The Business Case for RFID

Radio Frequency Identification is far from new. The earliest traces of RFID could be traced back to World War II in the form of Identify Friend or Foe systems. Even with its nearly sixty years of history, RFID has emerged in recent years as one technology that has the potential to become disruptive in the same way that computers and the internet has transformed life, society and business. This paper will examine why this is so and will try to answer how RFID will impact business. The paper will ask why RFID has had an emergence in recent years, the drivers for its development, the forces for its adoption and the roadblocks to its success.

RFID Technology

At its most basic, RFID can be imagined as a replacement for barcode technology. While barcodes are read by a laser beam shining onto a barcode pattern, RFID tags are read using radio waves. The implication is that to read an object tagged with RFID, there is no need for line of sight. Additionally, many RFID items can be read at the same time.

The basic RFID system hardware consists of two parts: the interrogator and the tag. The tag is composed of a microchip and an antenna and is attached to objects to be tracked by the RFID system. RFID tags can be battery powered or not, obtaining all their energy from the electromagnetic field emitted by the interrogator. The former are referred to as active tags while the latter are referred to as passive tags. The microchip in the RFID tag contains information about the object it is tagging, usually involving an EPC (Electronic Product Code number), similar to a UPC. Aside from the EPC, the microchip can carry other information like the product’s name, expiry date, manufacturing source, time in inventory and other pieces of information which the RFID system operator might desire to see (Gunther, Kubach and Kletti, 2008).

The interrogator is responsible for gathering information from the tags. A single interrogator can only read tags within a limited range – this would be the interrogator’s area of coverage. Moreover, in practical RFID systems, there are usually more than one interrogator deployments. Interrogators could be placed in points of sale, in warehouse entry and exit points, along baggage handling routes, and in forklifts. Aside from having multiple deployments, these interrogators are usually connected to some form of IT infrastructure. It is this IT backend which is responsible for enabling the features of the RFID System (Gunther, Kubach and Kletti, 2008).

RFID Business Applications

It was previously mentioned that RFID acts as a wireless barcode. An RFID tag acts like a barcode which does not need line of sight, like a barcode which , together with all other barcodes in its pallet, can be read simultaneously.

One immediate application of RFID would clearly be retail. Primitive RFID systems have been used to prevent theft in stores. With this modern RFID technology, RFID tags and readers can now go beyond preventing inventory loss, instead allowing wireless checkout of items. It has the potential of eliminating the check out queue, allowing customers to simply load the items in their cart and directly going to their vehicles as RFID interrogators study the contents of their shopping and proceed to make the appropriate charges.

In these cases, RFID is used as a value added service to the consumer. The RFID deployment has been made with the customer in mind, using the benefits of RFID to provide an easier purchasing experience for the customer. The business benefit would be in any additional spending by their clientele thanks to the value added service offered by RFID.

Another major feature for RFID would be to increase supply chain visibility. With RFID interrogators installed in critical places and RFID tags on a company’s inventory, a company can keep track of the movement of their inventory through their infrastructure. For a retailer, this will allow the manager to know which shelves are running low, which products are running out in inventory, which stocks have been languishing in inventory the longest, which products are about to expire. Additionally, this could be extended beyond the corporate borders. Instead of simply keeping track of where inventory is within the company, integrating the RFID IT infrastructure of the suppliers, distributors and retailers allow them to keep track of materials from the supplier down to the customer. Real-time information on the status and location of stocks would help immensely in scheduling of shipping from suppliers to the distributors to the retailers (Gunther, Kubach and Kletti, 2008).

The benefits of RFID to the consumer goes beyond simple queue less checkout, pervasive information from the RFID tags would allow companies to track their products long after these products have left their store shelves. This tracking can aid companies in diagnosing product faults at the customer end. Information stored in the tags can help companies in implementing product recalls, troubleshooting hardware, or aid the verification of warranty and insurance claims (Gunther, Kubach and Kletti, 2008).

Drivers for Adoption

One major driver for adoption has been the creation of an international standard for RFID. In 2006, EPC Global, a multinational conglomeration of companies invested in RFID released the Gen 2 protocol. This protocol specified a standard for RFID tag and reader operations. This standardization gave RFID manufacturers from all around the world to build their RFID tags and interrogators to a common spec. Moreover, the standardization has given potential RFID customers a sense of security as it guarantees that tags and interrogators made by one manufacturer can work with tags and interrogators from any other manufacturer.

It is clear how standardization is driving adoption. With a definite RFID standard, it is now possible to have large scale RFID deployments. Companies whose RFID tagged products shipped to other companies can be sure that the information coded in those tags will be decoded correctly at their destination. The standardization enabled the possibility of a large scale item based information system which can cross across corporate and even international borders.

Lastly, the EPC standard also prevents the development of monopolies in RFID equipment. With an openly defined standard, any corporation can enter the market and offer competing products. The effect of this would be to drive costs down, a much more preferred scenario compared to having a proprietary and private RFID protocol. Of special importance has been the large drop in costs of the RFID tags. The cheaper costs of tags would allow large scale RFID operations to become economically feasible. In 2007, a single RFID pallet tag costs 10 cents a large drop from 1999 when a single tag cost 10$ apiece (Sullivan, 2007).

