"The State of RFID Implementation 2006 for Retail Supply Chains"
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  • 1. RICHARD J. WEHLE SCHOOL OF BUSINESS Working Paper Series The State of RFID Implementation 2006 for Retail Supply Chains Lynn A. Fish Eruditio de Commercio WP 2006-02 October, 2006
  • 2. The State of RFID Implementation 2006 for Retail Supply Chains Lynn A. Fish Associate Professor of Management and Marketing Canisius College ABSTRACT As of January 2006, Radio Frequency Identification (RFID) implementation has focused on implementing tags from the distribution center to the retailer in a methodology referred to as “slap-and-ship”. In order to reap important supply chain benefits, management needs to fully implement RFID technology through the entire supply chain system. The current status of RFID implementation for retail supply chains, operations implementation issues, and future of RFID in inventory management are highlighted. INTRODUCTION Future supply chain management (SCM) improvements will come through demand uncertainty reduction (Simchi-Levi, 2003). Replacing inventory with information offers one key method to reduce demand uncertainty in the supply chain. Radio-frequency identification (RFID) offers a potential methodology to increase visibility and reduce demand uncertainty throughout the supply chain by replacing inventory with information. In the United States, RFID implementation efforts in the retail industry began in earnest with Wal-Mart’s initial mandate in June 2003. In a previous paper (Fish and Forrest, 2005) the initial implementation efforts in RFID with respect to achieving this mandate were reviewed. In general, the top 100 suppliers to large retailers, such as Wal-Mart and Target, achieved initial implementation of RFID tags at the case and pallet level in time to meet the mandates. But where does implementation stand today? Our objectives within this paper are to review the current state of RFID implementation in the retail industry a year later, discuss specific managerial issues related to continued RFID implementation—both internal and external to the retailer—and highlight the future issues of this implementation process in the retail industry. THE CURRENT STATE OF RFID IMPLEMENTATION IN THE RETAIL INDUSTRY The inventory management landscape in the retail industry has significantly changed in the last few years due to technological developments. Lead by the June 2003, Wal-Mart mandate, and a parallel U.S. Department of Defense mandate, requiring a certain percentage of cases and pallets from its top 100 suppliers to be passive RFID-tagged to EPC-global standards for delivery to three specific distribution centers in Texas by January 1, 2005 (Gonsalves, 2004; 2
  • 3. Hill, 2004a; Business Wire, 2004; RFID Journal, 2003b), the RFID implementation process began. Other retailers, such as Target and Albertsons, followed with mandates of their own. So what is the current status of implementation efforts as of the beginning of 2006? As expected, the industry is still experiencing difficulties in moving toward widespread adoption. Standardized tags and other company mandates were supposed to be the issues that would present themselves to retail companies during 2005 (Roberti, 2005c). Standardization did not occur and other companies failed to follow suit. However, RFID tagging is growing slowly and movement in these two areas is occurring slowly. In general, the retail industry is moving from an early-adopter phase, to increasing adoption, with companies struggling to show a positive return on investment (Field, 2005). According to an AMR Research survey, only 18% of companies are completely ignoring RFID in the next two years, with the remaining 82% planning some RFID initiative (Field, 2005). By the end of 2005, 8% of the 82% were involved in full deployment, 23% had pilot RFID programs, and 38% were planning to evaluate RFID (Field, 2005). Wal-Mart has led RFID implementation efforts in the retail sector, with other notable companies, such as Target, Best Buy, Marks & Spencer (U.K.), Tesco (U.K.), and Metro Group (Germany), also implementing RFID. Table 1 offers a snapshot view of RFID implementation efforts by various retailers from a current and future vision. Table 1 is not intended to review all companies that have made efforts to implement RFID; rather it offers a sampling of RFID implementation efforts. Different migration paths by distribution channel are evolving for RFID dissemination (Kay and Bogart, 2005). In some cases, such as Wal-Mart, Target, Best Buy, and some Metro Group divisions, implementation strategies began at the case and pallet level (Desjardins, 2005). In other cases, such as Hewlett-Packard (HP), Metro Group, Tesco, and Marks & Spencer, retailers have started by item-level tagging (Douglas, 2005). For example, item-level implementation is occurring in the apparel industry, which is starting to equip stores with RFID technology and item-level RFID before extending to upstream points of distribution, while the consumer goods industry deployed RFID at the pallet and case levels, driven primarily by the cost of individual tags (Kay and Bogart, 2005). We continue by discussing the state of RFID implementation at various companies, separating our discussion into the two different retail strategies - item-level versus carton/pallet-level RFID implementation. A) Case & Pallet Implementation Tagging A broad, but shallow implementation strategy has been developed by consumer product discounters as RFID implementation occurs at the case and pallet level (Kay and Bogart, 2005). In