TAGS, You're It!

RFID is a technology whose time has finally come - and that's good news for your supply chain.

When Australian Packaging giant Visy Industries embarked on a pilot project last year to trial the use of radio frequency identification (RFID) tags on delivery dockets for tracking loads through its supply chain, it had no idea it was creating a fait accompli. Yet by the time the tags had been in use for a month the level of acceptance from the business and users was so high it would have taken a brave person to take the tags away again.

"The fact of life is, once we had been running for over a month, the pilot had to become a production system," says general manager, information systems and business solutions, Peter Hood. "We met with the business and the users a number of times over the course of the trial, and they were so happy with what they saw that they already considered RFID a part of their business."

As the only Australian member of Auto-ID - a worldwide coordinating group for the radio frequency identification industry that has now morphed into EPC Global - Visy Industries felt it had a responsibility to go on an accelerated learning curve and get its hands dirty with the technology some pundits are touting as the next way to streamline supply chains and increase efficiencies at retail outlets.

Hood's verdict? The Auto-ID solution for the supply chain works; the US decrees from Wal-Mart and the US Department of Defence that by 2005 top suppliers must tag their cartons and palettes have provided a timeline and a sense of urgency about its adoption; users love its convenience, but the industry still needs to do some work on standards and cost of ownership before the technology becomes ubiquitous.

In this way a simple technology that has been around since World War II and in its present form for a couple of years is showing it has the potential finally to make the mark its promoters dreamt of. RFID enables objects to carry and transmit information inexpensively without human intervention by transferring data wirelessly between a tiny transceiver and a transponder or "tag". The tag can be attached to anything from the items on store shelves through to shipping containers; e-tags on cars to fruit, vegetables and livestock; and on to just about anything else business and the human imagination can dream up. Better still, tag and transponder can trigger actions, such as reordering from a supplier.

Unlike barcodes, RFID does not require line-of-sight scanning, with high-frequency RFID systems capable of transmission ranges up to 27 metres. This is RFID's great promise: to offer more granular, accurate information on product availability and to automate processes that are performed manually. On the other hand, some privacy advocates see an equally great threat: that customers wearing or carrying tagged items could be surreptitiously tracked by the government, store or hackers.

Even so, RFID is already in use in airport luggage routing systems, at highway toll collections, on dairy cows and samples of their milk, on the uniforms used by workers at Sydney's Star City Casino and to track everything from rubbish bins to commercial linen travelling through laundries.

Its use is starting to escalate. Sun Microsystems' chairman, president and CEO, Scott McNealy, sees RFID as one of the keys to connecting everything with a digital, electrical or biological heartbeat, even inert objects - and conceivably every object on the planet - to the network. "The evolution from a network of hundreds of thousands of computers, to millions, billions, even trillions of things, will be here much sooner than we expected," he says. "That's going to generate a tonne of information that needs to be processed, stored, accessed and served up."

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That hype aside, Sun's CTO Australia and New Zealand, Angus McDonald, predicts there will be a series of substantial moves and announcements on the technology in Australia over the next three to six months. Those predictions are in keeping with an IBM global survey measuring the usage of and attitudes toward RFID technology among more than 60 leading retail and manufacturing companies that found more than 70 per cent expect to start deploying RFID technology in some capacity by the end of 2004.

By that time, most companies expect to start tagging products by caseload, with 29 per cent of retailers expecting to start tagging at an individual item level. Most companies had expected to tag some high-value items by the end of last year, including toys, electronics and pharmaceutical products. IBM says the primary initial objective of deploying RFID systems will be to better manage inventories, out-of-stock products and warehouse efficiency, although many retailers are also interested in testing RFID for theft prevention purposes and manufacturing companies are considering its potential use in transportation and logistics applications.

IBM Business Consulting Services (BCS) is working with some of the world's largest retailers and manufacturers, including US giants Procter Gamble, Wal-Mart and Metro, on pilots of integrated business process networks that enable those companies to automatically respond to the tiniest variables throughout that network.

Pushing retail use of RFID along is the June 10, 2003 directive by Wal-Mart CIO Linda Dillman that the retail giant's top 100 suppliers would be required to utilise RFID tags on their cases and pallets by January 2005 (see "The Wal-Mart Factor, page 98), and complementary initiatives from the US Department of Defence.

"That provides a timeline and a sense of urgency," Hood says. "The interesting thing that's going to happen in 2004 is this whole application of the technology will move from the hands of the academics, who have done a great job for the last couple of years in setting up the framework, and into the hands of companies like Visy and others to actually make it commercial with the assistance of EAN [provider of the global EAN-UCC system for product identification, bar-coding and electronic messaging]."

