TAKING STOCK
Radio-frequency ID tags are set to smooth supply chains - and create savings.
By Yasmin Ghahremani

Household products giant Procter & Gamble (P&G) has a vision for the future: when customers hit the supermarket on a busy Saturday looking for Tide detergent, they will never be disappointed. That's because each box will carry a unique identity tag containing a microchip and a radio antenna. Every time someone takes a box from the shelf, the tag will signal a shelf scanner, which in turn will tell a back-end computer system. When inventories fall below a certain level, the system will alert shop staff and, voila, the shelves should stay perpetually stocked. The system will even be able to adjust the alert level for heavier or lighter shopping days. "We've realized that our current supply chain just isn't meeting our consumers' needs," says Jeannie Tharrington, spokesperson for P&G in the US. "So we're trying to implement new technologies to do that, and RFID is one of them."

P&G's vision may be some time off yet but RFID, or radio-frequency identification, is a technology that's showing genuine possibility now. Touted as the backbone for an "internet of things," RFID promises to revolutionize the way we sell and buy goods, reducing inventories, streamlining supply chains and making sure that that box of Tide is always there when you want it. Companies like DHL, and UK-based Marks & Spencer and Tesco are already implementing RFID on a limited scale, and Wal-Mart is demanding its suppliers get on board quick. "The savings are significant enough that this is something that should be a must-do," says Josef Mueller, a partner in the products operating group at Accenture in Hong Kong. "It's just a question of whether you want to do something today."

The technology is alluring. Consider RFID as the turbo-charged successor to the bar code. Where bar codes require close-range, individual scanning, reusable RFID tags can be read whole shopping-cart loads at a time, at a distance of ten to 100 meters, depending on whether they contain batteries. What's more, the information that can be loaded on RFID tags blows bar codes away. It's not just more plentiful, it's dynamic. Instead of just telling you a product's general category - "I am a pair of size nine blue Nike trainers," - an RFID tag can give you the life history of that particular pair of shoes, from where they were produced, to how long they've been on the shelf. "Giving every product a serial number and then being able to tell where it is, is pretty exciting," says Mark Hathaway, president of the US division of a Japanese RFID solution vendor called Leading Information Technology Institute (LITI). "I can't imagine a more granular level of tracking."

RFID has actually been around since World War II, when England used it to distinguish its own airplanes from the enemy's. Since then, the technology has been quietly spreading. Today it helps track everything from livestock and pets, to tanks and rations for US soldiers in Iraq. It also powers cashless payment systems, such as those used on toll roads. But until recently, the cost of deploying RFID technology was still too high for widespread business use.

That's changing. Falling prices have caught the attention of industry giants, who are leading the RFID charge. In June, Wal-Mart told its top 100 vendors they must put RFID tags on pallets and cases of goods by January 2005. It expects tens of thousands more suppliers to follow suit a year later. Asia, which has so far lagged behind the US and Europe in RFID adoption, can no longer be indifferent. "Think of where the top 100 suppliers for Wal-Mart are," says Accenture's Mueller. "No one knows for sure exactly who they all are but a lot of them are going to be in Asia."

Wal-Mart certainly isn't the only party who stands to gain. Once the kinks are ironed out - and there are sure to be many - companies all along the supply chain could benefit from RFID. Automatic inventory monitoring at key choke points such as loading docks, receiving points, distribution centers, stockrooms and store shelves could replace the slow, error-prone human recording of shipments. Accenture estimates that RFID could help lower distribution labor costs by up to 40 percent. Grey market sales and shrinkage - theft, loss, or damage, which costs the consumer goods industry alone billions of dollars a year - could also be cut dramatically. And inventory levels could be slashed, saving large companies millions. "To guard against stock outages, we keep 65 days worth of inventory in warehouses, at a cost of US$3 billion a year," says P&G's Tharrington. "If we could decrease that amount through efficiencies then we'd see real benefits."

All sorts of industries are showing interest. Hewlett-Packard (HP) is working with RFID vendors in the Asia Pacific region to come up with ways to reduce wastage in the fresh food industry. Fruit and vegetable producers lose up to 30 percent of their inventory to wastage because unpredictable yields mean food ends up rotting on docks or elsewhere in transit. HP's system utilizes RFID tags at the farm, block and lot levels. Farmers and produce pickers carry hand-held devices with RFID readers, scanning the identity of the fruit crop and entering specific details such as the maturity of the produce, the yield from each plant and any diseases detected. This information feeds into a back-end system that calculates the yield for each area of the farm, making planning and forecasting much more accurate. The system also tracks produce along the supply chain, sending out alerts whenever the food is moved out of a refrigerated environment. Although he declined to give specific figures, Des Yee, principal consultant for HP's Wireless Solutions Practice, says the investment is proving worthwhile for large producers. "Especially when you consider that 30 percent of their goods could perish because they're sitting on wharves or they don't have adequate freezer rooms," Yee explains. "If wastage is minimized and we can fulfill the market demands, then ROI is good."

Most businesses considering RFID, however, are not ready for primetime yet. A number of obstacles remain. Like cost. Passive tag prices still hover around 30 cents, well above the five-cent mark considered attractive. Readers run from US$1,000-US$2,500. Those prices will fall once demand reaches critical mass, but that still leaves the costs of revamping operations, training people and managing change. "Those costs will be the biggest," says Accenture's Mueller. "For companies who don't have flexible infrastructure, it won't be easy."

Many companies are also holding off on full-scale RFID deployments until industry standards are in place. The Auto-ID Center in Massachusetts, a group of 103 companies and five universities from around the world, has been releasing various specifications and standards throughout the year, and hopes to finish the rest of them by the end of the year. The idea is to make sure that different readers, tags and software can all talk to each other.

But then there are still technical interference issues. Radio waves don't travel well through liquids or metals, so manufacturers of things like shampoos or canned goods have to find ways to place tags so they can be read. Choosing which radio frequency to use is a consideration as well. Some governments ban certain frequencies for commercial purposes. More importantly, phones or other wireless devices in factories or warehouses may interfere with RFID transmission. "Countries are moving quickly to allow certain frequencies to be used, but if it's conflicting with your infrastructure it doesn't matter," says Mueller. "Even for your pilot you need to understand what else is operating in that space and consider what wireless devices you allow visitors to bring in."

Finally, privacy activists are trying to put a brake on RFID. They're concerned that scenes like those from the movie Minority Report, in which zealous marketers can detect what clothes you're wearing and then push personalized ads or promotions at you, aren't that far from the truth. In fact, Italian garment maker Benetton had to back off of its RFID plans under threat of a consumer boycott. Industry experts agree that some of those fears are founded. "A lot of it will be abused, there's no doubt about it," says Mark Manners, director of mobility and Cooltown innovation at HP. "Privacy policies need to be very robust." Ideas under consideration such as "kill codes" for tags after checkout would help ease those concerns.

With all these hurdles, and a lingering hangover from the dotcom bomb, most companies are approaching RFID with caution. Martin Reynolds, group vice president at Gartner, thinks that's wise. "I would suggest trying to pilot it on high value items, but certainly not through the whole store," he says. "The costs are too high and the returns are not there yet." Still, this is the time to test the waters. The day when every product will carry an RFID tag won't arrive for another five to ten years - if ever. But container-, pallet-, and case-level usage will hit its stride within the next two years. And after that, if RFID lives up to its promise, it could be a whole new world.