Playing tag

Retailers explore wireless labels for tracking merchandise and increasing sales opportunities.

Wireless asset-tracking systems are causing a stir throughout the ranks of traditionally IT-conservative retailers.

Wal-Mart is conducting field trials of wireless-enabled item labels that are embedded with tiny transmitters – technology that Gap already has piloted and Prada is parading in its flagship New York store. Other big-name retailers testing newfangled electronic tags include Ahold, Carrefour, The Home Depot, Marks & Spencer and Target.

These retailers are trying out systems that are based on radio frequency identification (RFID) technology, which transfers item-identification data between wireless transponders and readers.

RFID has been around for decades, a descendent of technology used during World War II to identify aircraft. Today, businesses use RFID gear to power toll-collection systems on highways, tag luggage at airports and track livestock.

In a retail setting, RFID tags function like bar codes on steroids. Item tags embedded with tiny chips and antennas store a unique identification number, called an electronic product code (ePC). RFID readers – which vary in format from handheld scanners to stationary tunnel-like devices that vary in size – transmit signals to activate the RFID tags and extract ePC data. When linked to management software, each ePC reveals characteristics about the item such as manufacturer, size and color. It also contains supply-chain information such as when the item was shipped, from where and its destination.

Unlike bar codes, multiple RFID tags can be read simultaneously and without direct contact. RFID tags also can identify individual items – a pair of pants as opposed to a style of pants, for example.

Among retailers, the allure of RFID is its potential to provide a real-time view of operations and reduce manual receiving and inventory management processes. In theory, retailers could track RFID-tagged products as they move from distribution centers to store rooms to store shelves. Shelf-mounted readers could alert managers when stock is getting low, or help sales clerks locate misplaced items.

“Basically, total asset visibility is what the goal is,” says Michael Liard, senior analyst at research firm Venture Development.

The main benefit of RFID is visibility, agrees Geoff O’Neill, head of central logistics for new sales channels at department store chain Woolworths. The British retailer is testing RFID gear and software from Savi Technology to track palette movements. Today, it has 16,000 RFID tags in circulation and 28 fixed readers in its distribution center and in two of its 808 stores. 

Combined with global positioning system (GPS) tools for tracking delivery vehicles, a wireless WAN and the company’s existing warehouse management systems, mobile RFID equipment ensures the right merchandise is delivered to the right stores, he says.

“Visibility of stock and its whereabouts reduces the opportunity for theft of merchandise and distribution assets within our supply chain,” O’Neill says. “Moreover, by ensuring that deliveries are complete and to the intended store we can run our business on lower inventories and offer better product availability to our customers.”

He cautions that RFID is no magic bullet. “What we have learned during this project is that RFID is only a single component of a complex, integrated solution to a business problem: improving asset visibility,” O’Neill says. “Through this project, and many others, RFID is proving itself to be robust enough for commercial application – but that it is only one piece of the jigsaw [puzzle].”

Market momentum

Interest in deploying RFID technology in the retail supply chain has increased significantly over the past few years, says Sanjay Sarma, chairman of research at Auto-ID Center, an industry-funded RFID research program at the Massachusetts Institute of Technology. The Auto-ID Center is partnering with the Uniform Code Council (UCC) and EAN International to form an organization called AutoID, which will be dedicated to creating and commercializing global standards for RFID tags.

Spurring interest in RFID is the emergence of inexpensive tags, network availability and the beginnings of standards, Sarma says. Over the past few years, vendors have worked to make RFID tags less expensive by stripping down the information stored on the tag and relying on the network to distribute information, he says.

“Taking memory off the tag makes the chip in the tag much smaller and therefore potentially makes the tag itself much more inexpensive,” Sarma says. “All the chip then stores is a unique number, and instead you move the data on the network.”

Fueled in part by falling prices, sales of RFID gear are growing. According to Venture Development, global shipments of RFID systems – including hardware, software and services – reached $965 million in 2002, up 8% annually since 2000. The firm expects the market to reach $2.7 billion by 2007.

