Slow but steady (page 2)

-- Logistics Management, 2/1/2005

Page 2 of 3

Gillette and P&G may be unusual in their level of commitment to the RFID project. According to Steve Banker, service director for supply chain management at ARC and the study's author, only two of the 24 companies in the study have committed to tagging all of their SKUs in Wal-Mart's Texas program. "All of the suppliers said, 'we're doing everything that we have committed to do for Wal-Mart,' " Banker says. "They have committed far less than the broader public thinks."

Despite Wal-Mart's public reputation for toughness, some observers believe that the retail giant has given ground when dealing with its suppliers on the RFID mandate. Banker says Wal-Mart conducted a series of negotiations with its top 100 suppliers on the pace of the rollout, and the company showed more flexibility in those negotiations than many had anticipated.

"They [Wal-Mart] are being much more flexible," concurs Michael Liard, an analyst who follows RFID technology for Venture Development Corp., a market research firm in Natick, Mass.

Liard and other analysts point out that Wal-Mart may have little choice but to negotiate with its top suppliers. Although the company considers its push for RFID tagging to be imperative, company executives acknowledge that the technology must overcome a number of obstacles before widespread adoption can become a reality.

For starters, the nascent technology continues to experience performance problems. A significant number of RFID tags fail to work properly, especially when applied to certain types of products, such as liquids or metal cans. There's also the issue of reliability. "You still have the problem of high tag-mortality rates," says Woods, who estimates that as many as 30 percent of all tags fail to function properly.

Costs for RFID devices have remained stubbornly high. "The tag's costs are not where we hoped they would be," says P&G's Tharrington. "We had hoped for a nickel or less [per tag]. Tags now cost anywhere from 25 to 50 cents."

That expectation that the per-unit cost for RFID tags would decline was predicated on a rapid increase in demand and production. But true mass production has been delayed by a lack of industry standards, which would make it possible for a single reader to decode tags made by a variety of manufacturers. "Once standards are solved, this can really take off," says John Hill, a principal with Esync, a Toledo, Ohio-based consulting firm.

The darkest cloud hanging over RFID, however, is the issue of how much the technology will benefit suppliers. Woods of Gartner Inc. says Wal-Mart executives believe that deploying RFID tags could improve their suppliers' distribution operations to such an extent that those improvements would justify the costs of the implementation. But those benefits have yet to materialize, he says.

Woods also contends that Wal-Mart, although firmly committed to rolling out RFID throughout its operations, is taking all of these considerations into account. "There's this impression that Wal-Mart is being a Neanderthal and just demanding that suppliers do all kinds of crazy things," he says. "There's no way Wal-Mart will push forward unless it's a win-win business proposition. People who have negotiated with Wal-Mart have a different impression on how they will proceed." Continued...

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