this industry, the implementation strategy favors case/pallet tagging as the multi-category nature of products, lean staffing, tag costs, and lack of tagging at the source for consumer product goods are favored over item-level applications on narrow sets of items (Kay and Bogart, 2005). Many companies have been slow to undertake the RFID implementation process, while others, such as Target and Albertson’s, have adopted a follower strategy and are learning from Wal-Mart’s efforts (Desjardins, 2005). Top managers at companies such as Circuit City cite the fact that RFID technology is still expensive and read rates are still too low to undertake this process (Sliwa, 2005a). Without question, Wal-Mart continues to be the retail leader in RFID implementation efforts. Their initial mandate in June 2003 required their top 100 tier 1 suppliers to deliver RFID tagged cases and pallets by January 2005 (Gonsalves, 2004; Hill, 2004a; Business Wire, 2004; 3
  • 4. Table 1: RFID Implementation Current and Future Status of RFID Implementation at Various Retailers. (Burnell, 2005; Desjardins, 2005; Douglas, 2005; Fish and Forrest, 2005; Godinez, 2006; Morton, 2006; Roberti, 2005c; Savvas, 2006; Shister, 2005; Sliwa, 2005b) Retailer Current Status Future Activities Case/Pallet Level Tagging Best Buy • Currently focused on case and • Vision for RFID includes tagging (U.S.) pallet tagging. individual items. Metro Case/Pallet tagging: • Continuing to expand RFID tagging Group • RFID tagging implemented to include 300 suppliers (60-68% of (Germany) across multiple industries for 3 merchandise value) RFID tagged by divisions. the end of 2006. Target • Case/pallet tagging at Tyler, • By spring 2007, all of its suppliers (U.S.) Texas distribution center by 100 will be expected to ship RFID-tagged largest suppliers. cases and pallets. Wal-Mart • Case/pallet tagging to over 200 • Continued case/pallet tagging to next (U.S.) first tier and second tier level of suppliers (over 300) and by suppliers and over 800 stores January 2007, Case/pallet tagging to and 6 distribution centers. over 600 first tier and second tier • Improved backroom knowledge. suppliers and over 1000 stores. • Suppliers can access the RFID • Developing a re-stocking strategy for information by logging onto pick-lists. Retail Link, Wal-Mart’s web- • Key is “how you use the data.” based inventory tracking database, which is updated every 30 minutes. Item-Level Tagging Hewlett- • By April 2004, HP already had • Tag all printers sold in the United Packard fully integrated RFID into its States. (U.S.) internal supply chain processes, • Use tags for quality control. end-to-end. • Item-level tagging of printers in Brazilian market from manufacturer through production, distribution, return and repair. Marks & • Item-level trial on men’s suits in • In spring 2006, plans to extend trial Spencer 9 stores as of 2004. to 53 stores and to women’s lingerie. (U.K.) Metro Item-level tagging: • Continuing to expand RFID tagging Group • ‘Store of future’ to include 300 suppliers (60-68% of (Germany) • In 2004, tested tags on fashion merchandise value) RFID tagged by items in Kaufhof stores. the end of 2006. Tesco • Pilot study on item-level tagging • Roll-out internal RFID efforts to (U.K.) on games and DVDs as of May 1400 stores and 30 distribution 2003. centers. 4
  • 5. RFID Journal, 2003b). 137 participants met this initial mandate on approximately 65% of the product cases and pallets that went into two Texas distribution centers, mainly through “slap and ship” efforts (Roberti, 2005b). Original participants included global manufacturers Gillette, Johnson & Johnson, Kimberly-Clark, Kraft Foods, Nestle Purina, Procter & Gamble and Unilever (Shister, 2005). Wal-Mart responded to difficulties in initial efforts by building flexibility into the percentage of shipments to be tagged (Kevan, 2004; Bednarz, 2004). Wal- Mart’s objectives in mandating RFID technology are to generate automatic “pick-lists”, reduce out-of-stock problems and therefore improve customer service, and to keep more accurate tracking of the inventory on hand and in the store (Roberti, 2005c). Wal-Mart monitors a unit as it enters the receiving bay, between the back room and the sales floor, and at the trash compactor (Roberti, 2005c). Initial RFID implementation efforts were tied into Wal-Mart’s Retail Link, an extranet used to provide suppliers with point-of-sale transaction data, and allowed suppliers access to information on supply chain lead time, often indicating to suppliers a longer lead time by a day than suppliers assumed (Roberti, 2005c). Just how effective has Wal-Mart been in attaining its goal? A University of Arkansas study of 24 Wal-Mart stores indicated positive effects with RFID implementation: a change from reactive to proactive pick list process, a 16% reduction in out-of-stock problems (Hardgrave et al., 2005), and a replenishment rate three times faster than non-RFID products (Watson, 2005). However, researchers have questioned the results of the Arkansas study as other inventory management techniques were tried simultaneously (Fuller, 2006). The authors attempted to parcel out these other techniques from RFID implementation and may have succeeded; however, researchers indicate that supply chain improvement techniques, such as package standardization, work flow improvement, data storage, portals-visibility, performance improvement metrics emphasizing supplier-customer relationships, demand planning, transportation management systems and warehouse management systems integration, and sharing data with supply-chain partners, may