Getting Past the Hype of RFID

Nov. 15, 2004
Not so fast—RFID is going to cost you. Both a new study by ARC and R4 Global Solutions’ CEO Jeff Richards discuss the issues
The story goes that, with radio frequency identification (RFID) equipment costs coming down and payback times shrinking, the era of ubiquitous RFID is upon us. Not so fast. Or, rather, not so cheap. Most insiders still don’t believe that inexpensive RFID is just around the corner.A new study conducted by the ARC Advisory Group ( on emerging practices finds that few companies currently using RFID technology see a short-term Return on Investment (ROI). Of the 24 companies consulted in the study, only one believed that it could have a payback in less than two years. All other firms believed getting a good ROI would take significantly longer.Better ROI won’t happen, the study concludes, until:
  • The reliability of tag reading improves
  • Tag costs fall
  • A “critical mass” of retailers are using RFID solutions
  • Companies are better collaborating with upstream
For most companies, of course, the question is not whether to adopt RFID, but how to do so most efficiently and effectively. R4 Global Solutions (San Francisco) offers ePedigree and other technologies designed to help companies deploy RFID at the item, case and pallet level. Leading pharmaceutical manufacturers are already calling on the company to help them develop a coherent track and trace strategy. In this interview, R4 CEO Jeff Richards shares his views of the “cutting edge” of track and trace. Cost is currently a major issue, he says.Q:Where is RFID right now as a practical, cost-effective technology in the pharmaceutical industry?A: In brief, it’s unquestionably early. The bulk of efforts today are still mandate-driven. However, mandate work is also enabling many participants to do a healthy dose of analysis on the role RFID may play in solving critical problems in the supply chain such as counterfeiting, inventory management, and pedigree in a relatively collaborative fashion.We work in the consumer goods and retail industries as well, but we’re big believers that many of the early benefits consumers see from RFID will be in the pharmaceutical industry. Examples include lower prices due to better inventory management and improved patient safety through prevention of counterfeiting.Q: When will we see some of these benefits?Has the clear business case been made?A: In 2005 we should start to see results from 2004 pilot work that may point to the “business cases” for using RFID in the pharmaceutical supply chain. Most participants understand the potential benefits at a high level—the challenge is quantifying the cost of implementation and the associated software and business process change to turn concept into reality.As an example, while some companies are piloting track and trace functionality, it will take a lot more than RFID to make cross-entity traceability a reality—software, information sharing, data pools, rules of engagement and data specifications are still to be worked out. We don’t expect to see cross-entity track and trace initiatives incorporating RFID in an operating (not a “pilot”) environment for 12 to 36 months.Q: You have said that RFID is an “evolutionary and disruptive” technology. Where is it in its evolution?A: We would argue that RFID will be both “evolutionary” and “revolutionary.” Many of the cases being deployed today are tactical extensions of functionality already provided by bar codes, with primary benefits being lower supply-chain costs (lower inventory and labor costs). These concepts are primarily “evolutionary” and not a tremendous leap from a barcode environment.When we take the next step to begin utilizing a more granular, sophisticated level of information (coming from the RFID-enabled supply chain), we expect to see more “revolutionary” steps that really benefit consumers and make exponential leaps in efficiency and sophistication. These steps will be enabled primarily by RFID’s capability to provide serialization of items throughout the supply chain—from manufacturer to end user.In terms of RFID’s evolution as a technology, one can argue it is relatively mature (its use was in WWII) or very nascent, depending on your perspective. The current form and function of passive RFID used by retailers and pharmaceutical firms is relatively new. Given that most firms purchased their first RFID technology in 2004, I’d have to say it’s pretty early in the adoption cycle.Q: How disruptive will it continue to be? How can firms minimize the disruption?A: For most of the firms we work with, RFID is not yet a disruptive technology. It hasn’t materially affected their IT or infrastructure budgets (almost all projects have been less than $500,000 to date), and they aren’t yet feeling the effects of an RFID-enabled supply chain, where leaders might eclipse laggards by leveraging RFID data and garnering operating efficiencies.Most firms are minimizing the potential disruption from RFID by a) educating their IT, packaging and supply chain leaders about the technology; b) working with partners who bring best practices, technical capability and deep understanding of available technologies (thereby reducing internal time spent evaluating a confusing market); c) and wrapping RFID projects into overall strategic thinking and initiatives aimed at larger business objectives such as supply chain optimization, visibility, etc.At the end of the day, RFID should not be a standalone initiative, and thus will be somewhat disruptive to the existing environment, but wrapped into other initiatives RFID will be seen as a core component and not a singular disruptive component.Q: What are the biggest myths out there about RFID? What are the hidden realities?A: “RFID doesn’t work” is perhaps the biggest. The technology works, but it has limitations (water and metal cause interference, for example) just like any other technology.Also, many analyst projections about rate of adoption are ahead of reality. While it’s hard to underestimate the impact RFID will have over the next decade, the rate of adoption and implementation will be slow until some of the key solution components evolve. For example, you won’t see consumer pharmaceutical manufacturers integrating RFID into manufacturing lines until print and application speeds catch up with line speeds—tough to make a business case for slowing down a line to accommodate RFID.  