While active deployments of RFID in retail settings are rare, many retailers are eyeing the technology.

At an AMR Research retail and consumer goods conference in April, only 10% of 250 attending executives said their companies are using or piloting systems enabled by RFID technology. However, 63% reported that their companies were evaluating such systems.

Jeff Carter, director of operations at online retailer BackcountryStore.com of Heber City, Utah, says his company isn’t piloting or rolling out RFID. But the company is interested in the technology’s potential to help it reduce loss and improve inventory processes through more accurate and readily available data. “We’re tracking its progress and applications,” Carter says.

Similarly, Bill Finefield is paying attention to RFID, but isn’t ready to deploy it. “It is something on our radar screen,” says Finefield, who is CIO of Navy Exchange Service Command, a Virginia Beach, Va., contractor that runs 112 stores serving U.S. Navy personnel around the globe. Finefield cites better inventory tracking, fewer manual processes in the distribution center and reduced product losses as potential incentives.

Losses incurred through process errors, damage or theft – known as shrinkage – plague retailers. U.S. retailers lost $31.3 billion in 2002 to inventory shrinkage, according to the University of Florida’s National Retail Security Survey. Of that, $15 billion is attributed to employee theft; $10 billion to shoplifting; $4.7 billion to administrative and paper errors; and $1.6 billion to vendor fraud.

Similarly, empty shelves hamper retail sales. Out-of-stock conditions average 8.3% and cause a typical retailer to lose about 4% of sales, according to a joint study by Grocery Manufacturers of America, Food Marketing Institute and CIES – The Food Business Forum.

RFID can help solve these problems, Sarma says. “If your shelf is empty and you’re turning away customers unfulfilled, you can prevent that. If you have shrinkage, you can reduce that. If you have quality control problems, you can detect that,” he says.

Another factor driving retailers to consider RFID is a pending change to bar-code standards. Effective Jan. 1, 2005, the UCC will require that all North American retailers shift from 12-digit to 13-digit Universal Product Code (UPC) bar codes. This migration will make retailers modify any applications and processes that rely on the 12-digit standard, experts say.

“That’s a Y2K effort. For every application file, you have to look for a UPC field and expand it,” says Peter Abell, research director at AMR Research. Abell says that if companies are going to undertake this effort anyway, it might make sense to consider building in support for a 28-digit ePC field. “Our recommendation has been that if they’re going to do it once, why not expand the data field to 28 digits?” Abell says.

In addition to internal drivers, outside sources are encouraging retailers to consider RFID rollouts.

Government sponsorship is contributing to Woolworths’ RFID pilot, for example. The project is funded in part through the Chipping of Goods Initiative, a U.K. government effort to encourage companies to use RFID to reduce theft.

A vendor was behind Movie Gallery’s decision to pilot RFID. When Sensormatic wanted to develop RFID products for retailers, the video rental company agreed to provide a setting for testing the new gear, says Richard Langford, senior vice president and CIO at Movie Gallery in Dothan, Ala.

The pilot covers two of the retailer’s 1,900 stores. In the first of three phases, Movie Gallery embedded RFID scanners in its drop-off boxes to automate the video-return process. The second phase, which is nearing completion, involves scanning Movie Gallery’s monthly in-store inventory.

The retailer’s existing system requires store personnel to scan each item’s bar code. With a handheld RFID reader, personnel can scan multiple items at once without having to establish line-of-sight between the reader and RFID tags. “It typically takes about six hours to complete full-scan inventory of a store. With RFID, we’re able to cut that down to two hours,” Langford says.

Phase 3 of Movie Gallery’s pilot will involve video check-out systems that deactivate security sensors built into the RFID tags once the customer pays for the movie rental. “In this scenario, you could deactivate the tags and have them automatically reactivated on check-in through the drop-box device,” Langford says. “It has the potential of simplifying things for the consumer.”

RFID roadblocks

For all its potential, RFID still faces obstacles. One is cost.

