RFID reluctance Rx: look at the long term: it may be hard to make the case for an ROI on RFID, but forward-thinking companies will find a way to do so

Food & Drug Packaging, March, 2005 by Pan Demetrakakes

Radio frequency identification (RFID) often is described as revolutionary.

And every revolution worthy of the name must overcome some resistance.

Not everyone is embracing RFID with equal enthusiasm. Wal-Mart, Target and other retailers are pulling manufacturers toward RFID adoption. But that pull is encountering friction: Some manufacturers are wondering what's in it for them.

Return on investment is the major concern. In a poll of 50 end-user companies conducted by ABI Research and quoted by RFID Journal, 23% cited inadequate ROI as the biggest factor keeping them from widespread implementation of RFID. (See also "RFID Today: Where and when is the ROD", Food & Drug Packaging, January.)

"The biggest hurdle is complete lack of return on investment," says Steve Banker, service director for supply chain management at ARC Advisory Group. "You're adding cost to a manufacturer and cutting into their margin and their profitability, and all they get out of it is the ability to keep doing business with a partner that does a substantial amount of business with them."

The largest such partner, of course, is Wal-Mart. The mammoth retailer is operating a test program in three of its distribution centers in the Dallas-Forth Worth area. These centers serve 104 Wal-Marts and 36 Sam's Clubs, all of which are equipped with RFID readers. Wal-Mart asked its top 100 vendors to put RFID labels on cases and pallets shipped through the Texas D/Cs. The deadline for the initial phase of Wal-Mart's project was Jan. 1.

There's no question that Wal-Mart is the biggest single retail driver to date behind RFID. Banker said that last August, he talked to 24 companies that were implementing RFID, and 18 of them were doing it because of the Wal-Mart mandate. (Another big player is the U.S. Department of Defense, which is phasing in RFID requirements for supplies from food to ammunition.)

So far, so good

Wal-Mart, officially at least, is happy with the initial results. "The implementation is going very well," says a Wal-Mart spokesperson. "We are pleased that we have over 100 suppliers that have shipped tagged merchandise destined for our distribution centers in DFW. We think it is a huge achievement and we commend them all."

Wal-Mart should be pleased, says Greg Gilbert, director of RFID solutions for consulting firm Manhattan Associates.

"While there has been some degree of hesitation, a lot of questions about the business case in the short term especially, everybody [among the top 100 vendors] has found a way to comply to some degree," Gilbert says.

The Wal-Mart results have to be taken in context, however. A big misconception about the Wal-Mart RFID project is that it requires a vendor to put RFID tags on every single case it ships through the Dallas-Forth Worth D/Cs. In fact, Wal-Mart asked only that vendors come up with a plan to use RFID for selected stock keeping units (SKUs) of product.

"For the most part, Wal-Mart was very flexible and understanding that this is something that's going to take time. Adopting RFID is not like turning on a light switch," Gilbert says. "But neither was the adoption of the bar code. It's going to take time and it's going to be very gradual."

Banker says that one or two of the Wal-Mart suppliers he spoke with were putting RFID tags on multiple SKUs, but most of them were doing it for less than a dozen. He predicts that there will be some give-and-take between Wal-Mart and its vendors as the RFID project continues.

"I think what's going to happen is, there will in effect be a rolling set of negotiations," he says. "Wal-Mart is going to come back and say, 'OK, you've been doing it on nine SKUs, next year we'd like you to do it on 50.' I think the manufacturer at that point is going to say, 'Look, we've got a year's worth of data. You've promised us this, but this is the real return on investment. We're not coming close to getting the benefits that you promised us--we can't do it on more $KUs.'"

The long term

The basic problem is that the benefits of RFID are long-term and hard to quantify, especially when compared to the costs.

"If we look at those potential benefit buckets, we're looking at a savings of maybe half a million to a million dollars, if things go right," Banker says. "It's not that there aren't benefit buckets, but it is that the cost of the tags is so high that it dwarfs any benefits they could get in the foreseeable future."

One of the most important decisions that manufacturers must make with RFID is whether, and how, to use the supply-chain data themselves. The easiest thing to do, when faced with demands from a major customer like Wal-Mart, is "slap and ship"--that is, simply encode the tags with the information the customer wants, without using it internally.

But slap-and-ship means that RFID will be nothing but pure expense. To get any sort of benefit from RFID besides customer goodwill, manufacturers must incorporate RFID data into their own information systems. The dilemma is that such integration represents an additional capital expense--and the deeper the integration goes, the more it costs.