From The McKinsey Quarterly:
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The 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.
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. |
