SUPPLIERS SEE LACK OF RETURN ON INVESTMENT IN RFID

MICHAEL GARRY

WASHINGTON -- Very few consumer packaged goods manufacturers -- if any -- can generate a positive return on investment for widespread deployment of radio frequency identification tags at the pallet and case level, based on current and near-term costs, according to a new report from Grocery Manufacturers of America here.

The report, "A Balanced Perspective: EPC/RFID Implementation in the CPG Industry," prepared for GMA by A.T. Kearney and IBM Business Consulting Services, was based on an analysis of RFID usage by 24 large North American CPG manufacturers. Names of the companies were not divulged.

The report looked at RFID technology incorporating the Electronic Product Code, a new microchip-encoded digital standard of product identification being developed by EPCglobal, a joint venture of the Uniform Code Council and EAN International.

"We're hoping this report brings concerns that are below the radar into the open and generates conversations that need to happen," said Pam Stegeman, GMA's vice president of supply chain and technology. "It's like talking about the elephant on the table as opposed to pretending it's not there."

"Much of RFID implementation is a learning process that will require cooperative efforts from both retailers and suppliers," said Michael Sansolo, senior vice president, Food Marketing Institute here. "Just as occurred with the Universal Product Code, we'll move forward together and look for ways to ensure that both sides achieve their goals."

The GMA report comes just as Wal-Mart Stores' RFID program in the Dallas area is about to mushroom in January from eight product suppliers to more than 130, including the retailer's top 100 suppliers. Under the program, manufacturers will place RFID tags containing tiny antennas on pallets and cases going to three Wal-Mart distribution centers that serve more than 130 stores.

Manufacturers, however, will be bearing the cost of the tags, estimated to be anywhere from 19 to 60 cents apiece. This has led to widespread concerns about the feasibility of the technology for manufacturers from a return-on-investment perspective -- concerns that were documented in GMA's report.

The report goes so far as to say, "Widespread adoption of EPC/RFID is unlikely to occur until the industry addresses the unfavorable economics and unequal distribution of costs and benefits for manufacturers."

One large vendor told SN that complying with Wal-Mart's RFID mandate would cost it about $1 million in 2005.

Wal-Mart has "heard pushback from suppliers" about ROI concerns, but "it won't affect our plans," said Ron Moser, Wal-Mart's RFID strategy analyst, in answer to a question at the EPCglobal U.S. Conference in Baltimore on Sept. 29. "We don't expect manufacturers to tag every SKU," he added. "They can tag what makes the most sense."

In a statement released last month, Wal-Mart noted "there are still some non-believers who question the timing of its [RFID] initiative and some organizations that claim that there is no long-term return on investment, even if RFID tags were given away for free."

However, added Carolyn Walton, Wal-Mart's information systems division vice president who is responsible for EPC implementation, "We sincerely believe there is ROI for any company willing to approach this technology as a way to improve their own business and not just a way to meet our milestone."

As an example of one such company, Wal-Mart pointed to Beaver Street Fisheries, Jacksonville, Fla., which began shipping tagged pallets to Wal-Mart this month and has invested in systems to support RFID. "We're going to become an even bigger player in the market, and RFID is going to help us achieve that," said Howard Stockdale, chief information officer for Beaver Street Fisheries, in a statement. "That's part of the ROI that we know is coming."

CATEGORY-DEPENDENT ROI

Stegeman stressed that a manufacturer's ability to generate a positive ROI from RFID technology depends on the particular category or product being tagged, and on the kind of distribution the product undergoes (warehouse-delivered or direct-store-delivered).

"There are categories where you can get a positive ROI. So let's push those categories and work out the kinks for them," she said. She singled out health and beauty care/over-the-counter products and nonfood grocery items as generating positive returns with tags priced at 5 to 10 cents each, though current costs are higher. Specific products were not included in the report.

Pharmaceutical products, because of their high cost and attractiveness to counterfeiters, have been viewed as a likely starting point for RFID tagging of bulk shipments. The Food and Drug Administration earlier this month issued a new set of guidelines for RFID testing aimed at promoting industry pilots. (SN, Nov. 22, 2004, Page 41.)

Another key to any future RFID success, she noted, is that trading partners determine which "business processes" need to be changed to maximize the potential of RFID. For example, to reduce out-of-stocks, retailers still need to take proactive steps to achieve better shelf visibility and replenishment, and share results with suppliers, Stegeman said.

Nancy Tai, manager, e-commerce R&D, Georgia Pacific, Atlanta, agreed with that assessment in a presentation at the EPCglobal U.S. Conference. "Out-of-stock reduction depends on store-level inventory accuracy and replenishment," she said. "If stores share that data with manufacturers, it will drive additional service improvements."

Moser said that by using RFID in the back room and at box crushers and tracking point-of-sale sales, Wal-Mart can "know when it's time to restock a shelf, vs. just seeing it on the shelf."

Another inhibiting factor at the moment is the absence of tag application systems that "can go at full line speeds for fast-moving manufacturer lines," said Stegeman. Tag application remains manual or only partly automated at present. "For pretty much every manufacturer, in the next year or so it's a slap-and-ship thing," she said.

Tai pointed to the need for applicators that allow her company to "source tag" RFID tags on pallets and cases at normal line speed. "How can Georgia Pacific afford RFID?" she asked at the EPCglobal U.S. Conference. "We believe source tagging is the best approach."

Stegeman also pointed out that the GMA study focused on "outbound" shipments from a manufacturer to a retailer, and did not look at the potential savings to be garnered from inbound shipments from a manufacturer's suppliers.