The U.S. Department of Defense last week said it will require all of its suppliers to put radio frequency identification tags on their shipping pallets and cases by January 2005, a mandate that likely will have an even bigger impact than a similar move by Wal-Mart Stores Inc. in June.
The endorsements of RFID technology by the Pentagon and the retail giant are expected to force product manufacturers and distributors to make big investments in their IT infrastructures over the next 15 months.
The Defense Department’s new policy will cover virtually everything bought by the U.S. military, from beans to bullets and from toothpaste to tank parts. The so-called passive RFID tags will be used to track the movements of about 45 million line items, said Alan Estevez, assistant deputy undersecretary of Defense for supply chain integration.
Estevez couldn’t quantify the number of suppliers that will be affected by the RFID policy, which was set out in a document signed by Michael Wynne, the acting undersecretary of Defense for logistics. But the Defense Logistics Agency, which bought an estimated US$24 billion worth of goods last year, currently does business with 23,642 suppliers, according to a spokeswoman.
Like Wal-Mart, which is requiring its top 100 suppliers to adopt RFID, the Pentagon plans to use electronic product code (EPC) standards that are being developed by EPCglobal Inc., a joint venture between Uniform Code Council Inc. in Lawrenceville, N.J., and EAN International in Brussels.
EPCglobal, which previously was called AutoID Inc., released the technical specifications for an RFID-based EPC network and supporting technology last month.
The Defense Department’s timetable for starting to use RFID technology is ambitious, Estevez acknowledged. Nonetheless, military officials believe that suppliers will be able to meet the rapid rollout schedule, he said.
But Kara Romanow, an analyst at AMR Research Inc. in Boston who cited both software and hardware impediments, said the early 2005 deadlines imposed by the Pentagon and Wal-Mart are highly impractical. For example, she said, RFID tags currently have a 20 percent failure rate and can’t stand up to the kind of environmental extremes that military units face.
The cost of the devices is another hurdle. Passive RFID tags typically sell for up to 50 cents each. Bentonville, Ark.-based Wal-Mart wants to see that lowered to 5 cents per tag. Estevez said the Defense Department is looking for “the lowest possible price,” but he didn’t disclose any cost targets.
In addition to requiring suppliers to use passive RFID tags on pallets and cases, the Pentagon has instituted a formal policy to put active RFID tags on all of the 20- and 40-ft. shipping containers used by the military. Estevez said. That has been done on an ad hoc basis until now, primarily by the U.S. Army.
Active RFID tags offer more capabilities than their passive counterparts but cost much more. RFID proponents claim that both kinds of tags can store more detailed information about products and materials than conventional bar codes.
Wynne, in his policy memo, said the military plans to use RFID technology to “improve our business functions and facilitate all aspects of the Defense supply chain.” It also expects improvements in “data quality management, asset visibility and maintenance of materiel,” he added.
But many suppliers will have to make massive IT investments to support RFID, with little in the way of tangible returns “aside from meeting the mandate,” said Mike Liard, an analyst at Venture Development Corp. in Natick, Mass. The cost of RFID readers and systems could run as high as $100,000 in a single warehouse, Liard said.
Larry Kellam, director of supply network innovation at Procter & Gamble Co., said that at 5 cents per tag, it would cost the Cincinnati-based consumer goods maker about $110 million to put RFID devices on all of the 2.2 billion cases and pallets it ships annually.
But the data produced by RFID technology could offer a big payback in the form of better inventory management, Kellam said. If done right, RFID should help ensure that products are available on store shelves while also lowering warehousing costs, he added.
P&G is one of the top 100 suppliers to both Wal-Mart and the DOD. Romanow estimated that P&G and the other 99 companies that Wal-Mart is working with will have to spend a total of $2 billion by the end of next year to meet its RFID mandate.