reap the same benefits as RFID implementation (Fuller, 2006). Initial estimated cost savings for RFID-equipped Wal-Mart stores include $ 67 billion in reduced labor costs, $600 million in out-of-stock supply chain cost reductions, $575 million in theft reduction, $300 million in improved tracking through warehouses and distribution centers, and $180 million in reduced inventory holding and carrying costs (Asif and Mandviwalla, 2005). Recent RFID initiatives at Wal-Mart include handheld RFID interrogators, mobile computers that can scan a bar code or read an RFID tag, to help store associates pick products to take to the shop floor, and upgrading its RFID systems to second-generation (Gen-2) electronic product code (EPC) standards (Roberti, 2006 a). In the near future, Wal-Mart will begin using first-generation forklift interrogators and wearable readers. These devices will streamline business processes by enabling the retailer to track where a pallet has been placed (Roberti, 2006 a). As of January 2006, Texas Instrument’s Educational and Productivity Solutions business division attached EPC Gen 2-compliant RFID tags to cases and pallets of its calculators heading to five Wal-Mart distribution centers, becoming the first supplier to do so (O’Connor, 2006). Other suppliers are expected to follow soon as Wal-Mart quickly installs associated Gen-2 capable RFID interrogators at its distribution centers. Target responded to Wal-Mart’s mandate with its own mandate requiring its suppliers to have distribution center compliance by spring 2005 and all-carton compliance by spring 2007 (Hill, 2004 b). Target’s initial efforts involved 19 suppliers shipping through its Tyler, Texas distribution center to 10 regional stores, and hoped to install RFID equipment at 40 stores per week, with the goal of implementation by the end of 2005 (Sullivan, 2005a). Like Wal-Mart, 5
  • 6. Target has been flexible in its mandate to its top 100 suppliers, allowing suppliers to selectively tag products initially rather than tag their entire product line (Desjardins, 2005). Target’s focus is on back room activities, thereby improving its inventory management system. Target’s implementation strategy has been one of “shadowing” Wal-Mart’s implementation efforts, lagging behind by approximately 6 months. Like Wal-Mart, their initial focus is in the northern Texas area, where a large supplier base exists in the area for both companies (Desjardins, 2005). Target has benefited from this ‘follower’ approach as the bugs in the system, such as read-rates, were addressed by Wal-Mart first (Desjardins, 2005). Best Buy requested, instead of mandating, that all of its major suppliers begin shipping cases and pallets with RFID tags by January 2006, with its entire supply base to be compliant by May 2007 (Spiegel, 2004a). Unlike Wal-Mart and Target, Best Buy has structured its RFID implementation as a partnership (Morton, 2006), working with suppliers to assist them in attaining positive returns on investment from product tracking and information usage, while hoping in the future to avoid duplication costs associated with running a bar coding and RFID system (RFID Journal, 2006). As of early January 2006, Best Buy’s major suppliers, accounting for 80% of the merchandise sold in its 650 stores, are expected to be RFID-tagged to two distribution centers (Sullivan, 2005b). Best Buy, due to its high product costs, expects full RFID benefits will come with item-level tagging (Morton, 2006), which is expected to follow immediately after case/pallet implementation with suppliers such as iRiver America Inc. (Sullivan, 2005b). Best Buy’s vision is to tag individual items, increasing efficiency, expanding product availability, providing real-time information to its suppliers, and improving the customer’s shopping experience (RFID Journal, 2006). The world’s fifth largest retailer, Metro Group, has implemented RFID at both the case/pallet and item levels at its full-scale RFID pallet-tracking center, which is its busiest distribution center (Burnell, 2005). Here, we will discuss their case/pallet efforts. Metro’s first RFID implementation at the case/pallet level focused on tracking incoming and outgoing shipments and reconciling shipments with shipping documents for three retail sales divisions (Collins, 2005a). By the end of 2005, Metro expected to have 100 companies sending a wide range of product using RFID-tagged shipments, extending this to over 300 suppliers in 2006 (Collins, 2005a). Metro has reported a 14% reduction in warehouse labor, an 11% improvement in stock availability and out-of-stock performance, and an 18% reduction in lost goods (Burnell, 2005). Metro is deploying RFID across three different retail divisions – Metro Cash & Carry (grocery and general merchandise from 12 suppliers into one distribution center and then into two stores), Metro Kaufhof department stores (five distribution centers into three apparel and textile suppliers), and Metro’s Real Hypermarket division (grocery shipments from four suppliers into three distribution centers onto eleven stores) and has been working to develop a range of equipment configurations to achieve consistent read rates across different implementations (Collins, 2005a). As a result, Metro management is stressing agreement on common standards across the world to assist efficiency and speed in implementation efforts across industries (Collins, 2006). In March 2005, Metro demonstrated the first commercial use of an EPC Gen-2 RFID system (Burnell, 2005). B) Item-Level Tagging A contrasting implementation strategy undertaken by some retailers, such as HP, Metro Group, and Tesco, has been to implement RFID at the item-level. Vertically-integrated retailers stand to benefit the most from item-level RFID as these retailers can most easily drive their 6
