Two reports tackle fallout of retailer-mandating
The decision of several major retailers, of which Wall-Mart’s has
been the most widely publicised, to mandate an RFID policy has given the
companies’ suppliers a problem – either comply or risk losing
business. Yet there are still arguments as to whether it yet makes economic
sense, particularly from the suppliers’ point of view.
The decision to mandate RFID has prompted the publication of two reports
on the subject, and which set out different viewpoints.
The first, "Emerging Practices in EPC RFID," comes from the
ARC Advisory Group and focuses on the possibilities for a reasonable Return
on Investment (ROI). The company conducted an Emerging Practices study
talking to 24 companies that were actively investing in EPC RFID (Electronic
Product Code Radio Frequency Identification). Only one believed it under
a two-year payback period, while 95 percent of the respondents believed
the payback period would be greater than two years.
Using Wal-Mart as an example, it posed the problem of a company that ships
50 million cases a year to the retailer. Even at 20 cents per tag, a very
optimistic assumption, that is a cost of $10 million, to which another
$1 million is needed to prepare the RFID infrastructure. Including the
extra labour needed for additional warehouse processes, such a company
would need to generate about $11.5 million in new savings merely to break
even. This story is typical of the kind of response that ARC heard during
the interview process.
Wal-Mart has mandated that by January, 2005, its top 100 suppliers must
apply passive RFID tags to cases and pallets headed toward three specific
Distribution Centres in Texas. Most consumer goods manufacturers will
eventually be affected as other retailers copy the Wall-Mart approach.
But according to this report, manufacturers and distributors selling to
large retailers will face much lower ROIs than their retail customers.
It suggests that certain benefits will not be possible until some preconditions
are met, including improvement in the reliability of reads, reduction
in the cost of tags and that there is a critical mass of retailers with
RFID mandates in place.
This study offers information on the status of the Wal-Mart mandate and
advice on how to prepare for mandate meetings with retailers, plus an
analysis of how companies are changing their processes to meet these mandates
and the strengths and weaknesses of the various process choices. It also
puts forward 13 recommendations which can save hundreds of thousands of
dollars if companies are obliged to implement RFID to meet a mandate.
The other report, "RFID: How Far, How Fast?" from Deloitte Touche
Tohmatsu, looks behind the headlines about the Wal-Mart and Metro roll-out
programmes and comes to generally more positive conclusions. According
to the company, its analysis shows that RFID is a transformative technology
for the retail and supplier industries with the capacity to synchronise
business processes and efficiencies across the supply chain. Though the
general industry expectation of increased revenues in the first five years
of RFID implementation is low, it is only a matter of time before all
industry participants realise its overarching benefit of supply chain
visibility and improved business processes, which ultimately leads to
an enhanced customer experience.
The study estimates that this year will see a quarter of companies with
$5 billion revenues or more spending between $500,000 and $10 million
on RFID adoption. Within 18 months, it expects to see some 70 per cent
of these large companies embarking on RFID initiatives. But it is interesting
to note that it is only these large companies that are expected to engage
in RFID implementations. It shows that RFID spending among smaller companies
will be significantly less. The large retailers expect a reasonably significant
return on investment from RFID adoption.