Radio frequency identification (RFID) system deployments have received high-profile headlines in places such as the Metro Future Store in Rheinberg, Germany, and the Wal-Mart store in Broken Arrow, Okla. Used by those retailers to track inventory and streamline shopping, the overarching promise of the technology is much greater than customer convenience. Researchers, such as SAP Global Services Partner Accenture, say RFID gives retailers, manufacturers and transportation companies the means to save billions of dollars through optimized supply chains, faster inventory turns and shorter shelf time in both stores and warehouses.
Jeff Smith, global managing partner of Accenture’s Retail and Consumer Goods practice, says when RFID technology is combined with standard electronic product codes (EPC), the result is Auto-ID, a system that can dramatically improve supply chain and inventory management. Accenture is a member of EPCglobal, Inc., a non-profit group that develops and oversees commercial and technical standards for the new systems. Accenture is also a leading researcher on the technology, via its Accenture Technology Labs in Chicago, Palo Alto, and Sophia Antipolis, France.
“Accenture spent the last two to two and a half years,” said Smith, “doing detailed research into where business benefits potentially could be driven by smart applications and RFID technology deployed in commercial ways.” Smith spoke to SAP INFO about Auto-ID and its potential impact on business. He says some forward-thinking companies, such as Wal-Mart, will use the technology to greatly enhance productivity and profits.
What is EPCglobal, Inc.?
Smith: It’s not a new technology or idea. Barcodes of various flavors for optical automated identification have been around for decades and used in a wide array of commercial, governmental and other applications. The new thing is the recognition of advancements in RFID technology. RFID tags now carry plenty of memory. Chips are getting smaller and cheaper. That led to the idea that if we could get the physics right, figure out the commercial viability and applications, get people excited about investing and get companies excited about making products and services, we could really make something happen. That’s what triggered EPCglobal, Inc. The Massachusetts Institute of Technology was the academic hub at the start and since then leading technology and research institutions around the world and about 90 companies have joined.
Why is EPCglobal, Inc., advocating uniform standards?
Smith: RFID has been in warehouses for foods and the packaged goods industries for decades. It’s been used as a way to dispatch forklifts, for example. But what you didn’t have before was access to computer networks that could share the visibility of the location of a physical object. If the object is tagged and identified, anyone in a plant that might need to know about it can find out its location. That’s the new thing. The Internet, wireless Internet and all of the applications and advanced enterprise resource planning (ERP) and supply chain management (SCM) systems that companies and governments have deployed in the past decade now have the necessary infrastructure collectively to make that little RFID tag extremely usable. That’s what makes Auto-ID so exciting and what creates the sense of energy and urgency around it as a business opportunity. The idea is to have a uniform way to uniquely identify any object so information about all the characteristics of that object can be available in real time. EPCglobal, Inc. advocates one standard way of defining, describing and capturing that information.
Accenture research indicates a $7 billion niche by 2008. What types of companies will generate that revenue?
Smith: The obvious ones are the tag and reader businesses. Just look at all the tags people are going to buy. It’s a huge number. For example, when Gillette orders 500 million tags to stick on just one SKU, you get to large numbers fast in the tag business. The math shows sales of more than half a trillion tags a year. Even if the cost is just a penny per tag, with the tag volumes that are going to be sold, it’s a substantial business.
Tag readers are a separate issue. Auto-ID-compliant readers have to be able to do two things: Read any other tag that is Auto-ID-compliant and handle all five frequencies that are currently within Auto-ID standards. Right now, no company can play in that multi-frequency, open standard world with the existing products. So companies that make readers have to do a fairly hefty product development jump. If a reader costs $100 and if sales of readers are some fraction of sales of tags, you are still talking about billions of dollars a year in hardware purchases alone.
A third category is data storage. To hold all the message traffic generated by readers reading tags as they move around and sit on shelves and so on, I need a lot of disk drive. The demand for data storage is going to be massive.
And this is where it gets interesting. Some 98 percent of messages generated by the tags and readers are going to be irrelevant. I want the one in 100 messages that says the tube of toothpaste was picked up by a shopper or a shoplifter. I have to have software intelligent enough to filter the message traffic. There’s a class of software the academics at MIT came up with. It’s a smart filter called a “savant” to which you can apply business rules to sort the mass of messages Auto-ID generates. Major software vendors such as SAP will include this type of software in their architectural strategies. That drives a whole other class of revenue activity. Any company who wants to use Auto-ID is going to have to adjust its software.
Tell me about Wal-Mart’s Auto-ID initiative?
Smith: Wal-Mart announced that it is going to require its top 100 suppliers to do case and pallet tagging by January 1, 2005. My prediction is if you can’t play on Wal-Mart’s terms, you will pay. There will be economic penalties to the suppliers who won’t have Auto-ID-, EPC-compliant tags on cases and pallets delivered to Wal-Mart starting January 1, 2005. Subsequently, Wal-Mart announced that all suppliers will be required to comply in 2006.
How will Wal-Mart benefit from this initiative and how can Auto-ID benefit other companies?
Smith: One benefit is operational and another is financial. A Bernstein & Co. analysis of the economic impact of Wal-Mart implementing this says Wal-Mart’s earnings per share will go up 40 percent. That’s because of the improved visibility to accurate information about inventory. Today, in consumer goods, wholesale distribution and manufacturing, there is easily $100 billion of excess inventory in the U.S. alone. What if you wipe out excess because you have certainty about the location and nature of all inventory in every position in your supply chain? Based on our research of 20 companies, Accenture estimates a 25- to 40-percent improvement in supply chain performance and elimination of working capital commitment. And, capital commitments could be cut even more in certain higher-value categories. Fast-moving products, such as fresh bread, turn in seven days. It will be hard to reduce that cycle by more than a day. But with television sets or personal computers, the ability to reduce the turn cycle can translate quickly into big money. That’s the point. Wal-Mart is going to dramatically improve its performance in working capital by dramatically improving turns and dramatically reducing stock levels while reducing economic order quantities.
That sets up an even more interesting and speculative possibility. This move by Wal-Mart sets up the possibility of Wal-Mart moving its suppliers to a form of consignment-based inventory. The title to the products wouldn’t shift from the manufacturer to Wal-Mart until the point of sale to the consumer. In terms of cash flow acceleration on a company when it suddenly doesn’t pay for things until it literally has the consumer money in hand, it could take billions of dollars in inventory off the books in one fell swoop. If Wal-Mart today pays suppliers on a 45-day basis and a supplier suddenly gets paid in seven, it’s amazing to consider the value of that cash flow acceleration. You could end up with a win-win situation that basically rips costs out of the supply chain up and down.