  • 7. internal merchandise planning activities from RFID-generated product flow data (Kay and Bogart, 2005). Specialty retailers can track the item across the entire value chain without issues surrounding supplier-customer data sharing (Kay and Bogart, 2005). Advantages to item-level tagging include: • Retailers have a better view of merchandise moving through the stockroom to the sales floor, through the point of sale and out the door (Douglas, 2005). • Inventory management improves as managers can focus on item movement from the shelf daily instead of at weekly or monthly increments, stocking shelves with customer demand items, reducing shoplifting and employee theft, improving the return and traceability of items, and reducing inventory management costs associated with a manual inventory management system (Douglas, 2005). • Item-level RFID assists in controlling internal shrinkage associated with a product having been diverted from its proper location, can potentially reduce labor costs, and improves efficiencies regarding product returns (Bishoff, 2006). • Item-level tracking is particularly effective with expensive items, where RFID can monitor out-of-stock items and shelf availability, and decrease lost sales (Bishoff, 2006). Reports indicate that item-level RFID can reduce out-of-stocks by 60%, cut shrinkage by 20 to 50%, and increase employee productivity by eight times (Douglas, 2005). Although companies that have adopted a case/pallet implementation process ultimately share the vision of item-level tagging tracked in real time by ‘smart shelves’ (shelves with RFID readers), item-level tagging comes with several limitations. In general, technological, reliability, standardization and cost issues still hinder item-level tagging (Douglas, 2005). AMR Research has indicated that item-level RFID requires specificity about shelf location, which requires a significant investment in equipment (Bischoff, 2006). Practitioners have questioned the negligible value of item-level data, where the current costs to acquire this information are significant versus the system’s current ability to process and utilize this information in a meaningful way (Chain Store Age, 2006). The data storage requirements become astronomical with item-level identification (Chain Store Age, 2006). We continue with a discussion of the item-level tagging strategies of HP, Metro Group, Tesco and Marks & Spencer. HP, along with their own internal RFID item-level tagging, also serves as a supplier to Wal-Mart and Target. HP, which only tagged four product stock-keeping units in 2004, is currently shipping 65 different consumer stock-keeping units to Wal-Mart and 40 to Sam’s Club, while tagging 60 to 75% (Shister, 2005). HP has taken advantage of a unique EPC code on each box in implementing its item-level tracking from packaging downstream, and initial tagging resulted in internal shipping process improvements (Morton, 2006). In the United States and throughout most of the world, HP is currently using the “slap-and-ship” strategy to meet Wal-Mart’s mandate (Morton, 2006). However, HP recently began individually tagging printers as they are manufactured at Sao Paulo, Brazil, allowing HP to track the units through production and distribution to customers throughout South America (Roberti, 2006b). From the beginning of the assembly line, information on the process, components, test results, and eventually each unit’s destination are stored on the item-level tag (Roberti, 2006b). In the future, HP will use the RFID tags to gather useful information regarding its reverse logistics system and quality control (Roberti, 2006b). Properly using RFID in manufacturing processes can improve tracking and raw material validation, monitor the manufacturing processes in real time (Modern Materials Handling, 2005), improve quality control within the process and in-coming raw material quality, eliminate 7
  • 8. inventory counting, improve bulk or temporary storage of warehouse items, enhance productivity on the shop floor, plan labor requirements, and improve picking accuracy (Rutner et al., 2004). HP truly demonstrates the next step in RFID implementation – moving the RFID upstream through the warehouse and production facility. The true benefits to RFID to moving tag placement upstream are enormous and other companies need to take note! United Kingdom’s Tesco, a supermarket chain enterprise and third largest retailer in the world, began by implementing RFID at an item-level for digital video disks and electronic games in two stores (Sliwa, 2005b). Tesco, which utilizes the information provided by RFID tags to track on-shelf availability of DVDs, needed to standardize its tags to ultra-high frequency tags first and improve its tagging methods at the distributor, before rolling this effort out to ten stores (Roberti, 2005a). Tesco also uses RFID to track internal shipments of high-value nonfood goods through tracking trays and dollies at its national distribution center in Milton Keynes to stores through its Secure Supply Chain initiative (Collins, 2004; Sliwa, 2005b). Since the tags are applied on DVDs manually, Tesco’s top managers indicate that the company does not project a payback on their investment in tags until the tags can be applied automatically (Sliwa, 2005b). On top of its case/pallet tagging efforts, Metro Group is also involved in item-level tagging. In April 2003, Metro