RFID: boon or bust?
The great debate continues about who stands to gain as radio frequency identification (RFID) technology sweeps into America's distribution centers. One clear winner will be the Wal-Marts of the world—that is to say, giant retailers. Wal-Mart alone expects to save $8.35 billion per year once RFID is in full-scale use. Most of the savings will come from labor costs: Wal-Mart stands to save just under $7 billion by not having to manually scan bar codes on incoming cases and pallets.
It's not quite so clear what's in it for suppliers, however. And that's a problem given that they're footing the bill. Wal-Mart claims better in-stock positions on retail shelves will translate into higher revenues for its vendors. But suppliers aren't so sure that the benefits will go much beyond simply staying in the good graces of the world's largest retailer.
"The business benefits of implementing RFID are not immediate, or at least we don't see it that way," Dan Cadigan of BP/Castrol told attendees at ARC Advisory Group's annual Performance Driven Manufacturing & Supply Chain Forum in June. "A drop in out-of-stocks should increase sales and profits," he acknowledges. "But will we ever be able to measure the results of that, or will the sales gains just blend into the natural increases in sales we normally see?
"To date we haven't built a business case for RFID," says Cadigan, who is BP/Castrol's senior strategic project leader. "Eventually we need to build a business case beyond just pleasing our customers. We're concerned about return on investment, although RFID could lead to revolutionary changes in packaging and distribution."
In a recent survey conducted by Accenture, supply chain execs cited the following as the biggest obstacles to implementing RFID:
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Costs of RFID tags and readers |
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Overall cost of implementation |
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Lack of standards |
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Market not stable/too early |
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Complexity of integration with existing system |
ROI issues aside, Castrol reports that its RFID pilot has been a success. The company, which ships liquids like engine oils and transmission fluid, had braced for big problems because of high rates of tag-reading failures in applications involving liquids and metals. But the technology has stood up to even the most rigorous testing. "We chose our five-quart product line because it had the biggest chance for failure—lots of liquid and a metal foil seal on each bottle," says Cadigan.He notes that once the company found the sweet spot for tag placement (an open air pocket inside the box), there hasn't been a single failure in three months.
Though Cadigan may not expect any immediate benefits from RFID, others have great expectations. A recent study by Accenture shows that almost half of North American manufacturing executives are looking for a high rate of return on their RFID investments, mostly in the form of short-term benefits. Almost half (48 percent) said they expected improved lot tracking abilities, 45 percent expected improved recall management, while 41 percent expected efficiencies in shipping and receiving.
Far fewer respondents expect long-term gains. Just under one-third predict a reduction in inventory and working capital, while only 28 percent expect to see a reduction of stock outs—the primary advantage touted by Wal-Mart.