Another driver for adoption has been RFID mandates. In 2004, US retail giant Wal-Mart announced that it will be requiring its top 100 suppliers to ship their pallets tagged with RFID. This has been a measure to improve the supply chain visibility in Wal-Mart’s operations. Similar mandates have been issued by other entities such as the US Department of Defense.

Real Life Deployments

The effectiveness of an RFID installation could hardly be questioned. As a result of Wal-Mart’s aggressive RFID program, the company has announced 16% reduction in product stock-outs. Moreover, Wal-Mart stores which were RFID enabled were 63% more effective in replenishing stocks. This is because with the visibility brought by RFID, managers would be in a better position to know the real time status of their shelves, their stock and their inventory. This result has been echoed by a University of Arkansas study which reported RFID enabled pilot stores “statistically outperformed” non RFID enabled stores. As a testament to the benefits of Wal-Mart’s supply chain visibility infrastructure, manual orders from suppliers dropped by 10% for RFID enabled stores (Sullivan, 2005). The benefit to RFID has also been felt by Wal-Mart supplier Procter & Gamble. The RFID operations of Procter & Gamble has been reported by the company to help them put the right product at the right place at the right time. This feature has been especially useful in time based promotions. The increased efficiency in operations has also allowed Procter & Gamble to fully recuperate its RFID investment (Songini, 2007).

While Wal-Mart and Procter & Gamble has encountered success in their RFID programs, there has been criticisms of Wal-Mart’s RFID program. For one, there has been criticisms that Wal-Mart’s RFID mandate only has a positive ROI for Wal-Mart and its larger suppliers. Smaller suppliers would have to find their own ROI. This fact combined with the RFID mandate from Wal-Mart makes RFID implementation seem like a dictatorial order instead of a natural business decision (Fleishman, 2007). Critics say that instead of an ordered mandate, businesses should be create their RFID systems on their own accord from the benefits which they perceive they will get from the implementation (Faber, 2006).

Some reasons for the lack of ROI for Wal-Mart suppliers has been the lack of integration with their existing inventory, logistics and transportation systems (Fleishman, 2007). As a technology, widespread implementation of RFID is essential to its success, both as a business success and as a technological success. RFID’s value as a source of pervasive information will only be viable as long as there is a critical mass of RFID systems working together. This is easy to achieve for Wal-Mart and their large suppliers due to their size. Thus it can be said that RFID technology benefits from the network effect. This means that the usefulness of RFID goes up as the more people (or businesses) use it. This is akin to the telephone which is useless with only a few installations but is critically important in a connected nation. There is therefore a need to create a complete RFID “ecosystem”, not only within the company but also with other businesses that the company does business with. This ecosystem would include integration of RFID into the entire IT infrastructure, to maximize the information use from the system. This ecosystem would also need to integrate RFID based information not only from one company but from multiple companies. An open approach to information is essential for a successful rollout of RFID across industries (Faber, 2006).

Conclusion

As a technology, what RFID does is to read tags wirelessly and simultaneously. But as a piece of the IT infrastructure, what RFID does is to allow pervasive gathering of information from basic objects. RFID, if employed at a large enough deployment, has the potential to bring a lot of information on everyday pedestrian objects into the IT system. RFID is not a simple replacement for a barcode reader, it is a giant information gateway.

Any business case for RFID would need to revolve around monetizing that large amount of information. As with any IT project, the benefits of the project should be clear from the very beginning. For RFID, the questions should be asked, how will this information be used? What business processes can be aided by RFID information? And lastly, is the organization doing enough to make the RFID implementation successful? Is the RFID “ecosystem” comprehensive enough?

It is hard to tell if it is already the right time for RFID. It is apparent that RFID’s benefits increase as its base of implementation gets wider. There is a question though of when is that base of implementation wide enough to make a successful business case for a particular company. These things should be answered using conventional financial analysis, carefully weighing RFID’s costs against its benefits.

Lastly, new uses for RFID should never be discounted. The massive amount of information has been used so far to augment traditional business processes such as inventory, supply chain management and stock control. There is still the possibility of new, more exciting, more profitable,  applications for RFID emerging as the adoption increases and the cost of tags and interrogators drop down to insignificant levels.

Bibliography

Faber, P. (October 31, 2006). RFID Strategy – RFID and the “Network Effect”. In Industry Week. Retrieved September 3, 2008 from <http://www.industryweek.com/ReadArticle.aspx?ArticleID=12965&SectionID=2>

Fleishman, G. (February 15, 2007). Hopes Pinned on Walmart’s RFID Rollout Recede. In WiFi Networking News. Retrieved September 3, 2008 from http://wifinetnews.com/archives/007417.html

Gunther, O., Klettl, W. & Kubach, U. (2008) RFID in Manufacturing. Berlin: Springer-Verlag

Songini, M. (February 26, 2007). Procter & Gamble: Wal-Mart RFID Effort Effective. In Computer World. Retrieved September 3, 2008 from <http://www.computerworld.com/action/article.do?command=viewArticleBasic&articleId=284160>

Sullivan, L. (October 14, 2005). Wal-Mart RFID Trial shows 16% reduction in Product stock-outs. In Information Week. Retrieved September 3, 2008 from <http://www.informationweek.com/news/mobility/RFID/showArticle.jhtml?articleID=172301246>