RFID in Retail: The Truth Behind the Hype

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RFID in Retail: The Truth Behind the Hype

  1. 1. RFID in Retail: The Truth Behind the Hype March 2008
  2. 2. RFID in Retail Page 2 Executive Summary While many retailers appear to remain hesitant or skeptical about Radio- Research Benchmark Frequency Identification (RFID) technologies, Aberdeen research indicates Aberdeen’s Research that many early adopters enjoyed significant initial business benefits, and are Benchmarks provide an in- building upon those. In March 2007, Aberdeen research revealed that depth and comprehensive look retailers are increasingly considering RFID adoption to improve the into process, procedure, customer experience and inventory visibility. As a follow-up, Aberdeen methodologies, and surveyed over 150 companies in the retail industry throughout February and technologies with best practice March of 2008. identification and actionable recommendations This report analyzes those survey results and additional interviews to explain how RFID is currently being used to deliver increased customer satisfaction and inventory accuracy, among other business improvements. The study also explores which RFID technology components are dominant in the retail industry, future RFID implementation plans, general perceptions and best practices for RFID for in-store use. Best-in-Class Performance "We can gain additional revenue if books can be Aberdeen used three key performance criteria to distinguish Best-in-Class accurately located. RFID retailers. Based on these indicators, Best-in-Class retailers enjoyed the improves customer service following performance improvements: and the supply chain in that we do not need to spend time • Customer satisfaction has increased over the past two years by an checking the accuracy of daily average of 12% shipments and correcting • 94% have improved employee productivity errors. We are also using RFID to learn how we can • 78% have increased inventory turns by an average of 5.4% improve customer service and our processes without extra hands." Competitive Maturity Assessment ~ Jan Vink, Survey results show that the retailers enjoying Best-in-Class performance IT Director, BGN, a leading shared several common characteristics: Dutch book retailer • Best-in-Class retailers are 80% more likely than all others to use RFID to improve in-store asset tracking efficiency • Best-in-Class retailers are nearly 11 times as likely as Laggards to enable customers to access current inventory levels and detailed product descriptions • Best-in-Class retailers are 80% more likely than Industry Average and are 3.6 times more likely than Laggard companies to have adaptable organizational cultures that embrace innovation Required Actions In addition to the specific recommendations in Chapter Three of this report, to achieve Best-in-Class performance, retailers must: © 2008 Aberdeen Group. Telephone: 617 723 7890 www.aberdeen.com Fax: 617 723 7897
  3. 3. RFID in Retail Page 3 • Find and go after opportunities now. RFID is being adopted by retailers worldwide, while costs fall and integration eases, compelling those not yet pursuing or researching RFID opportunities to get off the sidelines and into the game. • Centralize RFID and other data. To achieve the "one version of the truth" essential to business success, companies must start aggregating data into one warehouse - or at minimum, enabling consolidated, actionable information views, tailored to user roles. • Be open to change and risk. As the aphorism goes, "no risk, no reward." Innovations such as RFID provide both challenges and opportunities never seen before, but only to those retailers willing to take on the challenges and seize the opportunities. © 2008 Aberdeen Group. Telephone: 617 723 7890 www.aberdeen.com Fax: 617 723 7897
  4. 4. RFID in Retail Page 4 Table of Contents Executive Summary....................................................................................................... 2 Best-in-Class Performance..................................................................................... 2 Competitive Maturity Assessment....................................................................... 2 Required Actions...................................................................................................... 2 Chapter One: Benchmarking the Best-in-Class ..................................................... 5 The Current State of RFID in Retail.................................................................... 5 The Maturity Class Framework............................................................................ 6 The Best-in-Class PACE Model ............................................................................ 7 Chapter Two: Benchmarking Requirements for Success ..................................11 Competitive Assessment......................................................................................12 Capabilities and Enablers......................................................................................13 Chapter Three: Required Actions .........................................................................20 Laggard Steps to Success......................................................................................20 Industry Average Steps to Success ....................................................................21 Best-in-Class Steps to Success ............................................................................22 Appendix A: Research Methodology.....................................................................24 Appendix B: Related Aberdeen Research............................................................26 Figures Figure 1: 2008 Maturity of Retail RFID Initiatives ................................................. 5 Figure 2: Top Pressures Driving Implementation of RFID .................................. 6 Figure 3: Top Best-in-Class RFID Strategies........................................................... 8 Figure 4: Perceived RFID Challenges Among Non-Adopters ............................ 9 Figure 5: Knowledge Management Capabilities by Class ...................................15 Figure 6: Current Planned Performance Management .......................................18 Figure 7: Comparison of Closed-Loop RFID use to Open-Loop....................19 Figure 8: Planned RFID Technology Adoption within 12 months ...................23 Tables Table 1: Top Performers Earn Best-in-Class Status.............................................. 7 Table 2: The Best-in-Class PACE Framework ....................................................... 7 Table 3: The Competitive Framework...................................................................12 Table 4: The Competitive Framework – Technology ........................................17 Table 5: The PACE Framework Key ......................................................................25 Table 6: The Competitive Framework Key ..........................................................25 Table 7: The Relationship Between PACE and the Competitive Framework .........................................................................................................................................25 © 2008 Aberdeen Group. Telephone: 617 723 7890 www.aberdeen.com Fax: 617 723 7897
