A few years ago, radio frequency identification (RFID) was the technology du jour and touted as a way to make supply chains transparent, from manufacturing through point-of-sale.
With RFID, individual tags embedded with identification data are placed on components, materials, finished goods, cartons, boxes, pallets, or any other type of shipping and packaging materials. Electronic readers at warehouses, retail outlets, assembly lines, and checkout counters continually scan these items, sending their IDs and locales to centralized databases, where this information is translated into up-to-the-second snapshots of supply chain activity. Such a clear view, it was hoped, would minimize the expense of lost items, theft, and unstocked shelves, as well as significantly improve factory efficiency. Indeed, Wal-Mart Stores Inc., and the U.S. Department of Defense grew so enamored of the prospects for this technology that they told their contractors and suppliers to place RFID tags on items by January 2005 or risk losing their massive contracts.
These mandates went unheeded, or at least failed to engender the desired results. Only five Wal-Mart distribution centers have been RFID-enabled, seven fewer than the retailer had initially planned. And after suppliers complained that the tags were too expensive to purchase and the technology was balky, Wal-Mart and the Pentagon relaxed their directives so that now only the largest suppliers are required to adopt RFID.
But if RFID is not quite the behemoth it was initially predicted to be, it is nonetheless proving itself effective in smaller-scale, closed-loop applications, which is boosting its prospects again. According to IDtechEx Inc., an RFID industry analyst, in 2008 the value of the entire RFID market will reach US$5.3 billion, up from $4.9 billion the year before. And the Institute of Electrical and Electronics Engineers estimates that the market will grow to over $25 billion by 2017.
RFID’s renewed popularity has been spurred on by recent applications:
Land Rover Group Ltd. implemented RFID in some of its factories to keep track of vehicles as they leave the assembly line for testing and refinement. This system reduced the labor costs involved in looking for “lost” vehicles, assured faster order-to-cash cycles, and decreased inventory carrying expenses. Land Rover realized a full return on investment within nine months.
Hong Kong International Airport, which handles nearly 50 million passengers and 4 million tons of cargo a year, has installed an RFID system to monitor baggage within the facility from the time the passenger gives a bag to the clerk to the moment it is placed in the belly of a plane. The International Air Transport Association (IATA) says that RFID baggage handling systems are correct nearly 99 percent of the time, whereas bar code readers have only an 80 to 90 percent accuracy rate. The IATA says that full RFID implementation in airports could generate as much as $760 million in industry savings per year.
Beginning in 2006, Gillette Company placed RFID tags on all of the cases and pallets of its new Fusion razor that were shipped to 400 retailers with RFID readers in their storage facilities. When the databank showed the products had reached a store’s back room but were not placed on shelves for sale in a timely manner, Gillette would call and request that the product be moved out quickly. With this strategy, Gillette says, Fusion razors are placed on store shelves 90 percent faster than they were before; the company predicts a 25 percent return on its RFID investment by 2016.
For more widespread use, however, the technology must overcome some of the challenges that slowed its initial development. The cost of the nonreusable tags — an average of 25 cents each — is one barrier, especially for smaller manufacturers and retailers. That’s a high price to try to pass along to customers. But the price has been coming down quickly: The per-tag cost for the least expensive RFID tags fell to 15 cents last year from $1 in 2000, according to medical market researcher Kalorama Information. And Kovio Inc., an RFID startup, claims that it has developed a technology that will soon lead to penny-a-piece tags.
Reliability is another potential obstacle. In the past, some RFID readers haven’t been able to interpret all of the tags on a pallet of goods. In fact, a 2004 New York Times article said that Wal-Mart estimated the reading rate of all tags on merchandise received in its stores was only about 60 percent. That’s a concern because it means that some RFID systems will not be able to detect whether a box has been stolen from the middle of a pallet, defeating one of the primary purposes of an RFID network — to keep track of products so closely that theft becomes almost impossible. Mark Roberti, editor of RFID Journal, argues that being able to read at least one tag on a pallet tells the system that the items have arrived and that in itself is valuable. Nonetheless, to improve product tracking, companies like Mojix Inc. are designing position-based systems that indicate, through external tag positioning, whether products from a shrink-wrapped pallet have been pilfered. With this approach, if the shrink-wrap on the outside of a pallet has shifted because of a missing item within, the reader would detect the tag’s change in position and alert warehouse personnel that someone may have tampered with the contents.
Still believing that the technology has a future in large network application, Wal-Mart and the Pentagon have recently restated their support for RFID. In January, Wal-Mart reportedly sent letters to certain large suppliers warning that the retailer would soon institute fines of $2 to $3 per pallet for failing to place RFID tags on shipments to its Sam’s Club distribution center in Texas. In February, the Department of Defense said that its full rollout of RFID would be completed by 2015.
Between now and then, however, RFID will be far from ubiquitous. But for companies that hope to tackle specific operational problems in relatively closed or manageable environments, like a factory or a small logistics network, the returns from this technology could easily make moot any disappointment that RFID hasn’t yet become what people predicted it would be a decade ago.
Jeffrey Rothfeder is a senior editor at strategy+business and a former editor at Bloomberg News, Business Week, and Time Inc. His latest book is McIlhenny’s Gold: How a Louisiana Family Built the Tabasco Empire (Collins, 2007).
Also contributing to this article was Gwen Moran.