opened a “store of the future” to test the practicality and efficiency of RFID and other technologies in real-world conditions. The store, still operating today, includes smart shelves, RFID self-checkout systems, kiosks, and smart scales provided by Cisco Systems, IBM, Intel, Intermec, Philips Semiconductors and SAP. Customers can use the new technological system or shop the old-fashioned way. Individually-tagged items are tracked from suppliers to distribution centers to the back of the store, and finally to the store shelves, with the goal of out-of-stock reduction. This futuristic shopping experience also includes shopping carts outfitted with RFID tags and readers (RFID Journal, 2003a). The shopping cart readers are used for automatic checkout operated through a wireless network, while shopping cart tags work with readers at the store exit to assist managers in checkout management (RFID Journal, 2003a). Shopping carts also have a touch screen computer with directions to product locations, and store shelves feature displays that can be updated remotely (RFID Journal, 2003a). In another item- level initiative, Metro Group’s Kaufhof retailer tracked every garment from women’s clothing supplier Gerry Weber, through the supply chain to two stores and found that use of the technology was promising (RFID Journal, 2003c). At its full-scale RFID tracking distribution center, Metro has reported identifying individual garments at a rate of 8,000 per hour (Burnell, 2005). Some companies are using a category-focused RFID implementation strategy—tagging all garments from one or more suppliers within a specific department. For example, this category-focused implementation strategy has been used by Marks & Spencer, a United Kingdom department store, tagging entire product categories. The vertically-integrated company is expanding its pilot testing to item-level tracking at 53 stores for men’s suits, jackets and formal trousers and women’s suits, skirts/trousers and lingerie (Kay and Bogart, 2005; Roberti, 2005c). Every garment will have an RFID tag, but the company focuses its efforts on tracking product categories instead of just the individual item (Kay and Bogart, 2005). In its food division, Marks & Spencer uses RFID tags as a replacement on stacked trays, dollies and roll cages for food, which reduces the read time by more than 80% (Blossom, 2005). In the future of RFID, item-level tagging will be required. Texas Instruments’ Educational & Productivity Solutions division, which currently tags cases and pallets, is looking to tag individual calculators by 2007 or 2008 as it integrates RFID throughout the supply chain 8
  • 9. from procurement of materials to point-of-sale (O’Connor, 2006). Other companies are projected to take significantly longer before looking towards item-level tagging. Unfortunately, as of early 2006, the cost of the RFID tags is still significant, limiting item-level RFID efforts (Bischoff, 2006). SPECIFIC MANAGERIAL ISSUES RELATED TO CONTINUED IMPLEMENTATION Our discussion above highlighted the different RFID implementation strategies of several key companies. We continue by discussing the current and future implementation issues that retail companies are addressing, both internal and external to the retailer. A) Within Internal Retail Management Systems Within the retail store itself, RFID can assist in inventory and advertising management. Inventory management can have an impact upon stock-out reductions, reduced shrinkage, delivery receipt and reconciliation process improvement, time-sensitive goods monitoring, and back room efficiency (Blossom, 2005). However, there are other areas within the store where RFID can assist retail managers to better manage their inventory, provide customer service, and valuable information. In addition to improved back room tracking, reduction of out-of-stock inventory, and improved customer service due to retailer RFID implementation, RFID has proven itself to be a viable management tool to retailers within the store through advertising management and recently customer payment systems. As cited above, Target’s and Wal-Mart’s recent announcement of information sharing will greatly enhance back room capabilities and improve each company’s supply chains. Walgreen’s pilot study of Goliath Solutions’ RFID-based store display system will be expanded from 15 consumer packaged goods companies in 50 stores to all 5000 stores by mid-2007 (Roberti, 2005c). In the RFID-based display system, data are captured electronically regarding when, how long, and approximately where displays are located within the store as well as analyzing point-of-sale information versus the design and relationship with sales (Industrial Engineer, 2006; Chafkin, 2006). Chase’s recent announcement to offer MasterCard and Visa cards with embedded RFID tags, which will allow customers to make cashless payments at RFID-enable terminals (Roberti, 2005c), moves the consumer experience towards the Metro ‘store of the future’ model and check-out labor reduction (Collins, 2005a). RFID utilization at the Metro’s ‘store of the future’ can even become more futuristic and change retail management more than originally envisioned. The Metro model suggests that in the future, through technology and past purchases, tags will assist in making purchase recommendations and improve shelf management (Collins, 2005a). In the future, ‘smart shelves’ inventory management and point-of-sale information can be integrated (Rutner et al., 2004), allowing managers to initiate differential product prices changes based upon product location when the customer acquires the product. Safety stock reductions within the store will be enhanced as managers will be able to track multiple versus single product purchase patterns, such as differences in purchasing six-packs of cans versus single cans (Rutner et al., 2004). As shown by Best Buy’s efforts, the customer’s experience will be enhanced as salespeople will be able to locate products inadvertently moved by a customer, assist customers to find the products faster and check them out quicker, and assist both the customer and company to understand product bundles better (RFID Journal, 2006). However, these potential improvements do not 9