  5. 5. RFID in Retail Page 5 Chapter One: Benchmarking the Best-in-Class The Current State of RFID in Retail Fast Facts In March 2007, Aberdeen research revealed that retailers are increasingly considering Radio-Frequency Identification (RFID) adoption, where 64% of √ Best-in-Class are 80% more respondents were motivated to adopt RFID for asset tracking. Additionally, likely than all others to use RFID as a means to improve according to the March 2007 RFID: Roadmap for Retail report, the top two in-store asset tracking actions retailers were taking around RFID to increase their profit were to: efficiency • Improve the customer experience on the retail floor and at the √ 94% of Best-in-Class have point of sale improved employee • Achieve total inventory visibility productivity. Compared with the beginning of 2006, twice as many retailers indicate they have allocated budget for RFID initiatives. Key market drivers such as the Wal-mart and Sam's Club mandates have focused much of the discussion on RFID's applications in supply chain management. However, retailers are now leveraging RFID for inventory visibility, loss prevention and improved customer experience, and are increasingly interested in the use of RFID in the store and at the item level. To address this, Aberdeen surveyed over 150 companies in the retail industry throughout February and March of 2008 to understand how RFID is currently being used, which RFID technology components are dominant in the industry, future RFID implementation plans, and general perceptions of RFID for in-store use. Figure 1: 2008 Maturity of Retail RFID Initiatives 40% 36% 35% 28% 30% 25% 20% 15% 11% 10% 4% 4% 5% 1% 0% More than 2 Between 1 - Exactly one Less than 1 Will Plan to years 2 years year year implement implement in this year the future Source: Aberdeen Group, March 2008 Similar to the findings in 2007, survey respondents indicated the top pressures driving 44% of retail companies to implement RFID are the need to improve in-store asset tracking efficiency and to reduce the cost and time associated with inventory turns (Figure 2). Close behind these pressures is the need to reduce customer wait time, revealing that while the focus of © 2008 Aberdeen Group. Telephone: 617 723 7890 www.aberdeen.com Fax: 617 723 7897
  6. 6. RFID in Retail Page 6 RFID use is still on inventory tracking and replenishment, customer service is an important component driving RFID adoption. Figure 2: Top Pressures Driving Implementation of RFID Improve in-store asset 44% "We have seen a groundswell 26% tracking efficiency of interest in item-level tagging 24% in niche areas such as consumer electronics, where it Reduce cost and time 44% makes more sense so far than associated with 36% in more general areas such as inventory turns 31% supermarkets. Item-level tagging gives us the opportunity Derive maximum 33% to improve inventory accuracy, business value from 26% Best-in-Class RFID-generated data which improves both sales and 24% Industry Average the customer experience." Laggard Reduce customer wait 33% ~ Bill Hardgrave, time at the register 19% University of Arkansas and when locating products 14% 0% 25% 50% % of Respondents Source: Aberdeen Group, March 2008 According to respondents, the product categories where RFID will be most prominent within the retail industry are: • Consumer product goods (41%) • Consumer electronics (37%) • Apparel (32%) Such findings are not surprising considering the prominent implementations by Metro Group, Tesco, and Best Buy, which are leading the way for RFID tagging of consumer product goods and consumer electronics. Additionally, initiatives by retailers such as Levis, Lauren Scott and Prada demonstrate that item-level tagging can be successful when applied to apparel. The Maturity Class Framework In order to distinguish Best-in-Class retail companies from Industry Average and Laggard organizations, Aberdeen used three key performance criteria: • Percent increase / decrease in customer satisfaction over last year • Percent improvement / reduction of employee productivity over last year • Percent increase / decrease in inventory turns over last year Each respondent's overall performance was calculated using a weighted average across the three Key Performance Indicators (KPIs). The top 20% of responding retail companies were classified as Best-in-Class, the middle 50% were classified as Industry Average, and the remaining 30% were © 2008 Aberdeen Group. Telephone: 617 723 7890 www.aberdeen.com Fax: 617 723 7897
  7. 7. RFID in Retail Page 7 classified as Laggards. Table 1 provides a breakdown of how Best-in-Class companies performed in comparison to Industry Average and Laggard companies based on the aforementioned KPIs. Table 1: Top Performers Earn Best-in-Class Status Definition of Mean Class Performance Maturity Class Customer satisfaction has increased over the past Best-in-Class: two years by an average of 12% Top 20% 94% have improved employee productivity of aggregate performance scorers 78% have increased inventory turns by an average of 5.4% Customer satisfaction has increased over the past Industry Average: two years by an average of 2% Middle 50% 45% have improved employee productivity of aggregate performance scorers 35% have increased inventory turns by an average of 3.4% Customer satisfaction has not increased over the Laggard: past two years Bottom 30% 4% have reduced employee productivity of aggregate performance scorers 20% have decreased inventory turns by an average of 1.7% Source: Aberdeen Group, March 2008 The Best-in-Class PACE Model Using RFID to achieve corporate goals requires a combination of strategic actions, organizational capabilities, and enabling technologies. The need to "improve in-store asset tracking efficiency" and "reduce the cost and time associated with inventory turns" were the two top pressures identified among Best-in-Class respondents. Table 2 outlines the actions that Best-in- Class retail companies are taking to alleviate these pressures, including the capabilities and technology enablers they are equipping themselves with to ensure their RFID technologies are successfully addressing their business requirements. Table 2: The Best-in-Class PACE Framework Pressures Actions Capabilities Enablers Improve in-store Justify cost of RFID to Capture and store RFID data for Long distance readers (> 2 asset tracking senior management analysis and business process ft.) efficiency Integrate RFID data improvement 'Magic mirror' applications Reduce cost and with other business Employee training around RFID for dressing rooms time associated with process, Customers are able to access current Business Intelligence (BI) and inventory turns infrastructure, and inventory levels and detailed product analytics tools integrated inventory descriptions with RFID data management systems Vendors are able to access current Smart shelving inventory levels and in-store product RFID-compatible POS locations solutions Source: Aberdeen Group, March 2008 © 2008 Aberdeen Group. Telephone: 617 723 7890 www.aberdeen.com Fax: 617 723 7897
