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RFID: Next Big Thing?

June 3rd, 2004 · 5 Comments

Barron’s writes:

RFID works via a wireless-tracking system, based on a tag containing a semiconductor chip, an electronic product code and an antenna, which transmits real-time data, collected and stored when strategically placed scanners detect the tag.

RFID could drive gains in productivity by cutting labor costs, shrinking inventories and reducing out-of-stock items. A study by AMR Research in Boston finds that RFID tracking could trim warehouse labor by 20%, slash inventory by 25% and boost sales by 3% to 4%, compared with current methods of keeping count. Perhaps RFID’s biggest advantage is its ability to glean more direct insights into consumers’ buying habits. Armed with that knowledge, companies hope to find the Holy Grail: demand-driven planning, what Greg Aimi, AMR Research’s director of supply-chain research, calls a “pull” rather than “push” strategy for selling goods.

Some compare RFID’s impact to that of PCs or the ‘Net, providing companies with huge economies of scale and allowing them to use capital and people more efficiently. Certainly, radio-frequency identification is becoming one of the single biggest drivers of technology spending, according to William Whyman, co-founder and president of the Precursor Group, a technology and telecommunications research firm based in Washington.

And, in no small part, that is because two of the largest organizations on the planet, Wal-Mart Stores and the Defense Department, have seen the future and decided it includes RFID. Both behemoths are requiring their top 100 suppliers to become RFID-compliant by January. In addition, Wal-Mart issued a separate mandate to its top 30 pharmaceutical suppliers. For the Pentagon, the technology has security applications — keeping track of chemical and fertilizer shipments, for instance.

There are numerous obstacles impeding its rapid adoption. Uniform international standards are still being developed. Operating standards aren’t yet set; tags, priced anywhere from 25-50 cents to $250 each, are still too expensive and so are tag readers, which cost at $1,200 to $3,500. Moreover, the technology is still imperfect and the readers’ accuracy, at just 80% according to one study, is still below that which companies find acceptable. And as yet, no one has figured out how to make money from it.

So far, the cost of RFID to companies churning out low-margin high-volume products has fallen short of the benefits, according to Accenture’s Ginsburg, who has worked on developing business plans with many of those under the gun to incorporate RFID. While it may make economic sense for Gillette, an early adopter of the technology, to tag its relatively expensive packages of razor blades to try to reduce theft and lost inventory — “shrinkage” in industry parlance — there may not be as much benefit to Procter & Gamble to tag paper towels. Indeed, Wal-Mart suppliers are far from happy to comply with the big retailer’s RFID mandate. “This is a challenge for them,” says Ginsburg of the manufacturers group. “But it’s the long-term proposition everyone is after.” And as long as Wal-Mart is holding a gun to them, they have no choice but to continue to pursue the strategy.

Another big concern is that current computer systems won’t be up to the task of handling the immense volume of data expected to be generated by the technology, which will take tremendous processing power, bandwidth and storage. Then, too, there are questions of whether too much information will be collected and how to differentiate what’s vital and what’s not. Issues of privacy must be addressed. There’s also a shortage of expertise in the emerging field.

Tags: Emerging Technologies

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