RFID: ONE STEP AT A TIME 2004-05-31 (1)

Michael Garry

While many topics in retail technology were covered at the Retail Systems 2004/VICS Collaborative Commerce Conference & Exposition two weeks ago in Chicago, the buzz was decidedly about RFID (radio frequency identification).

Not that anyone should be surprised, given the attention -- some would say hype -- that's been directed at RFID. Indeed, a veritable ocean of ink has been spilled since Linda Dillman, Wal-Mart's chief information officer, made her now-famous announcement about the retail juggernaut's plans for the technology at last year's Retail Systems conference.

Yet here was Dillman back again on the stage of this year's show, showing no lack of enthusiasm for the topic. Joining her on stage, in what was billed a "Fireside Chat," was Paul Singer, her counterpart at one of her company's fiercest rivals, Target, along with executives from two suppliers, Kimberly-Clark and Hewlett-Packard.

Dillman was preceded by other top Wal-Mart executives. Earlier that morning, Michael Duke, president and chief executive officer for Wal-Mart's U.S. division, talked about the company's plans for RFID and its relationship with suppliers it is partnering with (SN, May 24, 2004). The day before, Simon Langford, Wal-Mart's manager, global RFID strategy, participated in yet another RFID panel discussion with retailers from Marks & Spencer and Abercrombie & Fitch.

Not to be outdone, Uniform Code Council, at its U Connect Conference last week in Anaheim, Calif., featured a series of sessions on the progress being made by its EPCglobal subsidiary to support standards for RFID technology. On hand were executives from Wal-Mart and such suppliers as Procter & Gamble, Johnson & Johnson and Gillette.

At the Fireside Chat, Singer tried to make light of his unusual pairing with Dillman, while also making an important point about industry unity. In prior discussions with show principals, he recalled saying, "Wouldn't it be great if Linda and I came out and said in front of God and everybody, 'We're going to [address RFID] in one way'?"

Then the panelists explained why they got started with RFID, what they hope to get out of it, and why other retailers should follow their lead. The moderator was Brian Kilcourse, a former CIO and research director for show organizers Retail Systems Alert Group.

Overall, it seems retail RFID pioneers are more gung-ho about the current state of the technology than their manufacturer counterparts, though all agreed on the technology's potential.

RFID consists of small "radio tags" with tiny antennas that can be placed on shipping containers like pallets or cases; the presence of a nearby reader triggers a radio communication from a chip in the tag that tells what's in the container (such as a pallet or case) and where more data about it may be obtained. That communication is then channeled up the supply chain, via the Internet, to those who need to know the specific identity and location of what's being shipped in real time.

This, in short, is the application of RFID that Wal-Mart and others like Target, Albertsons, Tesco and Metro Group are initially investigating. RFID tags can also be used to identify each item in a store, in effect replacing the bar code, but that application is much farther downstream.

Taking place alongside these tests is the development of global standards for RFID, including the EPC (electronic product code), housed in the tag's chip; the EPC contains the product information that is transmitted from the tag. Standards development is being spearheaded by EPCglobal, a joint subsidiary of UCC and EAN International.

What's In the Back Room?

One key point made by Dillman in the Fireside Chat -- and one echoed by other speakers at the Retail Systems conference -- is the need for an incremental approach to RFID. "You need to boil down the potential of RFID into one or two places to start and focus on those," she said. "If I try to figure out how to take all of the data RFID can provide and integrate it all now, that would be an awesome [task]."

For Wal-Mart, the initial goal is to know what products are in the back room of its stores in order to avoid out-of-stocks on the selling floor, Dillman said. "So we'll do that first, and then identify what's next and layer it on. Do it a step at a time."

In-store inventory visibility will also mean that product will not be needlessly ordered from the warehouse, reducing overall stock levels, said Wal-Mart's Langford.

In line with its simple approach, Wal-Mart, the world's largest retailer, has kept its core RFID team down to a manageable five people who "believe in the technology and see the chance of a lifetime to be involved in its early stages," she said.

Dillman said that in examining RFID 18 months ago, the company found "multiple business cases that work with today's technology." Wal-Mart decided the right place to start, in support of its inventory visibility objective, was to apply tags at pallet and case level.

Thus Dillman issued her pronouncement at last year's conference asking Wal-Mart's top 100 suppliers to begin tagging pallets and cases by January 2005. That "mandate," which has been streamlined to apply initially to the North Texas market, has been voluntarily adopted by another 37 suppliers. The Dallas market rollout began -- with one DC, seven stores and products from eight suppliers -- on April 30. (See SN, May 10, 2004.)

