Smarter than “Smart Labels”?

Radio frequency identification (RFID) is gaining wider adoption among consumer packaged goods (CPG) suppliers, driven in large part by a recent mandate by Wal-Mart Stores Inc. In 2004, Wal-Mart announced that its largest 100 suppliers were required to begin using the technology by the beginning of 2005. This announcement, along with the technological standards that have made B2B use of RFID technology possible, has contributed to the boom in interest and sales of RFID solutions.

CPG suppliers are looking for ways to begin implementing RFID solutions that require minimal initial investment, while still being capable of evolving and expanding in the future. As the usage of this RFID technology becomes more widespread, the CPG suppliers will want to better integrate RFID into other processes.

In supply chain automation applications, RFID serves the same function as printed barcodes, but RFID offers a number of distinct advantages. Data is automatically transmitted by radio waves and, therefore, RFID readers do not need the “line of sight” required by optically-scanning barcode readers.

RFID also offers a great deal of flexibility in the placement of identification tags, because data can be read at a greater distance. Additionally RFID even recognizes data through most packaging and product materials. For example, RFID tags placed on individual cases in a pallet can be automatically read, without unpacking the pallet.

Another advantage is that an RFID tag can store considerably more data than a barcode label, and it is possible to dynamically update the stored data. The RFID tag serves as a miniature database, allowing users to track the tagged object as it moves though the supply chain.

Resistance by CPG suppliers

The benefits for retailers like Wal-Mart are clear: RFID creates greater operating efficiencies and provides better inventory management to control stock outs, spoilage, and authentication. As you move upstream in the supply chain, however, the return on investment for RFID can sometimes be less obvious.

The situation is analogous to the adoption of barcode technology twenty-five years ago. Initially, in the mid 1970s, barcodes were intended to automate the checkout counter, at the tail end of the supply chain. Mass merchandisers, lead by Kmart, pushed suppliers to adopt the system. Only later, in the early 1980s, did it become apparent that barcodes and Universal Product Code (UPC) standardization offered enormous benefits in operating efficiencies and information management along the entire supply chain.

Some CPG suppliers are taking a strategic approach to RFID, investing in the technology to take advantage of the increased visibility of tracking information in order to re-engineer their internal processes. Other CPG suppliers offer RFID tagging, even when not mandated to do so, in order to competitively differentiate themselves and win new business from retailers that prefer products tagged with RFID.

But many CPG suppliers continue to take a cautious approach, looking for a way to quickly meet mandates from Wal-Mart and other retailers with minimum expense and minimum disruption to their manufacturing and distribution processes. They view RFID as a necessary cost of doing business – the “stakes” that they must put up to sit at the table and stay in the game with the major retailers.

These suppliers reluctantly comply with mandated requirements today, but they do not want to commit to major investments in RFID until the technology matures, standards are fully established, prices reflect large economies of scale, and ROI for process re-engineering has been proven.

Incremental and selective implementation

Many observers predicted that the Wal-Mart mandate would represent a tipping point that would create a critical mass of RFID users and unstoppable momentum towards universal adoption of the technology. It is clear that RFID is here to stay, but the adoption pattern is evolutionary, not revolutionary.

The Wal-Mart mandate itself is an incremental process. The mandate currently applies only to products shipped to its Dallas-area distribution centers. Some of the top one hundred suppliers who fall under the mandate are placing RFID tags on only a fraction of their Stock Keeping Units (SKUs). Reportedly, some suppliers are initially tagging as few as a dozen SKUs, with plans to gradually increase that number over time.

CSG suppliers are looking for an RFID solution that can be quickly put into operation with minimal investment, and can be implemented incrementally and selectively for different SKUs and different retailers, as needed. The typical approach is called “slap and ship,” putting an RFID tag on a case or pallet just before it is shipped from a supplier's facility to a retailer's facility.

Smart labels

Two methods of “slap and ship” are available: one option is to replace existing barcode printers with a smart label printer that creates a barcode label with an embedded RFID transponder. The alternative is to apply an RFID “Sticky Tag” separate from the bar code label and encode the data into that tag with a separate encoder, in addition to the existing non-RFID barcode printer. For both methods, a barcode is printed and applied as a back-up for the RFID technology, since reliability of RFID has not yet been perfected.