May 31, 2004
"RFID." If the 'Sixties classic film The Graduate were remade today, that might be the new Big Thing whispered to this generation's Benjamin. While less otherworldly sounding than previous transforming technologies, radio-frequency identification, which tracks goods from every stage of production to consumers' shopping carts, has the potential to rev up the economy — perhaps even more than the Internet or personal computers.
"That's where all the action is," says Lyle Ginsburg, managing partner of technology innovation at consulting firm Accenture. "The world keeps getting smaller and faster and more competitive, and the need for more information is king."
In this case, the demand is for information that pinpoints the location of individual items as they move from the factory floor, to the warehouse, to the truck or train or ship, then on to retailers and consumers. RFID works via a wireless-tracking system, based on a tag containing a semiconductor chip, an electronic product code and an antenna, which transmits real-time data, collected and stored when strategically placed scanners detect the tag.
RFID could drive gains in productivity by cutting labor costs, shrinking inventories and reducing out-of-stock items. A study by AMR Research in Boston finds that RFID tracking could trim warehouse labor by 20%, slash inventory by 25% and boost sales by 3% to 4%, compared with current methods of keeping count. Perhaps RFID's biggest advantage is its ability to glean more direct insights into consumers' buying habits. Armed with that knowledge, companies hope to find the Holy Grail: demand-driven planning, what Greg Aimi, AMR Research's director of supply-chain research, calls a "pull" rather than "push" strategy for selling goods.
Some compare RFID's impact to that of PCs or the 'Net, providing companies with huge economies of scale and allowing them to use capital and people more efficiently. Certainly, radio-frequency identification is becoming one of the single biggest drivers of technology spending, according to William Whyman, co-founder and president of the Precursor Group, a technology and telecommunications research firm based in Washington.
And, in no small part, that is because two of the largest organizations on the planet, Wal-Mart Stores and the Defense Department, have seen the future and decided it includes RFID. Both behemoths are requiring their top 100 suppliers to become RFID-compliant by January. In addition, Wal-Mart issued a separate mandate to its top 30 pharmaceutical suppliers. For the Pentagon, the technology has security applications — keeping track of chemical and fertilizer shipments, for instance.
While the Defense Department and Wal-Mart initiatives have grabbed much of the attention, other companies around the globe are quietly moving ahead with their own programs. Metro, the big German retailer, is introducing RFID, with the aim of cutting inventory costs by 20% by the time it completes the rollout in 2007. The largest retailer in the U.K., Tesco, is expanding its use of RFID. Target, the big U.S. discount retailer, is testing RFID in its supply-chain operations. Boeing is experimenting with RFID to track airline parts. The Food and Drug Administration is exploring the use of radio-frequency identification as a way of limiting counterfeit drugs in circulation. The Healthcare Distribution Management Association, a nonprofit organization of health-care product distributors, is encouraging drug makers and wholesalers to use RFID technology, according to Bear Stearns research.
As a result, RFID is expected to be a $4.6 billion market by 2007, up from $1.03 billion at the end of 2003, according to market-research firm Venture Development and brokerage house Robert W. Baird. That suggests an annual growth rate of 45%. Reik Read, a Baird supply-chain analyst, thinks that estimate could prove conservative as pilot programs and adoption mandates expand. Estimates suggest suppliers will spend at least $10 million to $20 million each on hardware, software and services to meet the mandates.
About 30 companies are playing an active role in the RFID market, ranging from consultants such as Accenture and Capgemini, to chip makers such as Philips Electronics, Texas Instruments and Infineon Technologies, to software developers such as IBM, SAP and Sun Microsystems and Manugistics, to tag and reader makers like privately held Alien Technology and Matrics, to data-registry and directory-service provider VeriSign.
For some of the bigger companies, such as Texas Instruments and SAP, radio-frequency identification represents a very small portion of revenue and will have only a marginal impact on overall prospects. Smaller outfits such as Alien and Matrics, which exist to provide RFID solutions, have much more to gain as the technology becomes more widely used. As it becomes more pervasive, look for data-management and server-and-storage companies such as EMC, Hewlett-Packard and Network Appliance to benefit.
Baird's Read is recommending Zebra Technologies, which makes printers and encoders for the RFID market; Unova, whose Intermec unit is a leader in data collection and wireless networking in the warehousing and distribution industry; and Manhattan Associates, another major warehouse-management-system company, as companies likely to profit in this early phase. Longer-term, Read likes the positioning of Symbol Technologies, which makes scanners and provides data management; Accenture, which has long been involved in developing RFID; Manugistics, which also has been undergoing a restructuring; and SAP, the No.1 enterprise-applications software provider.
