RFID Reality Check

Radio frequency identification (RFID) technologies are being widely touted as the next major breakthrough in inventory management. Despite the rosy projections, distributors should be wary of the hype given the uncertainty about technological feasibility, costs and the willingness of supply chain partners to embrace this technology.

Companies in many industries are experimenting with RFID for supply-chain applications. Pallets, cases or even individual items can be uniquely identified and tracked as they are manufactured, transported, purchased, used or consumed. Inventory quantities and locations can be precisely pinpointed, making it possible for products to pass through the entire supply chain without ever being scanned.

In theory, RFID will improve a distributor's internal processes. It could eliminate the need to scan shipments in the warehouse receiving area and enable effective inventory management at a customer location. Nevertheless, applications of RFID in the distribution industry are much more limited than early projections imply.

Many analysts point to Wal-Mart's Jan. 1, 2005 deadline for its top 100 suppliers to embed RFID tags in all cases and pallets. However, only a handful of distributors supply Wal-Mart following the company's 1990 announcement that it intended to deal directly with its vendors. Similarly, few industrial distributors use RFID applications today. We found only one in 20 companies using RFID in a recent Pembroke Consulting/Progressive Distributor magazine survey of industrial distribution executives. RFID will have its biggest impact when security and product integrity are crucial.

For example, concerns about counterfeiting are spurring item-level RFID initiatives in the pharmaceutical industry, while security concerns will affect suppliers to the U.S. Department of Defense. In fact, the director of logistics at the U.S. Defense Logistics Agency (DLA) recently stated that 97 percent of Department of Defense pallets being shipped to Iraq have RFID tags.Other significant barriers to the technology's rapid adoption still remain:

• Costs will remain prohibitive without widespread adoption

  Volumes will need to soar quickly to 30 billion tags each year before prices fall to 5 cents for a basic tag. As a frame of reference, Wal-Mart's suppliers are expected to require 8 billion tags annually by 2006.
• The technology has not been perfected

  Accuracy rates are still below bar codes, which keep inventory accuracy above 98.5 percent.

• Privacy concerns

  Privacy advocates oppose the introduction of item-level tags on consumer products because the technology could allow individual buyers to be tracked after purchase.

Distributors should consider RFID when planning future technology investments, yet be wary of inflated claims, overblown projections and unrealistic expectations. RFID is not a breakthrough technology but rather the innovative application of an older technology. RFID enables cost-reductions or improvements to existing ways of doing business but does not fundamentally change the basic structure, functioning, or purpose of a supply chain.

Unless the productivity benefits of RFID are overwhelming, it will be difficult for small and medium-size distributors to invest large sums merely to make their customers and suppliers more efficient. One firm estimates that a typical consumer packaged goods manufacturer will have to spend between $13 million and $23 million to meet Wal-Mart's RFID tagging requirements. Distributors with ties to powerful buyers experimenting with RFID need to make sure suppliers and customers share the costs and benefits of this new technology. Distributors should also consider the downside of providing their suppliers and customers with perfect information about every shipment in real-time.

The distribution industry has been noticeably absent from public debates on RFID. Trade associations should explore the potential impact on their members and the challenges to the role of wholesale distribution, given the novel information generated by RFID systems.

While many exciting possibilities exist with RFID, distributors should remember Arthur C. Clarke's adage: “We tend to overestimate the effect of a technology in the short run and underestimate the effect in the long run.”

The author is the founder and president of Pembroke Consulting. He can be reached at (215) 523-5700 or by e-mail at [email protected].