The technology components will catch up, but it’s going to take some time.Q: Your company has been working on item-level RFID deployment. What’s new on this front?A: Due to the relatively high cost of product (a case of pharmaceuticals might cost $40,000, versus a case of tuna fish at $40), the business case for utilizing RFID at the item level is compelling. The two current areas of focus for item-level tagging are for a) tracking Schedule II pharmaceuticals from manufacturer to retailer/end user, and b) tracking drug prescriptions for patient safety.We’ve completed several deployments at the item level, and the potential is promising.  Having said this, much of the work to date has been focused on expensive but low-volume Schedule II product. What’s new is that a few sites have gone live with in-line label application capability. These are at pilot-level volumes, but it’s promising to see real implementations.Look for expansion of pilots in 2005 to focus on end-to-end tracking of Schedule II product, and to perhaps see greater endorsement of RFID to enable pedigree and track and trace efforts. Much of the innovation to enable item-level deployments will come from the packaging and labeling providers like CCL, Avery and MeadWestVaco.Q: What obstacles face RFID at the item-level? Can they be overcome?A: The primary obstacle is cost. With label costs still around 30 cents each, and true cost of application much higher because equipment or manpower to apply labels to product have not been automated, most participants will move at a slow pace. Cost is a subject of much debate, but in a nutshell we expect to see tag costs decline to a 10- to 15-cent level in 2005. If the EPC Gen 2 spec [the latest standards by EPCglobal] moves forward and large chip and label manufacturers begin to produce in mass quantities, these cost numbers could be lower, but the most optimistic projections for production levels of Gen 2 tags point to the end of 2005 for availability.A secondary obstacle, mentioned earlier, is the capability of RFID equipment to catch up to the pace of an automated manufacturing or labeling line.A third obstacle is timing. It’s hard for one player to take advantage of item-level RFID if the other players in the supply chain can’t leverage the technology as well. If a manufacturer is using RFID at the item level but its distributor is not, the manufacturer doesn’t stand to gain much from being “ahead of the curve.” Two factors will drive the timing of adoption at the item level: 1) manufacturer and retailer benefits and 2) potential regulatory endorsement of RFID as an enabler of pedigree and track and traceability.  Both of these are tied to the greater, macro benefits to end consumers and the general public.Several manufacturers are also looking at the role RFID might play in a recall process. In a recall environment, RFID could enable more granular visibility into forward distribution of product, enabling firms to more quickly and effectively recall product.Q: You mentioned tag costs declining. How about reader costs?A: Reader costs are also coming down, but not as quickly. Today’s typical reader able to read Class 0 or Class 1 tags might cost $2,500. Factors driving tag costs down include increased volume purchasing from end users and label manufacturers, migration to the Gen 2 spec (still up for debate), large players entering the market (Texas Instruments, Philips, etc.) and, of course, innovation.A few companies we’re working with are taking different approaches to reducing costs.--switches and multiplexing technology which might enable the use of one reader across a large number of antennas . We’ll also see reader costs come down with volume, which should begin to rise considerably in 2005.Q: Where will RFID be one year from now? What might surprise us?A: A few data points for October 2005:
  1. Wal-Mart’s implementation at the pallet and case level will cover more than 600 stores.
  2. Some significant portion of the U.S. Department of Defense suppliers, numbering 40,000+, will have shipped considerable inventory to the DoD with RFID tags affixed at the pallet and case level.
  3. Target, Albertsons, Best Buy and likely other retailers will have implemented the first phases of their RFID rollouts.
  4. Traditional hardware players such as Philips, TI, Intermec and Symbol will be playing a much larger industry role (the space is dominated today by relatively small startups).
Although we may be fueling the hype (regrettably), we would predict the biggest surprise will be the sheer widespread activity and adoption of RFID. A great deal of work is taking place “under the radar” of the mainstream media and analyst firms. Many early adopters are not Fortune 500 companies and thus the stories and case studies have not been told. Additional retailers are lining up projects around RFID as we speak, both driving additional adoption in the supplier base and increasing awareness in 2005.Pharma is perhaps the most compelling industry for RFID in this respect -- consumers will respond positively to news about better patient care and drug safety even though they won’t get too excited about “retailers and consumer goods companies reducing inventory levels...”