  8. 8. RFID in Retail Page 8 In order to meet the pressure to reduce costs associated with inventory turns and in-store asset tracking efficiency, Best-in-Class respondents are making a case for RFID use to senior management and integrating all RFID data with other processes and systems (Figure 3). Figure 3: Top Best-in-Class RFID Strategies 50% "We can gain additional 39% 39% revenue if books can be 33% 33% accurately located. RFID improves customer service and the supply chain in that 25% we do not need to spend time checking the accuracy of daily shipments and correcting errors. We are also using RFID to learn how we can 0% improve customer service and Justify cost of Integrate RFID data Calculate costs / Link supply chain our processes without extra RFID to senior with other systems benefits against and partners to hands." management alternatives RFID solution ~ Jan Vink, Source: Aberdeen Group, March 2008 IT Director, BGN RFID is an emerging technology that requires senior-level support for implementation and continued deployment. According to survey respondents, the top three department areas that are leading the adoption and use of RFID in their organization are logistics / supply chain, operations, and senior management. The finding that supply chain and operations are the top champions for RFID within their organization is to be expected as both areas stand to gain much from improved asset tracking. In addition, senior management typically has the final word in technology decisions among retailers. Those executives have the high-level view of the organization and are able to evaluate how RFID can be used to streamline business processes across the organization, reduce costs, and increase customer satisfaction. Also, Best-in-Class retailers interviewed by Aberdeen all cite senior executive leadership as essential to success with item-level RFID deployments. In order to derive improved inventory efficiency, retailers need to ensure they have integrated RFID with their other critical systems to provide visibility across the organization. As noted in the January 2008 Aberdeen report, Business Intelligence in Retail: A Best-in-Class Roadmap for Performance Improvement, retailers need to centralize information from various sources to solidify "one version of the truth" that can then be dispersed throughout the organization. Further, for the supply chain and operations departments to gain from their RFID efforts, all information from the stores need to be linked upstream. As inventory management requires the compilation of information from various © 2008 Aberdeen Group. Telephone: 617 723 7890 www.aberdeen.com Fax: 617 723 7897
  9. 9. RFID in Retail Page 9 sources, the aggregation and elimination of redundant information is critical to gain the most from RFID. "At this point in our RFID Despite the high level of interest in RFID among retailers, resistance to evaluation process our IT adoption can still be high. To understand current perceptions of RFID department is the champion within the retail industry more fully, Aberdeen asked retailers without any for RFID within our RFID initiatives to indicate the barriers preventing them from initiating plans organization, but our for adoption. inventory control groups also have an interest. Regardless, Figure 4: Perceived RFID Challenges Among Non-Adopters all initiatives and plans still need to be approved by senior 60% 53% executives as they make the final decision." 50% - Doug Hunter, 40% 36% IT Director, Steve & Barry’s 30% 30% 30% 20% 10% 0% Technology has Additional Organization does Integration with not matured to a hardware required not know enough current processes point where ROI is is too expensive about the and procedures is proven technology too difficult Source: Aberdeen Group, March 2008 As shown in Figure 4, the top challenge is the perception that the technology has not matured to a point where ROI is proven, despite high- profile industry mandates and successes among early adopters. After maturity, 36% of retail respondents say that the additional hardware required for RFID is too expensive. However, with the cost of tags and readers a constant source of debate and the technology consistently being piloted with few enterprise-wide roll-outs, it is understandable that such perceived challenges persist within the retail industry. © 2008 Aberdeen Group. Telephone: 617 723 7890 www.aberdeen.com Fax: 617 723 7897
  10. 10. RFID in Retail Page 10 Aberdeen Insights — Countering Perceived RFID Challenges to Retail Adoption The technology has advanced, costs have been reduced, and enterprise-wide roll-outs have occurred over the past several years among top tier retailers. As the findings in this report demonstrate, there are benefits directly associated with the implementation of RFID. However, RFID is not without challenges, some of them significant. This is especially true for retailers, many of which operate with razor-thin margins and view almost every technology investment as a cost with uncertain potential for business benefit. This perception of RFID as expensive, unwieldy and of uncertain business benefit is in fact one of the biggest challenges to success with RFID in retail. The costs associated with RFID readers and tags have fallen steadily during the past few years, while accuracy and flexibility have increased. In addition, numerous vendors now offer solutions that ease and speed integration of RFID information into IT infrastructures and key applications. Further, some solution providers are offering retailers opportunities to explore RFID at little to no risk of intolerable costs or operational disruption. Additional perceived challenges to RFID success in retail include concerns over customer privacy. However, numerous retailers succeeding with RFID have avoided this issue entirely, by simply removing RFID tags from products at the point of sale. These retailers are still enjoying significant business benefits, including more accurate inventories and more satisfied customers, without increasing privacy-related risks. Among the most bedeviling RFID-related challenges is choosing correctly from among a number of varied and evolving technological alternatives. However, no retailers need to transform themselves into experts in the physics of RFID to overcome this challenge. Instead, retailers such as Byblos Bookstore in Portugal and Canada's Staples Business Depot are working with experienced and knowledgeable integration partners to ensure that the RFID technologies they choose match their business needs and goals as closely as possible, while minimizing costs and integration issues. RFID has evolved to a point that makes it practical and potentially transformative in its abilities to enable key business benefits to retailers of almost all sizes and types. Best-in-Class retailers identified by Aberdeen research are overcoming the perceived challenges of RFID, and gaining significant business benefits as a direct result of their RFID adoptions. In the next chapter, we will see what the top performers are doing to achieve these gains. © 2008 Aberdeen Group. Telephone: 617 723 7890 www.aberdeen.com Fax: 617 723 7897
  11. 11. RFID in Retail Page 11 Chapter Two: Benchmarking Requirements for Success Fast Facts For retailers, the selection of the right RFID technologies and integrating the RFID-generated data with inventory management and business process √ Best-in-Class are nearly 11- management systems play crucial roles in turning strategies into profits. times as likely as Laggards to give their customers access Case Study — STAPLES Business Depot to current inventory levels and detailed product STAPLES Business Depot, Canada's largest supplier of office supplies, descriptions business machines, office furniture, and business services embarked on a three month item-level RFID in-store pilot. From May to July 2007, STAPLES Business Depot tagged and tracked approximately 1,500 SKUs on high-ticket items, such as laptops and iPods, throughout their largest store (37,000 square feet). With seven readers mounted along the store ceiling, four distributed throughout the selling space, and three readers in the back room, the store was divided into RFID zones, so items can be located as they moved through the store. Using a web server, each item is tracked with an active reusable tag that could be read within 300 feet without interference from metal or liquid typically encountered by passive tags. Using the reusable active tags, they calculated the cost per use over the five-year lifetime is $0.08. The goal for STAPLES Business Depot was to improve inventory accuracy, reduce out-of-stock situations and labor costs associated with manual inventory counting, and improve customer satisfaction. The most difficult challenge was changing store operations and culture to adopt the new reporting processes. After providing a two-hour training session to employees, having a short conversation with cashiers, and empowering employees to test the technology and double-check the accuracy, STAPLES Business Depot was gradually able to change the organizational culture to support their RFID initiative. Over the three months, STAPLES saw the following benefits from use: • 100% read rate without any system issues • 21% reduction of out-of-stock merchandise • Redistribution of labor resources from manual inventory counting to assisting customers on the sales floor • Increased comparative sales for the tagged inventory categories continued © 2008 Aberdeen Group. Telephone: 617 723 7890 www.aberdeen.com Fax: 617 723 7897
