Manufacturers ready RFID rollouts

A wireless inventory system that’s worked for tracking cattle is winning converts in the retail industry, but it’s the suppliers who are getting prodded to adopt radio frequency identification.

Retailers such as Wal-Mart Stores Inc., Target Corp. and Carrefour SA say using RFID tags that can store and communicate detailed item identification data will allow for more accurate inventory management, fewer out-of-stock conditions, and less shrinkage, or product loss, throughout the supply chain than conventional barcodes.

This vision is forcing its suppliers to join the RFID revolution. Consumer packaged goods manufacturers such as The Gillette Co. and The Procter & Gamble Co. are launching feasibility studies, planning pilots and drafting implementation plans.

Wal-Mart, Target and Albertsons Inc. have imposed deadlines for their suppliers to begin shipping RFID-tagged pallets and cases. So too, has the U.S. Department of Defense, which is one of the nation’s largest consumer goods purchasers. Wal-Mart’s deadline is the most pressing: As of January 2005, Wal-Mart will require its top 100 suppliers to use RFID tags that each contain a unique identifier — called an electronic product code (EPC) — that is referenced in corresponding electronic transaction documents, such as advance shipping notices.

Such deadlines add urgency to RFID rollouts, which are not without complexity. Implementing RFID requires not only investing in the RFID tags and readers, but also linking the readers to supply-chain systems and designing new processes that incorporate the collection and dissemination of RFID tag data.

As one of Wal-Mart’s top 100 suppliers, Henkel Consumer Adhesives Inc. is directly affected by the retailer’s RFID mandate, says Gene Obrock, vice-president of operations at the Avon, Ohio, manufacturer.

In 2002, Henkel identified RFID as a system that could help improve internal efficiency and customer relations. “Now that the mandate has been declared, we are glad we had already been researching this technology,” he says. The company plans to have RFID active by late this year in its three warehouses.

The company is rolling out Manhattan Associates Inc.’s RFID-in-a-Box. According to the vendor, the bundle starts at US$60,000 and includes RFID readers and tags from Alien Technology Corp.; a limited-license version of Manhattan Associates’ Trading Partner Management application to generate RFID tags; professional services; and optional EPC printers to print the RFID tags.

Like Henkel, Larson Manufacturing Company already is thinking about future compliance. Ted Weinrich, MIS director at the Brooking, S.D., storm door maker, says his team has begun to discuss and research RFID. “We’re not pushing on RFID at the moment, but we want to make sure we’re positioned properly when the time comes,” Weinrich says. “It’s not an ‘if’ but a ‘when.'”

While Larson doesn’t sell to Wal-Mart, it does sell to Lowe’s Companies Inc. and The Home Depot Inc. When those retailers make technology decisions, Larson needs to be able to react quickly, Weinrich says.

Sensing a buying spree, vendors are rushing RFID products out the door. Software makers with retail and warehouse management expertise, such as Manugistics Group Inc. and Manhattan Associates, are unveiling RFID-enabled packages. Enterprise Resource Planning (ERP) vendors such as Oracle Corp., PeopleSoft Inc. and SAP AG are adding RFID capabilities to their suites, as are infrastructure software makers such as IBM Corp., Sun Microsystems Inc., Tibco Software Inc. and webMethods Inc. Countless services firms, systems integrators and consultants also are launching RFID programs.

Some vendors are going all out to help time-pressed consumer goods manufacturers. Sun, for example, built a 17,000-square-foot warehouse in Dallas that replicates a Wal-Mart site. The warehouse is outfitted with RFID readers, loading-dock bays and a high-speed conveyer belt. In this pseudo Wal-Mart environment, companies can test their RFID systems for compliance with Wal-Mart’s standards — choosing which RFID tags to apply and where to place the tags, for example.

Elusive payback

Observers agree there’s plenty of potential for ROI. RFID systems are expected to help boost retail and manufacturing revenue by decreasing out-of-stock conditions. Users also expect to reduce product-handling costs by moving to more automated processes.

However, realizing that ROI is another story. Management consulting firm A.T. Kearney reports that companies can generate significant savings in inventory and labor costs by adopting RFID technology, but that manufacturers will have to spend a lot of money upfront and will see few benefits in the short term. Adding to the fuzzy ROI picture is that spending data is hard to come by. Most companies that have implemented the technology won’t share their results because they don’t want to lose a competitive advantage, according to Nigel Montgomery, a director at AMR Research Inc.

What spending figures are available are often anecdotal. James Jackson, vice-president of strategy and information at Unilever, reportedly told attendees at last month’s Global Retail Technology Forum in Barcelona that the London consumer goods manufacturer spends between US$1 million and US$2 million on each RFID pilot.

Spending on RFID pilot projects today runs about 90 per cent services and 10 per cent components, says Vijay Sarathy, group marketing manager for Sun RFID. One reason is for the high services ratio is that much of the effort is by hand: “Tag placement is such an art, people have to literally hand-wire a lot of these things,” Sarathy says. That model won’t hold up in a broad enterprise deployment.

Adding to the complexity is that manufacturers need to integrate their homegrown software with retailers’ systems, says Jeff Richards, CEO of consulting firm R4 Global Services Inc. “Until now, a manufacturer’s software environment was its own and didn’t impact partners. Now they all have to have systems talking to each other,” Richards says.

To get the full benefits of RFID, manufacturers must balance the immediate need to comply with RFID mandates with longer-term plans to retool collaborative business process around the new technology, says Larry Kellam, partner at consulting firm Kellam Group and a 35-year Procter & Gamble veteran.

“It’s hard for most people to imagine changing work processes to capitalize on what RFID technology allows,” says Kellam, who led Procter & Gamble into its RFID pilots. “But if all we do is think about using EPC as a replacement for the barcode, all we will have done is increase cost. That’s a pretty bad trade.”

For manufacturers that so far have avoided undertaking RFID pilots, Kellam’s advice is to dive in. “Start using the technology on a limited scale. Buy 100 tags and a reader and software. Immediately follow by beginning to pilot,” he says.

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