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Mobile IoT: Article

The Price of RFID

It's an expensive proposition

Initiatives by Wal-Mart and the Department of Defense will soon require hundreds of suppliers to implement complex RFID systems. These systems can offer enormous benefits, but the costs are high. What are the key challenges that companies face in fulfilling the mandates?

Last June, Wal-Mart announced that its top 100 suppliers would be required to implement radio frequency identification (RFID) tags on all cases and pallets by 2005, with all other suppliers expected to follow by 2006. Soon after, the Department of Defense announced a similar plan, requiring its top 100 suppliers to place RFID tags on all pallets and cases by 2005, and all other suppliers to do so by 2006.

It's an expensive proposition.

According to a recent report by the management consulting firm A.T. Kearney, the price of adoption will be about $400,000 per distribution center, plus an additional $35-40 million company-wide for systems integration. For manufacturers of high-end goods like clothing and electronics, these costs will be much more manageable than they will be for food and grocery manufacturers.

Because more volume means more RFID tags to buy, food and grocery manufacturers who produce larger numbers of cheaper goods will have to spend a lot more to meet the mandates. "The high-volume manufacturers will see the greatest cash-flow impact," says A.T. Kearney vice president Dave Donnan.

Still, the advantages of tracking every case and pallet with RFID tags can be enormous for manufacturers and retailers alike. Because the tags can be read automatically from a distance and don't have to be scanned directly like bar codes, companies can save enormous time and effort by switching to RFID.

A.T. Kearney predicts that the benefits of RFID for retailers will include a 5% reduction in inventory, a 7.5% reduction in labor costs, and a reduction in out-of-stock items, resulting in an annual benefit of $700,000 per $1 billion in sales. Manufacturers can expect similar improvements.

And they're taking notice. A recent survey by PSC Inc., found that 47% of manufacturers and suppliers plan to use or pilot RFID technology within the next year, and fully 100% plan to do so within the next two years.

Still, the mandates by Wal-Mart and the Department of Defense have forced many of those manufacturers to implement RFID technology far sooner than they had initially planned. The technology is still very new and expensive, with costs expected to come down gradually over the next few years. In working to fulfill the mandates by the 2005 and 2006 deadlines, manufacturers will face a number of significant challenges.

The Cost of Compliance
While both retailers and manufacturers will face considerable costs for implementation of readers and other back-end systems, the cost of the RFID tags themselves will be borne by the manufacturers alone - which means that the mandates will cost a lot more for manufacturers than they will for retailers. "For those tags, if you take a large manufacturer who might ship a billion cases a year, you're talking about $250 million in recurring expenses each year," says Omar Hijazi of A.T. Kearney's Technology Solutions Practice.

Over the next few years, until other companies join Wal-Mart and the Department of Defense in requiring RFID, some manufacturers might try to segregate their inventory and tag it differently from inventory for other retailers. Still, Hijazi says that would require an enormous investment of time and effort to break down and repack pallets of goods, eliminating any potential cost savings that might result. "That's a labor charge, and when we did the economics for that, it was highly unfavorable," he says.

As a result, Hijazi says, many manufacturers are likely to do as little as possible to fulfill the mandates, simply purchasing the tags and placing them on pallets and cases, but not implementing the systems required to take advantage of the benefits of RFID themselves. "I think the larger group will take a minimalist approach," he says. "Some of the larger, more aggressive companies that want to be known as innovators and want to prove their relationship with Wal-Mart will invest in this wholeheartedly."

Ian McPherson, president of the Wireless Data Research Group, says manufacturers are being forced to decide quickly how much risk to accept when fulfilling the mandates: either save money now and risk falling behind technologically, or spend more money in the expectation that it will eventually pay off. "They have to decide, 'Do I spend $1 for compliance, or do I spend $2 and hope that the byproduct of that is $3 in productivity,'" McPherson says.

Reaping the Benefits
Some larger manufacturers will take the leap and invest fully in the technology. "RFID has the capability to make significant improvements in operations," McPherson says. "Even the suppliers who are looking at this with trepidation will come to the realization that this technology does have the potential to dramatically benefit their operations."

As a result, McPherson says, two classes of provider are likely to result: the larger or more aggressive ones who make the extra investment and use the technology for their own benefit as well as for compliance; and others who simply accept that they'll have to comply at a bare minimum.

