Does Smart tag=Abracadabra? A new tracking technology is being touted by retailing and consumer product companies as the next big thing, but it isn’t ready for prime time.
<<Elmat's take: Smart tags, coupled with hot spots wireless networks, has a sweet spot in container and container ships management rather than in retailing. It is a potential Abracadabra. Smart tag concept here: q-anywhere.net
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Alex Niemeyer, Minsok H. Pak, and Sanjay E. Ramaswamy
The McKinsey Quarterly, 2003 Number 4
Wal-Mart recently announced that it wants its top 100 suppliers, by 2005, to begin fitting their cases and pallets with radio-frequency-identification (RFID) tags—chips that can automatically transmit to a special scanner all of the information about a container’s contents or about individual products. A number of these suppliers are tempted to do more than just affix chips to the goods they ship to Wal-Mart; they are also looking to implement RFID technology more broadly in their organizations in hopes of cutting their own supply chain costs. Retailers and consumer products manufacturers, aware of Wal-Mart’s interest in RFID, have also begun eyeing it as the next supply chain technology to invest in.
Not so fast. At present, RFID can provide positive returns on investment in certain circumstances. However, our analysis of the current benefits (and costs) of the technology indicates that, for most companies, making substantial investments in it now would be premature.
Certainly, the size of RFID tags belies their potential. About as large as a pinhead, they consist of an antenna and a chip that contains an electronic product code (EPC).1 These tags can store more information about a product than bar codes can—not just what it is but also, for example, when and where it was made, where its components come from, and when they might perish. Unlike bar codes, which need line-of-sight contact to be read, RFID tags also act as passive tracking devices, signaling their presence over a radio frequency when they pass within yards of a special scanner. The tags have long been used in high-cost applications such as automated tolling systems and security-ID badges, but recent innovations have caused the price of the tags to plummet and their performance to improve: in 2000, RFID tags cost $1 each; they now cost 25 to 40 cents and are widely expected to cost no more than 5 cents apiece in a few years (exhibit).
The prospect of affordable tags has retailers drooling. If every item in a shop were tagged, an apparel retailer, say, could both improve customer service and combat top-line losses, which are typically 5 to 15 percent of sales. RFID technology could be used to locate mislaid products, to deter theft, and even to offer customers personalized sales pitches through displays mounted in dressing rooms. Ultimately, tags and readers could replace bar codes and checkout labor altogether.
Affordable RFID tags also have enormous implications for the supply chain: since all EPCs are unique, products tagged in factories could be tracked as they moved along the supply chain. The resulting visibility of inventory levels and flows of raw materials could result in large savings. We estimate that a retailer or consumer goods maker using RFID could cut total warehouse labor costs by nearly 3 percent, chiefly through more efficient receiving, shipping, and exception handling. More promising still are the potential effects of RFID on vendor-managed inventory systems. By exchanging the information gleaned from RFID readers over the Internet, a consumer goods maker could manage its own stock replenishment for key customers more efficiently, saving both parties 20 to 40 percent or more in inventory and out-of-stock costs.
But retailers and suppliers alike should cast a gimlet eye over the current state of the technology. The main value of RFID is that it eliminates the need to handle items individually—by allowing, say, distribution centers to receive mixed pallets of goods automatically. But if the tags themselves are not robust, reliable, and tamperproof, the savings evaporate. Tellingly, an October 2002 pilot by the Auto-ID Center found that RFID-tagged pallets failed 3 percent of the time even when double-tagged; only 78 percent of the individually tagged pallets were read accurately.
Companies should avoid fixating on the price of a tag lest they lose sight of the costly upgrades in enterprise-resource-planning (ERP) software that RFID technology requires. For relatively easy tasks, such as measuring inventory levels, simple add-ons might suffice. But tackling more complex applications, including tracking individual items throughout the supply chain, would require ERP upgrades that might cost tens or hundreds of millions of dollars for a large company. Server and network infrastructure would also need fortifying to handle the thousands of additional data transactions per product.
So the watchword, for both retailers and manufacturers of consumer products, is caution. For most retailers, long-term investments in RFID technology are still risky. They should be undertaken only by the small number of industry-dominating companies, such as Wal-Mart, that have the clout to influence suppliers as well as the deep pockets to weather the ups and downs inherent in using a nascent, albeit promising, technology. Wal-Mart’s recent announcements indicate that it plans to proceed slowly, concentrating first on pallet- and case-level tagging to reduce supply-chain-handling and inventory costs.
For consumer products suppliers, a careful examination of existing supply chain characteristics will reveal cases in which a positive return on RFID investments is likely even now, despite the costs. Companies that frequently lose revenues because retailers run out of stock might eliminate the root cause of the trouble through tagging. Gillette, for example, has pioneered the use of RFID tags to reduce both stock shortages and theft, since items such as razor blades are small, pricey, and easily resold on eBay—and thus perfect targets.
Moreover, manufacturers whose products (for instance, automobile tires and pharmaceuticals) reach consumers through a number of channels could use RFID tags to help defray the high cost of rare events such as product recalls by providing third parties with quick access to product information. One medical-device manufacturer we studied uses RFID technology to identify illegal reimports in the gray market.
Going forward, businesses should convert their excitement about the potential of RFID—as with any technology—into a solid business case.
Notes:
Alex Niemeyer is an associate principal in McKinsey’s Miami office, Minsok Pak is a principal in the Seoul office, and Sanjay Ramaswamy is a consultant in the Chicago office.
1The EPC standard was developed by the Auto-ID Center, a partnership founded in 1999 by five leading research universities (anchored by the Massachusetts Institute of Technology) and nearly 100 leading retailers, consumer products makers, and software companies. |