  • 10. come without costs. Currently, suppliers typically bear the costs of product spoilage. In the future, poor inventory stock rotation practices will easily be seen throughout the supply chain, and result in a shift of spoilage costs to retailers with poor practices (Rutner et al., 2004). Category management, which is currently performed by the supplier, will shift to the retailer (Rutner et al., 2004). Other poor managerial retail processes will be uncovered to all parties in the supply chain. For instance, the Grocery Manufacturers of America, in a recent study, indicated that nearly 75% of all out-of-stock situations were from poor planning, forecasting, and in-store tracking at the retailer (Collins, 2005b). As a result, retailers—and suppliers—will have to change their business processes in forecasting and demand planning. Hence, within the store, managers have just “touched the surface” of ways to use RFID technology to improve their inventory tracking and improve customer service. Retailers will have to examine and improve their own business processes in relation to fully implementing this technology and develop appropriate business models. B) External Issues to the Retailer There are several external issues that retailers must address as they continue to implement RFID across company boundaries in order to reap its full benefits including integration between suppliers and retailers, the system costs, standardization, reliability, data abundance, tag application, and security issues at the customer and company levels. We continue by discussing the current and future state for each of these areas. Supplier-retailer integration to reap the full benefit of the technology is a critical issue, particularly to the suppliers who need the information provided by RFID to replace inventories and reduce system costs. As noted above, HP has successfully completed this integration in moving its product from Brazil to its South American distribution system (Roberti, 2006b). Obviously, this integration was an internal integration and does not face the standardization issues in coding, radio frequencies, and database sharing that exist between most suppliers and retailers. A particularly noteworthy result in 2005 was the agreement between Wal-Mart and Target—competitors—to share EPC data gathered from their RFID systems with thirteen suppliers in the consumer goods industry (Fitchard, 2005). The end result will be data consolidation across fewer platforms to ensure reliability and interoperability in the retail industry (Fitchard, 2005), with the result of moving the consumer goods-retailer relationship from a retailer “push” market to a more balanced retail/consumer products push-pull market (Microwave Journal, 2005). Several companies are seeking to provide integration services; however, RFID remains a highly fragmented industry, with a significant number of technology, middleware and hardware vendors, and complexities that no single company has been able to bridge (Fitchard, 2005). RFID interchanges are being developed by companies such as TIBCO to provide scalable, standards-based architecture to facilitate integration, linking warehouse management systems and order fulfillment processes (M2PressWIRE, 2005). Other companies, such as AT&T, are also working to create a fully-integrated open system RFID solution from tagging individual items, to scanning the packages through middleware and hardware, through handling the traffic and network connectivity and data centers that will store and pass information down the supply chain (Fitchard, 2005). IBM, Accenture, and AT&T are forming partnerships to overcome difficulties in security, quality of service and bandwidth requirements (Fitchard, 2005). However, these systems and inter-company agreements are still in the development phase, and without standardization as we will discuss further below, integration remains a critical problem. 10
  • 11. The ultimate goal will be to mimic HP’s success in the South American market, moving current “slap-and-ship” tagging whereby the suppliers see significant costs and little benefit, back through the supply chain to gather important operational information. RFID tags, readers, middleware, and other associated costs remain significant hurdles to implementation. As of late 2005, the lowest reported individual, passive RFID tags cost is $.07 each (Neff, 2005), and the average company in AMR Research’s survey spent over $500,000 on hardware and software associated with implementation (Field, 2005). Other researchers cite costs for homogenous pallet, in-line tagging applications at roughly 10 cents per case, while costs for mixed pallet requirements tagging increase to 50 cents per case (Shister, 2005). Current efforts have failed to show that RFID is cost effective (Modern Materials Handling, 2005). The AMR Research study on enterprise-wide investment in case and pallet tagging showed no revenue gains even after four years as the projected out-of-stock