For the former group, which decides to implement RFID systems fully, that implementation process will be a challenge. "The not-so-secret secret is that the big winners in this are going to end up being Accenture, IBM Global Services, and the other companies that do the professional services for design of deployments, as well as implementation and consulting," McPherson says.

A well-managed, company-wide initiative will be required to make sure that the adoption is integrated and consistent. That's good news for Accenture and others. "There's an outstanding opportunity to make some money building those interfaces and extracting the complexities of those systems to interface with these new data capture devices," McPherson says.

Still, for a retailer like Wal-Mart, there's very little downside, and the same is true for any other retailer that's large enough to bear the costs of a full implementation. "If they can get their suppliers to tag all their pallets with this, they're going to greatly increase their accuracy and lower their processing time," McPherson says.

Consumer Concerns
For any company that considers adopting RFID technology, privacy concerns can present a significant problem. Because RFID tags can be read from a distance and don't have to be scanned directly, consumers' purchases can be tracked without their knowledge. Understandably, that makes many people uncomfortable.

In 2003, Wal-Mart canceled a pilot project with Gillette to test in-store RFID sensors after privacy concerns were raised, and groups like C.A.S.P.I.A.N. continue to protest any and all use of RFID at the item level.

Ian McPherson of the Wireless Data Research Group points out, though, that there are valid ways for retailers to assuage consumers' privacy concerns. "You make sure that the consumer knows that these are part of the product they're purchasing, and you put kill switches on them," he says. "Those should be a mandatory part of a consumer packaged product, along with the ability to remove the tag when possible."

Still, he says that privacy advocates have done a good job of raising visibility. "Their tactics have probably been more shrill than they needed to be, and that hasn't ingratiated them to the vendors," McPherson says. "But somewhere along the way, that conversation needs to happen. Technology is agnostic in terms of where it goes and how it's developed, so this does need to be brought to the forefront for discussion."

And as A.T. Kearney's Hijazi points out, privacy concerns are valid even when items are tagged only at the case and pallet level. Sam's Club, a division of Wal-Mart, sells items in bulk, meaning that consumers frequently buy an entire case at a time. "At a Sam's Club, consumers could potentially be picking up product with RFID chips even though they're not tagging it at the item level," Hijazi says.

Precautions like those that McPherson describes, divulging the use of RFID tags and then disabling and detaching them after the sale, will be necessary to make consumers comfortable with the use of RFID tags at all levels. Still, with the publicity that RFID implementations like Wal-Mart's have received, it's likely that all retailers that implement the technology will continue to face those concerns as they move forward.

Future Improvements
As more companies take on the technology, McPherson expects a number of changes to occur that will make adoption easier. "We'll continue to see the costs for the hardware driven down," he says. "We'll also see multimode and multifunction readers that span the gap between UPC, bar codes, EPC, and RFID, and that make it a little bit more of a migration rather than a wholesale replacement."

Still, the cost of the tags themselves will continue to provide the most significant challenge. "You're looking at about 25-30¢, for a very basic tag," McPherson says. "When you're talking about a pallet-level tag, you're looking at 75¢ to a dollar for something that's more capable, that has some storage capabilities."

Bringing the cost of a tag below 5¢, McPherson says, will take quite a while. "I don't think we'll see a 5¢ tag in five years," he says. "The economics just aren't there. Regardless of how much you automate the manufacturing process, the cost of the materials is still going to be prohibitive."

Clarke McAllister, RFID Solutions Manager for PSC Inc., says that improvements in antenna technology will have a significant impact on tag costs. "Etched copper antennas are the standard way of building a tag these days," he says. "You're going to see that begin to give way to something more like a printed silver antenna."

As costs come down, McAllister says, more and more companies will come to understand the advantages of investing in a full-scale adoption of RFID technology. "The benefit really does accrue to those who can implement RFID and reduce the amount of human touch, reduce the number of errors, and increase the thoroughness of monitoring to give them complete supply-chain visibility," he says.

And regardless of the challenges it may cause for manufacturers, the Wal-Mart and Department of Defense initiatives have sent a strong signal to the market in general about the viability of this technology. "It attracts some that might ordinarily sit by the sidelines and watch to see what happens," McAllister says. "Even they are now attracted to the market and may well say, 'Yes, this is it. It's happening now.'"

More Stories By Jeff Goldman

Jeff Goldman is a freelance writer specializing in business and technology issues. Brought up in Belgium, Jeff spent the last decade in New York, Chicago, and London; he now lives in Los Angeles.

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