  12. 12. RFID in Retail Page 12 Case Study — STAPLES Business Depot "Unsold and misplaced items can sit around for weeks or even months, during which prices erode sufficiently and margins are diminished," says Joe Soares, director for process engineering at STAPLES Business Depot. "With RFID, we are able to conduct inventory counts at the touch of a button and locate misplaced or unpaid for items within their current quadrant location immediately." STAPLES Business Depot was also able to redistribute labor that had traditionally been spent manually managing inventory to the sales floor. This improved their customers' in-store experience because employees were more readily available to satisfy customer requests and assist customers with product questions. As a result of the successful pilot, STAPLES Business Depot has recently announced the intention to roll- out item-level RFID into four more of their stores. Competitive Assessment Aberdeen analyzed the metrics of surveyed companies to determine their performance rank. In addition to having common performance levels, each class also shared characteristics in five key categories: 1. Process. The approaches they take to execute their daily operations 2. Organization. Corporate focus and collaboration among stakeholders 3. Knowledge management. Contextualizing data and exposing it to key stakeholders 4. Technology. The selection of appropriate tools and effective deployment of those tools 5. Performance management. The ability of the organization to measure their results to improve their business These characteristics (identified in Table 3) serve as a guideline for best practices, and correlate directly with Best-in-Class performance across the key metrics. Table 3: The Competitive Framework Best-in-Class Average Laggards Capture and store RFID data for analysis and business process improvement 27% 15% 8% Process Ability to sense and respond to changing inventory levels between the stockroom and the sales floor 33% 13% 4% © 2008 Aberdeen Group. Telephone: 617 723 7890 www.aberdeen.com Fax: 617 723 7897
  13. 13. RFID in Retail Page 13 Best-in-Class Average Laggards Employee training around RFID Organization 50% 17% 4% Customers are able to access current inventory levels and detailed product descriptions 53% 13% 5% Item-level RFID is linked back to suppliers / supply chain Knowledge management 36% 14% 5% Vendors are able to access current inventory levels and in- store product locations 31% 8% 0% In order to improve store performance: 40% measure and 13% measure and 8% measure and track stock track stock track stock accuracy accuracy accuracy 38% monitor 3% monitor level 0% monitor level level of of promotional of promotional Performance promotional success with success with success with RFID tracking RFID tracking RFID tracking 21% regularly 9% regularly 27% regularly scheduled report scheduled report scheduled report updates with updates with updates with real-time real-time real-time information information information Source: Aberdeen Group, March 2008 Capabilities and Enablers Based on the findings of the Competitive Framework and interviews with "The cost of RFID is worth it. end users, Aberdeen’s analysis of Best-in-Class companies demonstrates Our company has seen how they are able to meet their top RFID objectives to improve inventory significant benefits in terms of tracking and inventory turns. These capabilities reveal what Best-in-Class reduced store inventory, retail companies currently use to differentiate themselves from Industry increased speed in receipt of Average and Laggards. goods, and reduced out of stocks. With RFID we have improved inventory Process management as well as What a retailer does not know can hinder performance and stymie increased employee improvement. Best-in-Class retail respondents are 3.3 times as likely as productivity." Laggards to capture and store RFID data for analysis and business process - Enterprise Architect, improvement. There has been much debate as to whether or not the data U.S. Apparel Retailer & output from RFID is manageable. However, there are now software Manufacturer solutions available to streamline this process for analysis and performance management. Further, RFID has the ability to provide accurate, real-time updates, not "near-real-time" or "close-to-real-time" results that are often © 2008 Aberdeen Group. Telephone: 617 723 7890 www.aberdeen.com Fax: 617 723 7897
  14. 14. RFID in Retail Page 14 accepted as sufficient for inventory accuracy. Findings from this research revealed that: • 40% of respondents conduct store-wide cycle counts once or twice a year • 25% of respondents conduct store-wide cycle counts quarterly or monthly • 7% of respondents conduct store-wide cycle counts more than once a month There is room for improvement within the retail industry in maintaining accurate inventory counts. When items within a store are tagged, RFID has "Retailers operate on razor- the ability to provide truly real-time inventory counts on demand, within a thin margins and many of them matter of minutes if needed. This can not only improve the accuracy of are naturally risk-averse. RFID inventory counts, but reduce the labor associated with conducting store- can span the entire wide cycle counts and lost sales due to inaccuracies. Capturing and storing organization, which hasn't real-time RFID data for visibility and data analysis reveals patterns and been seen since bar codes. trends for improved future inventory management. Customer service is also Some retailers view RFID as improved, as customers will be provided with accurate inventory an incremental technology, information. Employees previously preoccupied with time-consuming another bar code, but the manual inventory processes can also be more quickly redeployed for tasks visibility RFID provides is that improve revenues, customer satisfaction or both. unprecedented and creates opportunities to do things differently. Asking how much Organization better than bar codes RFID Educating and training employees is essential in order to make the most of can be is a narrow view. " any technology investment. Given this, 50% of Best-in-Class retail -Bill Hardgrave, respondents provide their employees with training around RFID. If University of Arkansas employees understand the capabilities of the technology they can maximize the technology user's ability to improve performance. Challenges associated with implementing a new technology such as RFID will only be compounded if employees are not educated on its capabilities and limitations. The receptivity of employees to embracing new technology and changing their work procedures is also an important component to successful use of RFID. Best-in-Class retail companies are 80% more likely than Industry Average and are 3.6 times more likely than Laggards to have an organizational culture that is adaptable and embraces innovation. Regardless of the education and training provided, retailers need to create "The power is with the an environment where new ideas and processes can be originated and customer in terms of received freely. Additionally, the ability to embrace innovation and adapt to determining the speed of innovation. If you cannot changes is critical to the successful implementation of RFID since the keep up, you are going to technology may need to be tested as it becomes incorporated into the fade out." unique structure and needs of each retail organization. ~ Jan Vink, IT Director, BGN Knowledge Management There is much to be gained from improving inventory accuracy within a retail organization, but there is much more to be gained from providing that © 2008 Aberdeen Group. Telephone: 617 723 7890 www.aberdeen.com Fax: 617 723 7897
