June 11, 2012
technology review | Auto ID

Is item-level RFID right for you?

Is item-level RFID right for you?

Sure it's pricey, but for certain companies, the benefits of item-level tagging far outweigh the cost. Here are five signs yours might be one of them.

By Susan K. Lacefield

RFID finally seems to be hitting its stride. Last year, several big name companies—particularly in the retail industry—launched widescale item-level RFID tagging initiatives. For example, Macy's Inc. pledged that all 850 of its Macy's and Bloomingdale's stores would be using RFID technology by 2012.

These early initiatives are reportedly producing big benefits. According to a white paper from Motorola Solutions, "Item-Level RFID Tagging and the Intelligent Apparel Supply Chain," companies that have implemented item-level tagging programs are achieving inventory accuracy rates of between 98 and 99.99 percent and have seen sales jump anywhere from 4 to 21 percent.

With results like these, you may be wondering, Is my company ready to join the item-level RFID revolution? Here are some indicators that your company might be a good fit for the technology and is ready for the next step:

1. You have inventory accuracy issues that can't be solved with bar codes. Industry experts say there's a reason why item-level RFID has gained traction in the retail sector: RFID easily trumps bar codes when it comes to doing store inventory counts. Conducting a storewide inventory with bar codes typically requires scanning every single item, a labor-intensive task that most stores only perform once or twice a year. RFID technology allows them to obtain more accurate data with significantly less time and labor.

With a more accurate picture of its inventory in hand, a company can reduce out-of-stocks and increase sales. That's what really spurred the adoption of RFID in the retail industry and made 2011 such a big year for the technology, says Chris Warner, senior product marketing manager for Motorola Solutions, which makes RFID readers and antennas.

There are other, peripheral advantages to item-level RFID tagging, such as reduced labor, better demand forecasting, and better promotions, says Warner. But these tend to produce incremental benefits. "The biggest chunk of the ROI [return on investment] comes from reducing out-of-stocks," he says.

"I don't think anybody expected the kind of sales lift [that item-level tagging produced]," says Joe Andraski, president and CEO of the Voluntary Interindustry Commerce Solutions Association (VICS), which has a committee dedicated to studying and promoting RFID. Andraski believes that it's this sales lift that encouraged so many big-name companies like Macy's to move from the pilot stage to a major implementation so quickly.

The benefits of item-level RFID tagging aren't confined to the retail industry. The practice is also catching on in other sectors where tight control over inventories is required, says Russell Beverly, senior manager for consulting company Accenture's Retail Practice. Examples include aerospace and defense, high-priced medications, controlled substances, and alcohol, tobacco, and firearms.

2. You are tracking relatively high-priced items. While the cost of RFID tags may have dropped, they're still not free, and neither is the labor or automated equipment required to apply them. "To get a good ROI, your variable cost for tagging the item—which includes the price of the tags themselves as well as labor or gear to get your tag on an item—has to be lower than the net benefit that you are achieving," says Beverly. "Usually that's easier with a prom dress than with a can of tomatoes."

A white paper from Accenture and VICS (which Beverly co-authored), "Item-Level RFID: A Competitive Differentiator," provides a table that shows the sales lift needed for an RFID tagging effort to break even. (The white paper can be found on Accenture's website.) The table breaks the amounts down by unit margin and cost of the tag. For example, according to Accenture's calculations, a product with a $5 margin and total tagging costs of 20 cents per item would need a 4-percent sales lift to justify the cost.

It's worth noting that companies are using RFID tags to track more than just merchandise. Some are also tagging individual shipping and warehousing assets, particularly high-cost, moveable items. Companies typically lose one in four of their returnable, reusable shipping containers, such as totes, containers, or plastic pallets, says Warner. So it makes a lot of sense to tag these items for tracking purposes, he explains.

3. Your systems are coordinated and your data is synchronized. As Andraski says, before a company can implement item-level RFID, it needs to "have its act together." What he means by that is you have to make certain all your systems—such as your enterprise resource planning system and your order entry systems—are coordinated and can talk to one another.

In addition, it's important to have accurate product information. "Data synchronization is really key," says Andraski. "You need to make sure that whatever you have in your product master [data sheet], your customer has the same information in its product master in terms of weight, size, and what you're calling the product."

4. You have a lot of items that are offered in various permutations. If your products come in multiple sizes, styles, and colors, tagging individual items can make a lot of sense, according to Warner. RFID tags can make it significantly easier to find the exact item the consumer is seeking, he explains. Macy's, for example, has begun its item-level RFID implementation by focusing on products that come in many different sizes, such as women's shoes and men's slacks.

5. You have an item with a short sales window. Companies whose survival depends on selling enough snow shovels or designer coats between December and March can benefit from the real-time inventory information that RFID can provide.

For all its many benefits, RFID doesn't make sense for everybody. "If bar codes are working well today and you can't point to a clear problem, then RFID's probably not a good option for you," Beverly says. "The cost of the tags is still not to the point where you should retire all bar-code infrastructure and processes just to go with something new. Bar codes still work extremely well for a wide variety of things."

For example, the pharmaceutical industry had been pushing hard for companies to adopt RFID to fulfill chain of custody requirements. But some industry players have backed off from RFID after realizing there are still ways to get more from their existing technology and data management systems, says Beverly. Many companies in the industry now see RFID as something for the long term.

This also applies when it comes to the business case for the technology. While there are undeniable benefits to implementing RFID in your distribution operations—reducing chargebacks, boosting inventory accuracy, and cutting invoice and payment cycle times, to name a few—that's not what's driving current implementations, according to Beverly.

"The knee-jerk reaction is to assume you can get benefits from it in a lot of different areas," Beverly says. "And while that's true, it's hard to add up all those incremental benefits versus using bar codes today. If you can just simplify and focus on one or maybe two benefits at most, that makes it much easier to figure out where and how to use it."

About the Author

Susan K. Lacefield
Editor at Large
Susan Lacefield has been working for supply chain publications since 1999. Before joining DC VELOCITY, she was an associate editor for Supply Chain Management Review and wrote for Logistics Management magazine. She holds a master's degree in English.

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