Management consultancy firm AT Kearney says Dillman's pronouncement sent the industry scurrying, and immediately focused both manufacturers and retailers on RFID and the Electronic Product Code (EPC). "Single-handedly, Wal-Mart's action will speed the implementation of RFID and the EPC, creating a whole new way of managing products and ushering in a new era of supply chain efficiencies," the consulting firm says.

Retail Winners

AT Kearney predicts retailers will experience significant benefits from RFID, including reduced inventory, store and warehouse labour reductions and reductions in the number of out-of-stock items, but the blessings for manufacturers will be mixed.

Not only will manufacturers have to pay for readers and infrastructure, they will also incur the significant cost of tagging each pallet and case. For this reason it predicts high impact manufacturers (who sell lower volumes of expensive goods and experience significant out-of-stocks and shrinkage) will fare much better than low impact manufacturers (who sell high volumes of less expensive goods and hence experience limited shrinkages, and who usually already have very efficient supply chains). And the consulting firm points out that some benefits for manufacturers will very much depend on the actions of trading partners.

Nevertheless, BearingPoint national enterprise solutions manager Paul Chester is one who believes the potential for future growth is enormous and limited only by the relative cost of the RFID tag and the development of global standards. "For Australian organizations, proliferation will be so rapid that competitive advantage will be bypassed," Chester predicts. "Savings attributable to increased information flow and inventory reduction will ultimately be enjoyed by the consumer.

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"Application opportunities are endless due to the ability to scan fast-moving products, capacity to scan multiple items simultaneously, expanded transmission distance, accuracy of recognition and non-reliance of direct line-of-sight scanning. One day we may be scanning our trolley once at the self-service supermarket and that day may be closer than we think."

According to NCR managing partner, store performance consulting, Judy Dobson, much of the current thinking on the use of RFID technology in retailing has focused on the supply chain and distribution centres, largely because advantages can be obtained there quickly with tagging only at the pallet and case level. But Dobson says as compelling as the business cases are for RFID use in those contexts, they pale in comparison to the potential for store adoption. "As tag and reader costs continue to drop, more manufacturers and retailers are likely to use RFID at the item level, providing a wealth of opportunities for improving merchandise selection and availability, operational efficiency, protection of merchandise and store property and customer service," she says.

"The value of some applications seems fairly obvious, with early recognition of their benefits by retailers and technology vendors alike. These uses can be accomplished relatively quickly, requiring modest infrastructure investment but with returns that can justify their costs." Dobson lists applications that include: automatic recording of incoming stock, locating merchandise in stockrooms, assisted reordering/low shelf level alerts and securing high-value and theft-prone items. "Several of these applications have the advantage of providing benefits even when RFID tags are applied only on pallets and cases, which many suppliers should be doing by 2005 to meet Wal-Mart's mandate."

Others are not yet quite so enthusiastic.

Australian Retailers Association (ARA) technology director Chad Gates says local retailers are taking a cautious approach, while "seriously investigating" RFID for its potential to reduce reliance on labelling and to take costs out of the supply chain.

Gates says the ARA expects the two biggest retailers - Coles Myer and Woolworths, who both sit on the standards groups - to adopt RFID first, but says he cannot see anything happening in Australia in a serious way before 2005. In fact, while Coles Myer CIO Peter Mahler has previously expressed an interest in exploring RFID, a spokesman for Woolworths says the company has no immediate plans for the technology.

Gates says the relatively high cost of tags currently makes it difficult to achieve a value equation, and retailers are also exploring the possibility the industry may be plagued with conflicting standards, and trying to assess where the technology fits into the supply chain. "One of the things that is said is that it will replace the barcode, which is not necessarily the case," Gates says. "It merely augments what is there, and has different applications as well."

Peter Hind, manager of user programs and InTEP Forum, IDC Australia, says RFID is currently barely on the radar for many Australian CIOs and he doubts it will have much impact in the short term. "Alternatives like OCR and barcodes may lack its [RFID] functionality but they are mature technologies backed by standards and the work of organizations like EAN International. I can see challenges in getting parties to cooperate, challenges in getting the infrastructure in place to harness it. In addition, the standards issue may hold people back and until it gets significant market penetration it will lack the critical mass to encourage adoption," Hind says.

"Perhaps the retailers may drive it through like they did with EDI. Yet these organizations have huge investments in EDI and are in a period of some corporate flux. Why should they do it in 2004? I just can't see it happening in the short term."

For now, the relatively high cost of tags and readers, while dropping, is likely to be prohibitive. For instance Ry Crozier, writing in online magazine RFID News in October 2003, pointed out that while the five cent tag is regarded as the key to bringing RFID technology to mass applications, the only way to meet this price is volume orders demanding billions of tags.

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