  15. 15. RFID in Retail Page 15 information to customers and partners. Fifty-three percent (53%) of Best-in- Class respondents provide customers with the ability to access current inventory levels and detailed product descriptions. Further, 31% provide their vendors with access to current inventory levels and in-store product locations (Figure 5). Providing customers with access to current inventory levels allows them to make more informed purchasing decisions and improves customer service. When customers are aware that certain products are no longer available or replenishment is indeterminate, they will select another product or go to a competitor for the product. Eliminating out-of-stock situations is why communicating with vendors and other partners to replenish inventory in a timely manner is so critical. Figure 5: Knowledge Management Capabilities by Class Customers are able 31% to access current Best-in-Class inventory levels and 13% detailed product Industry Average 0% descriptions Laggards Vendors are able to 53% access current inventory levels and 8% in-store product locations 5% 0% 25% 50% 75% % of Respondents Source: Aberdeen Group, March 2008 Inventory counts are important, but replenishment is paramount for increased sales. If vendors and supply chain partners alerted when inventory levels of their product are low and can react quickly to replenish in-store stock, more purchases can be made. Customer satisfaction is therefore improved, because the product they are shopping for is actually available for purchase. Case Study — BGN Tracks Books In-Store at the Item Level Located in The Netherlands, BGN is a leading bookstore currently operating a total of 42 bookstores, 17 of which are consumer stores and 25 are located on university campuses. On December 8, 2005, BGN initiated plans for RFID implementation, the first of which was carried out in April 2006 in the company's flagship bookstore. Currently, three BGN stores in Holland stores are RFID-enabled. All inventory is tagged at the item level with passive gen 2 UHF tags while in BGN's distribution center. Tags are deactivated at the point of sale. Boxes are scanned by employees equipped with handheld readers upon arrival at the store. continued © 2008 Aberdeen Group. Telephone: 617 723 7890 www.aberdeen.com Fax: 617 723 7897
  16. 16. RFID in Retail Page 16 Case Study — BGN Tracks Books In-Store at the Item Level In addition, BGN has installed self-serve kiosks in their store where customers can locate books among BGN's 1.8 million offerings as well as shop online. BGN's online store provides customers with a search engine and the opportunity to personalize their in-store and online experiences. Both the in-store kiosks and online store are updated on a regular basis with current in-stock inventory counts. The decision to implement RFID was initiated to provide customers with improved service and improve inventory accuracy. BGN evaluated both the market and how customers shopped in their stores, and saw a need, according to IT Director Jan Vink. Currently, 75% of their replenishment is done automatically without manual interference. As a result of RFID, BGN has 98% inventory accuracy, while the time required to inventory incoming shipments has been reduced from 3-4 minutes to 3 seconds per box. BGN integrated RFID tagging with price labeling, which reduced tagging costs by 80%. The company also adopted a packaged, customizable item- level RFID infrastructure platform, which reduced requirements for custom-built software by 60%. The company has seen a significant difference between RFID-enabled and non-RFID-enabled stores in terms of revenue. Non-RFID-enabled stores have an average sales increase of 6-6.8%, whereas RFID-enabled stores enjoyed sales growth ranging from 15% to 30%. "There's always a fight between hidden costs and transparent costs. RFID will automatically eliminate hidden costs as it is a tool that improves your business short-term and provides foresight into the future," says Vink. In terms of their future plan, BGN intends to implement RFID enabled self-checkouts as well as RFID-enabled POS systems to reduce customer wait times. The company is also considering RFID-enabled shelving, for more complete and timely inventory information. If BGN's RFID efforts continue to prove successful, the company will continue and expand RFID roll-outs throughout 2009, according to Vink. Technology With so many tags, readers and RFID middleware technology components available, it is interesting to note that 50% of Best-in-Class organizations have implemented long-distance readers, 17% implemented smart shelving, and 15% implemented RFID-compatible POS solutions. In addition, 64% of Best-in-Class respondents chose to implement passive RFID tags. Long-distance readers enable retailers to track information across greater physical ranges, which can reduce the number of readers required to cover © 2008 Aberdeen Group. Telephone: 617 723 7890 www.aberdeen.com Fax: 617 723 7897
  17. 17. RFID in Retail Page 17 specific areas. Smart shelving improves the ability for retailers to replenish products as they become out-of-stock. RFID-compatible POS solutions decrease customer wait time during check-outs. Passive tags minimize the data generated by RFID infrastructures. To round out their RFID components and drive the value of RFID, 36% of Best-in-Class companies have implemented magic mirror applications for dressing rooms and 23% use Business Intelligence (BI) and analytics tools integrated with RFID data. Table 4: The Competitive Framework – Technology Best-in-Class Average Laggard RFID technology currently in use: Magic mirrors provide customers with the ability to 50% long distance 33% long distance 16% long distance view product information, readers (> 2 ft.) readers (> 2 ft.) readers (> 2 ft.) complementary product 36% magic mirror 0% magic mirror 0% magic mirror suggestions, and request applications for applications for applications for assistance from an employee. dressing rooms dressing rooms dressing rooms While magic mirrors 23% BI and 14% BI and 4% BI and applications do not increase Technology analytics tools analytics tools analytics tools the performance of a retailer integrated with integrated with integrated with directly, they do improve RFID data RFID data RFID data customer service which in 17% smart 12% smart 5% smart shelving turn increases sales. In shelving shelving 4% RFID- addition, BI and analytical 15% RFID- 9% RFID- compatible POS tools assist retailers by compatible POS compatible POS solutions providing them the means to solutions solutions analyze their data and extract valuable insights. Source: Aberdeen Group, March 2008 Each system has its own benefits