rate reduction is only 0.5 percent, generating just enough revenue to cover the cost of the RFID initiative (Ferguson, 2006). The ARC Advisory Group found that more than 95% of suppliers using RFID labels expect to wait over two years for return on investment and suppliers felt that they would not gain any real benefit (Watson, 2005). Again, as demonstrated by HP, since most suppliers have not moved tagging upstream, they bear significant implementation costs and do not reap the rewards of exchanging information for inventory. HP’s initial results demonstrate cost saving through invoice deductions and internal information regarding inventory location (Roberti, 2006b). When the original Wal-Mart mandate was given in 2003, the goal was to reduce the cost per tag to $0.05 to generate widespread use (Rutner et al., 2004). Obviously in the three years since the mandate, tag costs are approaching, but have not yet reached, this level. However, as the volume and number of RFID tagging companies continues to increase, the tag costs, as well as other hardware and software costs, will continue to decrease. From a return on investment standpoint, item-level tagging remains several years away. As top management at Metro Group has indicated, standardization is a critical issue to continued dissemination of the technology (Collins, 2006). Common technology and standardized coding are critical to Wal-Mart and Target as manufacturers must ensure that same methodology works for their other partners (Fitchard, 2005). Different frequency and codes used by different suppliers and customers, as well as different country requirements, have created a fragmented implementation process. Recent adoption of the Generation 2 EPC code will increase the adoption rate as companies will have a system to serve more than one customer simultaneously (Roberti, 2005c). Standardization should also lead to improvements through faster read rates, better handling in an environment with multiple readers (dense reader modes) and better password control over tags (Modern Materials Handling, 2005). Standardization should also assist in reducing technology costs, but users should be wary of difficulties in adopting new systems as the current and future systems may not be integratable (Modern Materials Handling, 2005). Since implementation efforts began, obtaining reliable read rates has been an issue; however, the failure rate is much lower today than when implementation efforts first began (Roberti, 2006b; Modern Materials Handling, 2005). Reader ranges and read rates can fluctuate dramatically and signal interference is a problem (Baker, 2005), as the warehousing environment can also have an impact on read rates (Shister, 2005). Even in late 2005, Wal-Mart’s read rates were over 90% for singular cases and 60% for pallets (Shister, 2005). Similarly HP recorded difficulties in obtaining reliable read rates due to the liquid and metal in the printers until the tag placement and orientation of the tag on the pallet were studied (Shister, 2005). Read reliability is 11
  • 12. hampered by material issues such as problems with reading signals through metal, foil packaging, or fluids (Griffiths, 2005). Even today, Metro indicates that EPC tags may be unreliable and inconsistent, and the costs to manually apply tags can be significant (Roberti, 2005a). Future implementation will require tags that are reliable, consistent and can automatically be applied. An information technology issue that has evolved is the abundance of data, particularly as companies move toward item-level tagging. Companies are faced with the question of what to do with all of the data generated from the RFID tags, both from amount and complexity standpoints (Bischoff, 2006). The information needs to be mined and utilized in a value-added way to improve the entire supply chain system. Backup and integration systems need to be developed. Throughout the supply chain, companies must learn and build upon the information that is gathered. Tag applications mainly occur at the distribution center using one of three methods – manually at a station in the distribution center or at ad hoc stations on the receiving dock, or as pallets and cases move along conveyor-belt systems, or by using pre-printed RFID tags applied when the goods are picked for shipment (Malykhina, 2005). As noted above, HP has successfully completed this integration in moving its product from Brazil to its South American operations (Roberti, 2006 b). As the volume of tags increases, tags need to be applied to units in an accurate, efficient and cost-effective way. Manual methods will not be able to handle the volume or guarantee the required accuracy. Consumer privacy groups are concerned about the privacy and security issues surrounding RFID usage, particularly at the item-level (Douglas, 2005). The Supreme Court in “Kyllo vs. the United States” ruled that agencies cannot use a device that “is not in general public use to explore details of a private home” (Kyllo v. United States 533 U.S. 27), which will act to protect individual consumer rights, but inevitably will have an impact on RFID implementation. Published on September 27, 2005, Spychips: How Major Corporations and Government Plan to Track Your Every Move with RFID by Katherine Albrecht and Liz McIntyre, has become a best- seller. The book outlines futuristic scenarios for RFID use beyond store tracking individual customers and violating individual rights (Neff, 2005). Even today, companies are faced with questions regarding how to “shut the RFID tag off” once the customer leaves the store. Inroads in