A.T. Kearney: RFID Mandate Will Cost Manufacturers

Some consumer product manufacturers will face higher costs and delayed benefits from adopting radio frequency identification (RFID) technology, according to a report on RFID and the Electronic Product Code (EPC) from global management consulting firm A.T. Kearney. "Meeting The Retail RFID Mandate: A discussion of the issues facing CPG companies, focuses on the issues that retailers and manufacturers face in terms of the Wal-Mart and U.S. Department of Defense mandates. It estimates the cost of EPC and RFID adoption to retailers at $400,000 per distribution center and $100,000 per store, with an additional $35 million to $40 million needed for systems integration across the entire organization. "While these are very significant amounts, the upside is that most of the costs to retailers are fixed," says Dave Donnan, vice president, A.T. Kearney. "The story for manufacturers, on the other hand, is quite different depending on the type of product they make." The cost of tagging varies significantly across manufacturing. The report compares two manufacturers with $5 billion in sales -- a low-impact (meaning high-volume, low-cost products) grocery manufacturer and a high-impact (meaning low volume, high-priced products) OTC drug manufacturer -- and concludes the low-impact manufacturer loses out by $155 million from a capital budgeting perspective (assuming the current 15 cent cost per RFID tag, a 10-year horizon and a weighted average cost of capital of 12%). The report also notes that most manufacturers are "well beyond the basics when it comes to supply chain efficiency" so there might not be much left to gain from increased tracking and inventory visibility, enhanced labor efficiency and improved fulfillment, according to A.T. Kearney. Indeed, the benefits depend on retailers taking advantage of improved product information to give manufacturers greater visibility into out-of-stock items, inventory and items that can't be sold. This will require retailers to change some of their processes and become more comfortable sharing information currently considered confidential, the report states. A.T. Kearney advises low impact manufacturers to closely examine the rationale behind the EPC and RFID tagging and consider alternative courses to meeting the mandate. Some alternatives include using other technologies, delaying implementation until the per-tag cost drops to a reasonable level given each company's business case, and negotiating information sharing with their retail partners to take advantage of the increased inventory and sales information EPC will provide. A copy of Meeting The Retail RFID Mandate is available at www.atkearney.com/main.taf?p=5,4,1,89.

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