to 70 percent of sales are recorded in the first seven days after a film is released on DVD. Preventing stock-outs is also crucial with expensive electronics like plasma TVs that carry high margins for both manufacturers and retailers.

Streamlined manufacturing
Indeed, manufacturers are hoping to benefit as well, in the form of internal process improvements. Computer makers like Dell and HP, for example, are eyeing manufacturing advantages that could transform the industry. Dell is already a big user of RFID to manage its just-in-time supply chain, and, like other computer makers, it's now studying how RFID can streamline production lines.

For example, Robertson points to the process of installing DVD drives into new desktop computers. For every DVD install, production line workers scan the station where the desktop is and then scan the desktop unit so they know which unit the DVD is going into. Next, workers scan the bar code of the actual DVD being installed as well as its serial number.

"During that whole process, you're not doing anything that's value added—you're just identifying things," says Robertson. "So imagine if you're running a kanban production line and you simply reach back and pick up a DVD and immediately start putting it into the unit. All the scanning processes are gone because [RFID] has [identified] the unit you are working on, it has checked that it's going into the right machine, and it's picked up the serial number."

So what began as a major headache for manufacturers— the need to comply with supply chain and retail mandates for tagging finished goods—has led to rising interest in RFID for internal applications that promise a greater return on investment. While numerous pilots designed to evaluate the potential for RFID in manufacturing are currently under way, the number of pilots that actually result in fullblown implementations will be a key determinant of the rate and timing of overall market growth.

According to a new study by ARC Advisory Group, the worldwide market for RFID in manufacturing applications is expected to grow annually at 8.9 percent over the next five years. ARC vice president Chantal Polsonetti says that standardization and technology convergence will drive prices downward and elicit strong growth in unit shipments. ARC's new report says that expenditures for RFID in the manufacturing sector totaled $208.8 million in 2006, and predicts they will reach nearly $320 million in 2011. "Compared to the challenge of generating ROI from mandate-driven RFID implementations," says Polsonetti, "numerous opportunities exist for internal RFID applications to generate ROI for manufacturers."

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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