RFID tag prices have been shrinking from $1 or more a few years ago to the 20-cent range they are at today, Sarma says. But getting to the hyped nickel-a-tag level will be tough, he says. “There’s a chicken-and-egg problem,” Sarma says. If vendors don’t have volumes, they can’t really invest enough to get their prices down. And if they don’t get their prices down, they’re not going to get volume.”

RFID readers also carry high price tags. RFID scanners cost about 10 times more than traditional bar code scanners, Langford says. For Movie Gallery, a constantly circulating inventory can help justify the elevated gear costs. “The tags are kind of expensive and to just put them on sell-through items doesn’t make any sense,” Langford says. “But with rentals, where you’re processing the same stuff over and over again, you can cost-justify RFID because you’re basically reusing the tag.”

In addition to the cost of new gear, retailers have to consider the cost of integrating RFID systems with their existing systems to leverage the data collection capabilities of RFID, observers say.

For example, retailers have to provide a means for distributing data. “In order to get to the information about the product, you are required to have a network connection,” AMR’s Abell says. But establishing persistent network connections across all retail sites is no easy task, he says.

Processing all the data generated by RFID readers also poses a challenge. “RFID readers and tags generate very detailed information – information at a level of detail that most enterprise systems today don’t deal with,” Sarma says.

For this purpose Auto-ID Center has developed middleware called Savant. The software collects data from readers then cleanses, sorts and prioritizes it so that enterprise systems don’t have to deal with a flood of information. “It lets you handle huge volumes of data without bringing down the network,” Sarma says. “You can take the data, deal with it locally, and send only the important data up the food chain.”

Another barrier is interoperability. Tag incompatibilities exist because laws regulating radio frequency differ from country to country, Abell says.

On the standards front, Auto-ID Center is working with groups such as UCC and EAN International to propel the adoption of RFID and ePC standards. Vendors, too, are tackling the problem. MIT spinout ThingMagic has developed software for RFID readers that can handle multiple frequencies and power levels, Abell says.

Technology concerns aside, public acceptance of RFID shouldn’t be taken for granted, observers say.

Italian retailer Benetton found itself in a publicity nightmare earlier this year after news that it would be tagging its clothing with RFID sensors spawned boycotts from consumers concerned that sensors could track their movements.

Retailers have to be very careful about how they position RFID initiatives, says Jeff Woods, principal analyst at Gartner. “There are ways to protect people’s privacy, and there are ways to protect security. But it’s hard work, and it’s something that there aren’t really good, easy answers for.”

Auto-ID Center has devised privacy guidelines that call for retailers to inform consumers when RFID tags are being used and give consumers the option to have those tags deactivated before leaving the store, Sarma says.

Education is important, he adds. People need to understand what kind of information RFID tags contain – and the physical limitations of RFID systems – so that privacy issues aren’t overstated, Sarma says. “The tags don’t know who you are; they don’t have any private information of yours. They just have a number on them,” Sarma says. The range of RFID systems also is limited. “It’s certainly impossible today for someone to drive by my house in a truck and read all the tags in my house,” he says.

For RFID to move from pilot stage to production requires retailers to think creatively, Gartner’s Woods says. “One of the big challenges right now is that people are barking up the wrong tree with RFID,” he says. “They’re trying to solve problems that bar codes have already solved in a lot of cases. And it doesn’t make any sense.”

For example, the idea that RFID will give retailers better insight into what gets sold at their stores isn’t very compelling, because point-of-sale data exists already, Woods says. While RFID data quality can be better than POS data quality, he’s skeptical that a marginal increase in data quality is enough to justify the expense.

On the other hand, if RFID could be used to build new automated check-out systems that eliminate POS systems – and the labor required to run them – retailers would have a compelling business case, Woods says. “That is the kind of radical business redesign that’s going to be required to justify something that’s as expensive as RFID is,” he says.

In the meantime, pilot projects will remain the norm, experts say.

“There’s some great stuff that can be done with RFID technology. It’s just there are a lot of issues that need to be addressed in order for the market to move forward,” Venture Development’s Liard says. “Maybe in 2004 and 2005, we’re going to start seeing some real rollouts.”