Bear Stearns' supply-chain research team also likes Manhattan Associates, Zebra and Unova as well as Tibco Software, which writes computer programs that link trading partners with real-time data.
The push to implement RFID technology is reminiscent of the introduction of the now-ubiquitous bar-code labels used to track inventories, a technology that Sears, Roebuck and Kmart ordered their suppliers to adopt in the 'Seventies to improve efficiencies. RFID, which is more flexible and durable, will eventually replace the bar code.
Though still emerging, RFID isn't a new technology. Developed during World War II to identify aircraft and thus avoid having them come under friendly fire, it's been used commercially since the 1980s in special applications that include prepaid electronic highway toll-collection systems such as the East Coast's EZPass and California's FasTrak. Other niche applications include ExxonMobil's SpeedPass for authorizing gasoline purchases, car keys that allow users to lock and unlock doors remotely and tags used in tracking livestock. And it is used internally by some big manufacturers, including the auto makers and Caterpillar. And prior to announcing its mandate to be RFID-ready, Wal-Mart had been testing RFID applications with major consumer-goods companies including International Paper, Unilever, Johnson & Johnson, Kraft, Procter & Gamble and Gillette, in a consortium that also includes research labs at major universities.
But the technology has never been applied on the scale that is being suggested. Wal-Mart has 10,000 suppliers, and 70% of its goods originate in Asia. The Defense Department has 43,000 suppliers. And that's just the start.
Despite the talk of 2005 deadlines, don't expect the radio-frequency identifier revolution overnight. "It will be the next big thing — in 10 to 20 years," says Jeff Woods, lead RFID analyst at technology consultant Gartner Group.
There are numerous obstacles impeding its rapid adoption. Uniform international standards are still being developed. Operating standards aren't yet set; tags, priced anywhere from 25-50 cents to $250 each, are still too expensive and so are tag readers, which cost at $1,200 to $3,500. Moreover, the technology is still imperfect and the readers' accuracy, at just 80% according to one study, is still below that which companies find acceptable. And as yet, no one has figured out how to make money from it.
So far, the cost of RFID to companies churning out low-margin high-volume products has fallen short of the benefits, according to Accenture's Ginsburg, who has worked on developing business plans with many of those under the gun to incorporate RFID. While it may make economic sense for Gillette, an early adopter of the technology, to tag its relatively expensive packages of razor blades to try to reduce theft and lost inventory — "shrinkage" in industry parlance — there may not be as much benefit to Procter & Gamble to tag paper towels. Indeed, Wal-Mart suppliers are far from happy to comply with the big retailer's RFID mandate. "This is a challenge for them," says Ginsburg of the manufacturers group. "But it's the long-term proposition everyone is after." And as long as Wal-Mart is holding a gun to them, they have no choice but to continue to pursue the strategy.
Another big concern is that current computer systems won't be up to the task of handling the immense volume of data expected to be generated by the technology, which will take tremendous processing power, bandwidth and storage. Then, too, there are questions of whether too much information will be collected and how to differentiate what's vital and what's not. Issues of privacy must be addressed. There's also a shortage of expertise in the emerging field.
"For something this big and this complex, it's hard to get the timing right," says Whyman, of the Precursor Group.
As a result, timelines are stretching out. The deadlines imposed by Wal-Mart and the Defense Department increasingly appear to be "paper tigers," notes Gartner's Woods, as suppliers struggle with working the technology profitably into their business models. "In the past six to nine months, there's been a 180-degree sentiment change among Wal-Mart suppliers," he says. "These are trials masquerading as rollouts."
Indeed, the Wal-Mart trial will be carefully controlled to include only three distribution centers serving 150 stores in Texas. Only cases and pallets will be tagged, rather than individual items. They will also include bar codes as a backup and the test will be limited to only certain product lines. One big difference between Wal-Mart and DOD trials is the military agency will assist its suppliers with the implementation cost.
Many believe the industry will evolve in a series of waves, with those companies making readers and tags the early beneficiaries, followed by the software and storage and service providers. One caveat: As the industry evolves and RFID becomes more pervasive, the prices of tags and readers will decline dramatically and those products will become more marginalized.
Before radio-frequency identification's Big Bang occurs, expect the technology to continue to progress in niche areas. Privately held TrenStar, for instance, is using it to provide keg-management services for brewers and just recently inked a 15-year deal with Adolph Coors' U.K. subsidiary to acquire its keg and cask inventory and provide container management services. How does Coors benefit?
"The arrangement will provide opportunities for more effective use of cash, further debt reduction and increased returns on capital," says Tim Wolf, Coors' chief financial officer. That's something to drink to.