Dillman's interest in inventory knowledge was shared by the head of RFID for London-based Marks & Spencer, James Stafford, who spoke on the panel with Langford. Referring to the company's RFID test on apparel, involving some 200,000 items across six stores, Stafford said, "It's about accuracy. We want to know what we've got in the supply chain, and link that to the IT stocking systems."

Marks & Spencer is also tagging food trays containing fresh products, with 3.5 million (non-EPC) tags deployed by year-end. The focus is on processing speed. RFID tags were found to be faster to read than bar codes, Stafford said.

Dillman acknowledged that the business case for RFID still varies by product; it's vastly different for diamond rings than for candy bars. Still, over the past year, in preparing for Wal-Mart's 2005 target, she expressed amazement at how quickly RFID has progressed. "Tags cost half of what they did a year ago, and readers have double the functionality for the same price or less," she said. "If this pace continues, we'll get to a [business] case for everyone in five years."

"It's blatantly obvious to us that now is the time [for RFID]," added Singer. "It's a matter of the number of tags produced [being enough] to drive down the cost."

In his earlier presentation, Wal-Mart's Duke cited one technology provider that put its current tag cost at 30 cents each, which, with sufficient volume, could drop to five cents by the end of 2006.

Still, some manufacturers, who bear the brunt of tag costs, think they remain too high. "Tag costs are lower than a year ago, but higher than they need to be," said Simon Ellis, supply chain futurist, Unilever, in a supplier panel discussion.

Stafford pointed out that though manufacturers pay for the tags, the cost is built into the cost of their products. In order for retailers to avoid passing along that cost to consumers, the technology needs to "create savings in the supply chain," he said.

Technical Issues

Like many observers, Dillman said data synchronization is needed to pursue RFID. "To take advantage of the information, [Wal-Mart and its suppliers] need to talk about the same items and know we have the same information at the same time," she said. Synchronized data that is transmitted by RFID can then be "filtered" so specific pieces "flow though our system to Retail Link for our suppliers to see."

Regarding the tags, Dillman said in a company statement that Wal-Mart is "experimenting with various tag types and tag placements to see how they impact readability on various products in a non-laboratory environment." Wal-Mart, she said, is targeting 100% readability of pallets at dock doors and 100% readability of cases on DC conveyor systems.

Langford, however, noted that the "laws of physics" are preventing Wal-Mart from reading every case on a pallet. It's well-known that liquids and metals can interfere with read rates -- a problem noted by Unilever's Ellis. Langford remains hopeful that readability issues will be resolved, adding that "antenna design" on tags can help improve read rates.

On the public relations front, Wal-Mart is educating consumers to allay potential concerns, especially regarding privacy, said Dillman. Though its Dallas test is focused on pallets and cases, some individual Hewlett-Packard items are tagged. This has sparked a stern rebuke from privacy group CASPIAN (Consumers Against Supermarket Privacy Invasion and Numbering), which said Wal-Mart's education campaign is marked by "omissions and spin."

Wal-Mart, which informs consumers that many car keys now come with RFID tags, is telling them the technology will help ensure that they will find what they are looking for in stores. Dillman said the feedback from Wal-Mart shoppers is that the technology "makes sense."

Another often-expressed sentiment at Retail Systems was the need for other retailers besides the pioneers to start testing RFID. "Don't think it's only for big companies," said Dillman. She cited a small Wal-Mart supplier, whose CEO "sees huge potential" in the technology. Dillman stressed that RFID should not be regarded as Wal-Mart's project alone. "It's not going to work if any one company drives it on their own. It has incredible potential for all of us if we work on it together."

Some retailers are already working with manufacturers and technology vendors on EPCglobal's action groups to develop standards, but more participants are needed. "That is the only way to get a common standard," said Langford. "It doesn't help to go in different directions."

While supporting standards development, Stafford noted that "there are many things you can learn at this stage while the standardization process is going on."

How Far, How Fast?

How much progress have retailers made with RFID? A new survey from Deloitte Touche Tohmatsu, ePC Group and Retail Systems Alert Group shed some light on the question.

"RFID: How Far, How Fast?" is a study that queried 90 retailers, distributors, CPG companies and apparel manufacturers about their plans for adopting RFID in 2004 and 2005, as well as expectations for the next five years.

"Members of the retail and CPG industries have only begun to get their feet wet -- and they don't want to jump into the pool too quickly," said Peter Abell, president of ePC Group, Boston.

Still, some progress is being reported:

Seventy percent of large companies ($5 billion or more in sales) will embark on RFID initiatives within the next 18 months.

Nearly 72% of large companies will spend less than $500,000 on RFID in 2004.

The biggest obstacles identified by the report include technical challenges related to tags and cultural resistance to change and innovation.