and challenges. However, retailers must evaluate their organization and decide which will provide their company with the most value. For grocer organizations, the selection of an open-loop system or a combination of closed-loop and open-loop may be best, as participation of suppliers is necessary to tag every item or pallet. Alternatively, a specialty apparel retailer may decide to leverage a closed- loop system since their product is manufactured in-house and can easily be tagged, where all information does not need to be shared with suppliers and vendors. (Open-loop and closed-loop RFID applications are discussed in greater detail at the end of this chapter.) Utilizing the data for insight helps these Best-in-Class companies move from being reactive to proactive. As their understanding of their inventory fluctuations increases, they are more equipped to make better future decisions and avoid out-of-stock situations and better customize inventory plans by store and region. Performance Management Best-in-Class companies are three-times as likely as Industry Average and are five-times as likely as Laggards to measure and track stock accuracy (Figure 6). These companies also monitor their © 2008 Aberdeen Group. Telephone: 617 723 7890 www.aberdeen.com Fax: 617 723 7897
  18. 18. RFID in Retail Page 18 level of promotional success, link their information back to suppliers, and set up their systems to provide updates to respond in a timely manner to inventory fluctuations. Figure 6: Current Planned Performance Management Currently Use Plan to Use Measure and track stock accuracy 40% 33% Monitor level of promotional 38% 31% success with RFID tracking Item-level RFID linked to suppliers 36% 36% System-driven ability to sense and 33% 27% respond to changing inventory levels Regularly scheduled report 27% 47% updates with real-time information 0% 20% 40% 60% 80% Source: Aberdeen Group, March 2008 Implementing RFID and collecting the data is wasted effort and cost without "Our item level RFID tagged leveraging it for improvements. Tracking and monitoring the effectiveness of garments have a 99.7% RFID with regular reports and updates not only allows visibility into any inventory accuracy rate, which improvements that have been made, but reveals areas for improvement. is great compared to manual inventory counts. Historically, As Figure 6 displays, roughly a third of Best-in-Class companies are we would conduct inventory currently involved in these processes and another third have plans to counts only once a year so implement it within the next 12 months. Based on Aberdeen research inventory was way off. Using results, if Best-in-Class retailers follow through on their RFID makes a tremendous implementation plans, over two-thirds of these companies will be difference for automatic measuring, tracking, and linking all information upstream to their replenishment; it takes two supply chain by the beginning of 2009. months worth of stock out of every store and links Making use of RFID data for reporting, improved inventory tracking, and replenishment back upstream." turn efficiency has a direct impact on customer service and the bottom line. -Enterprise Architect, For example, 69% of Best-in-Class companies have increased the U.S. Apparel Retailer & success of their in-store promotions, compared to only 33% of Manufacturer Industry Average, and 0% of Laggards. Best-in-Class companies are able to make such improvements because they have the capabilities in place to help them monitor promotions and replenish stock quickly when necessary. This not only improves sales but customer service as well. © 2008 Aberdeen Group. Telephone: 617 723 7890 www.aberdeen.com Fax: 617 723 7897
  19. 19. RFID in Retail Page 19 Aberdeen Insights — Closed Loop versus Open Loop With the Wal-mart, Department of Defense, and more recently, Sam's Club mandates, many consumer product goods companies focused on the use of open-loop applications. However, as the success of open-loop applications is dependent on participation of suppliers, manufacturers, and / or retailers, many retailers have chosen to focus implementing a closed-loop system. For closed-loop RFID systems all RFID tracked goods are stored within the retail organization where all goods are tagged by the retailer and are tracked through purchase. Aberdeen research reveals the top selection among 44% of Best-in-Class companies is a combination of closed-loop and open-loop applications. Figure 7: Comparison of Closed-Loop RFID use to Open-Loop Combination of 44% closed-loop and 33% open-loop 16% applications 17% Open-loop 17% Best-in-Class applications 23% Average Laggard 17% Closed-loop 31% applications 32% Open-loop 6% applications with 6% extension to post- sales events 3% 0% 25% 50% % of Respondents Source: Aberdeen Group, March 2008 When asked to indicate why the respondents had chosen closed-loop, 67% indicated the ability to track items as they move through the supply chain to the point of sale, and 47% indicated supplier participation reduces RFID costs. When asked to indicate the perceived benefits of closed-loop systems, 41% indicated that they can control which SKUs are tagged and tracked and 38% indicated the use of re-usable tags drive down costs. © 2008 Aberdeen Group. Telephone: 617 723 7890 www.aberdeen.com Fax: 617 723 7897
  20. 20. RFID in Retail Page 20 Chapter Three: Required Actions Whether a retailer is trying to move its performance in retail RFID usage Fast Facts from Laggard to Industry Average, or Industry Average to Best-in-Class, the √ Best-in-Class retailers are following actions will help spur the necessary performance improvements: 2.5 times as likely to have their item-level RFID data Laggard Steps to Success linked back upstream to • Research RFID and determine the components that are their suppliers and have a right for your organization. As more retailers expand RFID system-driven ability to sense and respond to pilots into enterprise-wide roll-outs, others can no longer afford to changing inventory levels as sit on the sidelines and wait. Their competitors may already be in Industry Average. the planning stages of RFID implementation, if not about to deploy or expand deployment of RFID-based solutions. Aberdeen research √ 76% of Best-in-Class reveals the top three areas respondents use to gather information retailers increased their year are: over year same store sales, where they are 1.4 times as · online resources (cited by 67%) likely as Industry Average to · vendors (63%) have seen same store sales increase and are 4.5 times as · conferences (57%) likely as Laggards to have seen an increase in same Each of these sources has valuable information to share with store sales. retailers to enable more informed decision-making around RFID. Interviews conducted by Aberdeen indicate that a strong starting point is to ensure that all RFID-related decisions are made based upon the most timely information available, as RFID technologies are evolving rapidly. • Start measuring and tracking inventory today to achieve "one version of the truth.” As demonstrated by the results of the Best-in-Class, measuring and tracking performance leads to bottom-line increases. Specifically, 76% of Best-in-Class increased their year-over-year same-store sales. However, it is not enough to just measure and track. Data must be rationalized into a single, accurate and timely version of the truth upon which the entire organization bases all business actions, decisions and policies. Inaccuracy or inconsistency in the information driving the business can make retailers slower to respond to customer requests, and to business challenges and opportunities. To prevent such problems, centralize inventory, point-of-sale and other relevant information sources. Doing so provides visibility into the entire process from supply chain through point of sale and enables analysis for improvement and growth. • Provide vendors with access to current inventory levels and in-store product location to avoid out-of-stock situations. Visibility should not begin and end within your organization. All partners must be made aware of current inventory levels and © 2008 Aberdeen Group. Telephone: 617 723 7890 www.aberdeen.com Fax: 617 723 7897