solving these issues have been made over the past year, but they all remain unsolved. Information technology breakthroughs and yet undeveloped managerial best practices will be helpful in system integration, cost reduction, standardization, reliability, data abundance, tag application, and security issues. Retailers must uncover internal opportunities to improve merchandise flow through store operations metrics, point-of-sale data and item profitability results (Kay and Bogart, 2005). DISCUSSION: THE FUTURE OF IMPLEMENTATION EFFORTS Inventory management is the number one benefit cited by companies implementing RFID and includes other anticipated benefits of product theft reduction, improved collaborative planning with supply chain partners, easier product tracking and automated product replenishment (Spiegel, 2004 b). Based upon our discussion throughout this paper and as cited by the ARC Advisory Group, the “slap-and-ship” system for RFID application that most suppliers use is not a scalable approach for high-volume production (Spiegel, 2004 b). Most 12
  • 13. companies are not looking at other areas where RFID can assist the supply chain (Field, 2005). Ultimately, to gain the full benefits of RFID implementation, RFID systems need to support material handling efforts, and to be moved upstream into manufacturing and packaging processes (Modern Materials Handling, 2005). As we elaborated upon above, retailers also need to fully analyze their own business processes – internally and with their business partners, in order to fully implement RFID. Our discussion has highlighted the different strategies to apply tags – at the item or case/pallet level. These strategies take advantage of different distribution channels and product differences, as well as company goals. In general, case/pallet level RFID implementation has been adopted by large consumer goods retailers, whose products are relatively inexpensive and the current RFID system costs are exorbitant. Wal-Mart, Target, Metro and Best Buy suppliers have all met initial requirements and the retailers continue to expand RFID compliance to other supply chain members. Case/pallet-level tracking is focused on improving inventory management in the backroom and from the distribution centers. Today, retailers are not concerned with costs or potential process improvements upstream. Best Buy projects the earliest movement to item-level tagging, mainly due to the item value. Item-level tagging retailers are skipping the case/pallet-level tagging phase and jumping to the individual item. Item-level RFID tracking is most effective to companies where the item cost is significant in comparison to the tag cost. HP is truly leading the way in demonstrating inventory management improvements throughout the supply chain. Obviously, since HP has a vertical supply chain, standardization and sharing issues are irrelevant and the advantages to individual tagging can be easily attained. Tesco’s strategy has revolved around the high-value of its items in comparison to tag cost. Similarly, Metro has benefited from several vertically-controlled RFID applications. Marks & Spencer’s RFID strategy demonstrates the ability to item-tag but the inability to gather and perform data mining in a cost effective and efficient way. Obviously, the issues that companies face today, as we discussed above, must be solved if item-level tracking is to occur in the future. The ultimate goal of the supply chain should be item-tagging, whereby information is communicated to various members within the supply chain, replacing demand uncertainty, reducing supply chain costs throughout, and improving customer service. The next revolution in information technology is a field-level nervous system for every business – networked sensors and analytical tools that will allow companies to monitor where their products are made, distributed and sold in real time, and give managers insight into customer behavior and critical business processes (Om, 2005). Data management tools that can sift through terabytes of information, and inexpensive tags on merchandise, in a stores retail system to detect customer location, brand preferences and with communication devices, will assist future customers with selections (Om, 2005). Inventory management will be revolutionized through inexpensive networked sensors that will allow up-to-the minute view of the inventory on the store shelves (Om, 2005). The United Kingdom’s Office of Science and Technology predicts that by 2055, RFID will play the most crucial role in logistics and food retailing, successfully monitoring goods and tracing product through the supply chain (BMP Today, 2006). They also predict that warehouses will cease to exist as good are shipped directly from their place of manufacture to the purchaser or retail shop (BPM Today, 2006). New technologies will reverse the trend to make things offshore as it will become cheaper to manufacture goods locally as machinery becomes less expensive and the cost of freight increases (BPM Today, 2006). 13
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  • 18. The Richard J. Wehle School of Business Working Paper series does not copyright contents. Authors are solely responsible for the content and opinions expressed; in particular, the authors warrant that their papers are original, factually correct, unpublished works. A list of recent faculty seminars and working papers can be found online at the faculty research website, http://www.canisius.edu/business/faculty_research.asp. Series editor: Joseph G. Eisenhauer, Ph.D. Editorial assistant: David C. Andrews 18