For fast-moving consumer goods (FMCG) retailers, an enterprise-wide investment in radio frequency identification technology based on case and pallet tagging will not generate enough revenue to significantly add to the bottom line.
The best justification for the multimillion-pound expense is to lay the foundation for creating and acting on real-time demand signals that the technology will create.
Retailers are investigatingradio frequency identification, spurred on by high-profile pilots from companies such as Wal-Mart, Target, and Metro AG and supplier promises of directreturn on investment opportunities and improved operationalefficiency.
AMR Research developed a model to outline the return retailers can expect as they move from pilot project investments to an enterprise-wide RFID infrastructure. Based on a three-year, company-wide roll-out for an FMCG retailer with £5bn in annual sales that embraces case and pallet tagging, our analysis demonstrated that the retailer would not generate enough profit in a reasonable, multi-year timeframe to cover the cost of the investment.
As a result, companies will have to decide if other benefits make the technology worth the expense. Organisations in other retail categories should use this model to help decide where and when an RFID investment may make sense for them.
Although many retailers believe that RFID technology will eventually transform their supply chains and make their operations more efficient, the reality is that even leading retailers have not been able to develop a clear-cut case for moving forward from research investments or pilot projects to an enterprise-wide roll-out of the technology.
Today, RFID systems promise tremendous long-term benefits, but present near-term hurdles. Tags remain too expensive (primarily for suppliers and manufacturers); immature technology - from readers that will not function at forklift and conveyor speeds, to the dearth of RFID data analysis tools - limits the usefulness of the data; and existing business processes, organisational behaviour, and established IT infrastructure must be overhauled to take advantage of the new technology.
With so many obstacles in the path to wide-scale RFID adoption, why are retailers moving forward?
RFID, when combined with integration technologies, promises to deliver real-time demand data from the retailer to the manufacturer. This data can help retailers and manufacturers optimise inventory, reduce logistics costs, and react more quickly to changes in consumer buying patterns. This real-time data will form the foundation for a demand-driven supply network, a key capability for organisations to compete successfully.
Reducing stock shortages
Many retailers have directed technology and resources at the out-of-stock problem for years, but they have only seen minimal improvements and continue to suffer lost sales as impatient customers spend their money with well-stocked competitors.
RFID technology promises to tie tagged goods directly to replenishment systems, eliminating or reducing the industry's 8% average out-of-stock rate - a figure that can jump to 18% when a product is promoted. A true understanding of inventory visibility, both on the shelf and in the backroom, would enable retailers to avoid many stock shortages, or at least mitigate the impact of having insufficient product.
Cutting labour costs
An enterprise-wide RFID infrastructure will rely on automated systems that increase store and distribution centre accuracy and efficiency. By automating these systems, retailers can reduce the number of man hours dedicated to manual shipping, receiving, and inventory activities and redeploy store workers to more high-value, customer-centered functions. The ability to automate these functions is particularly appealing to retailers with high employee turnover.
Keeping pace with Wal-Mart
Wal-Mart's high-profile RFID programme, which began with mandates to its top suppliers taking effect in January 2005, and its historical approach of continuously improving operations and logistics, tends to dominate the discussion of RFID in retail.
Given Wal-Mart's successful track record of gaining operational and financial improvements from new technology and key process changes, many retailers feel they cannot afford to miss out on a solution that an industry leader is aggressively pursuing.
Some retailers are interested in using RFID to improve the shopping experience, thereby increasing sales, improving customer satisfaction and creating a unique brand experience.
For example, a retailer might use strategically placed readers to quickly locate items a shopper is interested in, or develop a "magic mirror" system that allows a shopper to superimpose RFID-tagged clothing over a digital representation of themselves, allowing customers to visually mix and match garments without trying them on.
Although the motivation for experimenting with RFID varies by retailer and industry segment, there is some common rationale surrounding what retailers are not interested in pursuing with RFID, at least in the short term (see box).
Retailers should not expect a return on investment from implementing RFID at the case and pallet level. Although the promise of improved supply chain visibility, deeper data analysis and expanded automation still exists, broad case and pallet-level RFID will not generate profits in the near term.
It will take years of effort, experimentation, and commitment to change technology and culture to gain the maximum value RFID technology can provide.
A number of retailers have chosen to follow a more established and proven approach to obtaining these benefits, using technology such as demand forecasting systems, supplier collaboration tools, and new replenishment and retail planning applications to create both stock improvements and enhanced customer satisfaction.
In the end, it will be the combination of these activities that will revolutionise retail supply chains and in-store performance. RFID technology has the potential, when fully deployed, to enhance the demand, planning and supplier collaboration efforts critical to effective retailing.
What retailers are not doing with RFID
Retailers want different things from RFID, but what many have in common is what they are not taking on board.
Universal item-level tagging
Most retailers are investigating the impact of case and pallet-level tagging, but there are only a few instances of retailers investigating the more expensive tagging of individual merchandise. Moreover, the concept of store-wide tagging of all products is a decade or more away. To date, only items with relatively high value, such as DVDs, video games, consumer electronics, pharmaceuticals and high-end apparel, are seen as viable targets for individual tagging.
Electronic proof of delivery
No retailers are deploying RFID tag reading in distribution centres and stores as proof of delivery, despite the fact that several manufacturers have said this single use of RFID could justify their investment.
Delivering supplier edicts
Although Wal-Mart's second RFID mandate is approaching - one that has an impact on a second tier or smaller suppliers - most retailers are taking a more cautious, collaborative approach to their partners. This group of fast followers is exploring RFID, but it is more willing to share detailed business cases and project plans and is more flexible about the stock-keeping unit tagging requirements and roll-out dates.
Scott Langdoc is vice-resident of retail research at AMR Research. Research director Kara Romanow also contributed to this article
This was first published in October 2005