  21. 21. RFID in Retail Page 21 upcoming promotions in order to plan replenishment accordingly. By working with vendors to prevent out-of-stock situations, retailers increase their sales as well as maintain consistent levels of customer satisfaction. Industry Average Steps to Success • Measure and track inventory accuracy and promotions success. Measuring and tracking inventory is critical to understand "Unsold and misplaced items customer purchasing patters and to plan future stock requirements. can sit around for weeks or However, not having accurate inventory counts in the first place even months, during which hinders the reliability of all analysis, particularly for promotions. This prices erode sufficiently and research found that 65% of respondents conduct store-wide margins are diminished. With inventory counts no more than once a month and that inventory RFID, we are able to conduct counts are not accurate. Best-in-Class retailers are five times inventory counts at the touch of a button and locate as likely as Industry Average and Laggards to conduct misplaced or unpaid for items weekly inventory counts. within their current quadrant Being aware of when and where loss occurs is important to location immediately." reducing shrink. Inaccuracies are reduced when counts are taken ~ Joe Soares, frequently. RFID is a technology that can maintain nearly 100% Director, Process Engineering, accuracy. STAPLES Business Depot • Link updated inventory counts regularly upstream to partners to improve replenishment. Best-in-Class retailers are 2.5 times as likely to have their item-level RFID data linked upstream to their suppliers and have a system-driven ability to sense and respond to changing inventory levels. In addition to having accurate inventory counts, all inventory information must be linked to partners and suppliers to improve the speed of replenishment and avoid out-of-stocks. Establishing a system that is able to both sense and respond to inventory fluctuations is important to ensuring there are no missed sales opportunities and that customers are always provided with the products they expect or the size / color they want. Having current and accurate inventory counts is beneficial but to improve efficiency the information needs to be communicated throughout the retailer's network in such a way that the retailer is able to be proactive about relaying the information as the need arises. • To improve their inventory management system, 58% of the Best-in-Class use exception reporting. RFID can facilitate this process in that if using an open-loop or combination of open- loop and closed-loop systems, real-time data can easily be transmitted to all supply chain members as inventory reads are taken. • Use RFID to monitor the success of promotions. Only 3% of Industry Average companies monitor the level of promotional success with RFID, compared to 38% of Best-in-Class respondents. This places Industry Average retailers at a competitive disadvantage because they are not monitoring their promotions as effectively. © 2008 Aberdeen Group. Telephone: 617 723 7890 www.aberdeen.com Fax: 617 723 7897
  22. 22. RFID in Retail Page 22 When running each promotion, retailers need to know how promotional products are selling to ensure that the shelves are filled. With RFID, allows retailers the opportunity to know what products are selling, when they have sold, and when replenishment is needed. Retailers using item-level RFID have found the technology improves their ability to make the most of their promotions. Best-in-Class Steps to Success • Maximize the business value of RFID and inventory data. Data is one of the most valuable and underused resources a retailer has. Centralizing data and monitoring performance is important, but analyzing the information allows Best-in-Class retailers to maintain their high level of performance. Through analysis, Best-in-Class retailers seem to have foresight because their actions are based on solid past evidence. Asset tracking, reducing shrink, reducing labor costs, and improving the customer's in-store experience are all important benefits of RFID that are key drivers for adoption. However, not utilizing the valuable data that is derived from the RFID solution in place leaves a retailer perpetually reacting to fluctuations instead of being proactive. • Consider adding magic mirrors and self-serve kiosks to improve customer experiences and business benefits. Once an RFID system is in place, there are in-store solutions available that can improve the customer experience even further. Thirty-six percent (36%) of Best-in-Class companies have already implemented a magic mirror application in their dressing rooms, and 7% currently use RFID-enabled self-checkout solutions. Those companies are using such solutions to extend the business benefits of their RFID investments. After asset tracking, retailers are focusing on the use of RFID to improve their customer's experience. Customers are already familiar with self-checkout systems, so the transition to RFID- enabled self-checkouts is relatively painless. Additionally, magic mirrors provide customers with product information and assistance on demand. Providing the customer with control over the shopping experience improves the level of satisfaction because they are able to create the shopping experience they want. • Implement RFID-compatible POS solutions to provide end- to-end visibility. In many retail pilots and roll-outs, retailers invest in RFID technology but then do not implement POS systems that are RFID-enabled. For example, out of the 83% of Best-in-Class companies that have RFID initiatives in place, only 15% currently use RFID enabled POS systems. Implementing RFID-enabled POS systems allows a retailer and its supply chain partners to achieve complete item-level visibility. © 2008 Aberdeen Group. Telephone: 617 723 7890 www.aberdeen.com Fax: 617 723 7897
  23. 23. RFID in Retail Page 23 Aberdeen Insights — Planned RFID Adoption Figure 8 shows that the percent of Best-in-Class with implementation plans is significantly higher than Industry Average and Laggards. As Best-in-Class are already equipped with readers and tags, they are now looking to round out their RFID systems to improve visibility and the customer experience further. Figure 8: Planned RFID Technology Adoption within 12 months 46% RFID-compatible POS solutions 6% 8% RFID data integrated with 38% 11% business intelligence / analytic tools 12% 36% Magic mirror 0% 0% 33% Smart shelving 6% 5% 31% Data warehouse(s), data mart(s), 14% and enterprise information integration 9% 17% Best-in-Class Long-distance readers (> 2 feet) 10% Average 8% Laggards 0% 10% 20% 30% 40% 50% % of Respondents Source: Aberdeen Group, March 2008 © 2008 Aberdeen Group. Telephone: 617 723 7890 www.aberdeen.com Fax: 617 723 7897
  24. 24. RFID in Retail Page 24 Appendix A: Research Methodology Between February and March 2008, Aberdeen examined the use, Study Focus perceptions, and intentions of more than 150 enterprises using and considering RFID in a diverse set of retail enterprises. Responding retail executives completed an online survey Aberdeen supplemented this online survey effort with telephone interviews that included questions with select survey respondents, gathering additional information on RFID designed to determine the strategies, experiences, and results. following: Responding enterprises included the following: √ The degree to which RFID is currently deployed in their • Job title / function: The research sample included respondents with in-store retail operations the following job titles: manager (27%); senior management (20%); √ The structure of existing other (18%); consultant (17%); director (13%); and vice president RFID implementations (5%). √ Current and planned use of • Industry: The research sample included respondents in the following RFID and its components retail industries: specialty (23%); stores (18%); consumer electronics (17%); supermarket (14%); hardware (9%); apparel (9%); mass √ The benefits, if any, that have merchant (5%); furniture (4%); and restaurant / hospitality (1%). been derived from RFID initiatives • Geography: The largest representation of respondents (48%) were from North America. Remaining respondents were from the Asia- √ Anticipated challenges to Pacific region (20%), Europe (20%), Middle East, Africa (8%), and RFID implementation South/Central America and Caribbean (4%). The study aimed to identify emerging best practices of • Company size: Thirty-eight percent (38%) of respondents were from RFID usage in retail, small businesses (annual revenues of $50 million or less); 35% were perceptions of RFID, and to from large enterprises (annual revenues above US $1 billion), and provide a framework by which 27% were from midsize enterprises (annual revenues between $50 readers could assess their own million and $1 billion). management capabilities. • Headcount: Thirty-five percent (35%) of respondents were from large enterprises (headcount between 1 and 99 employees); 20% were from midsize enterprises (headcount between 100 and 999 employees); and 45% of respondents were from small businesses (headcount greater than 1,000 employees). Solution providers recognized as sponsors were solicited after the fact and had no substantive influence on the direction of this report. Their sponsorship has made it possible for Aberdeen Group to make these findings available to readers at no charge. © 2008 Aberdeen Group. Telephone: 617 723 7890 www.aberdeen.com Fax: 617 723 7897
  25. 25. RFID in Retail Page 25 Table 5: The PACE Framework Key Overview Aberdeen applies a methodology to benchmark research that evaluates the business pressures, actions, capabilities, and enablers (PACE) that indicate corporate behavior in specific business processes. These terms are defined as follows: Pressures — external forces that impact an organization’s market position, competitiveness, or business operations (e.g., economic, political and regulatory, technology, changing customer preferences, competitive) Actions — the strategic approaches that an organization takes in response to industry pressures (e.g., align the corporate business model to leverage industry opportunities, such as product / service strategy, target markets, financial strategy, go-to-market, and sales strategy) Capabilities — the business process competencies required to execute corporate strategy (e.g., skilled people, brand, market positioning, viable products / services, ecosystem partners, financing) Enablers — the key functionality of technology solutions required to support the organization’s enabling business practices (e.g., development platform, applications, network connectivity, user interface, training and support, partner interfaces, data cleansing, and management) Source: Aberdeen Group, March 2008 Table 6: The Competitive Framework Key Overview The Aberdeen Competitive Framework defines enterprises In the following categories: as falling into one of the following three levels of practices Process — What is the scope of process and performance: standardization? What is the efficiency and Best-in-Class (20%) — Practices that are the best effectiveness of this process? currently being employed and are significantly superior to Organization — How is your company currently the Industry Average, and result in the top industry organized to manage and optimize this particular performance. process? Industry Average (50%) — Practices that represent the Knowledge — What visibility do you have into key average or norm, and result in average industry data and intelligence required to manage this process? performance. Technology — What level of automation have you Laggards (30%) — Practices that are significantly behind used to support this process? How is this automation the average of the industry, and result in below average integrated and aligned? performance. Performance — What do you measure? How frequently? What’s your actual performance? Source: Aberdeen Group, March 2008 Table 7: The Relationship Between PACE and the Competitive Framework PACE and the Competitive Framework – How They Interact Aberdeen research indicates that companies that identify the most influential pressures and take the most transformational and effective actions are most likely to achieve superior performance. The level of competitive performance that a company achieves is strongly determined by the PACE choices that they make and how well they execute those decisions. Source: Aberdeen Group, March 2008 © 2008 Aberdeen Group. Telephone: 617 723 7890 www.aberdeen.com Fax: 617 723 7897
  26. 26. RFID in Retail Page 26 Appendix B: Related Aberdeen Research Related Aberdeen research that forms a companion or reference to this report includes: • RFID in the Consumer Industries: Being a Winner, Not a Follower; March, 2004 • RFID: Roadmap for Retail; March, 2007 • Item-Level Tagging Comes of Age in Retail; August 2007 • Winning RFID Strategies for 2008; December 2007 Information on these and any other Aberdeen publications can be found at www.aberdeen.com. Author: Michael Dortch, Senior Analyst, Enabling Technologies & Information Systems michael.dortch@aberdeen.com Since 1988, Aberdeen's research has been helping corporations worldwide become Best-in-Class. Having benchmarked the performance of more than 644,000 companies, Aberdeen is uniquely positioned to provide organizations with the facts that matter — the facts that enable companies to get ahead and drive results. That's why our research is relied on by more than 2.2 million readers in over 40 countries, 90% of the Fortune 1,000, and 93% of the Technology 500. As a Harte-Hanks Company, Aberdeen plays a key role of putting content in context for the global direct and targeted marketing company. Aberdeen's analytical and independent view of the "customer optimization" process of Harte- Hanks (Information – Opportunity – Insight – Engagement – Interaction) extends the client value and accentuates the strategic role Harte-Hanks brings to the market. For additional information, visit Aberdeen http://www.aberdeen.com or call (617) 723-7890, or to learn more about Harte-Hanks, call (800) 456-9748 or go to http://www.harte-hanks.com. This document is the result of primary research performed by Aberdeen Group. Aberdeen Group's methodologies provide for objective fact-based research and represent the best analysis available at the time of publication. Unless otherwise noted, the entire contents of this publication are copyrighted by Aberdeen Group, Inc. and may not be reproduced, distributed, archived, or transmitted in any form or by any means without prior written consent by Aberdeen Group, Inc. © 2008 Aberdeen Group. Telephone: 617 723 7890 www.aberdeen.com Fax: 617 723 7897

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