Questions of return-on-investment (ROI) have dominated the RFID discussion ever since Wal-Mart announced their retail compliance initiative in 2003. What have we really learned since then? Here are some of the lessons learned in the past few years in RFID retail compliance, thrown into sharp relief for me by a recent Wall Street Journal article.
RFID Static At Wal-Mart?
The Wall Street Journal stirred up controversy around RFID's value in the February article "Wal-Mart's Radio-Tracked Inventory Hits Static." As might be expected, the attention of the financial newspaper of record evoked a good deal of reaction throughout the small and closely-knit RFID industry.
The article, which took a critical view of Wal-Mart's RFID pilot program, correctly noted that Wal-Mart has not met their original targets for RFID distribution. They have deployed RFID in five distribution centers thus far, instead of the 12 originally planned. In addition, the article accurately notes that Wal-Mart's labor costs have not declined as a result of RFID deployment.
On the positive side, however, it does appear that Wal-Mart plans to roll out RFID technology to 400 more stores this year -- a similar pace to the previous year roll-outs. The controversial article also repeats Wal-Mart's previously published claims that RFID technology is, indeed, reducing product out-of-stocks. But in reading between the lines, one could attribute the overall pessimistic Wall Street Journal coverage to evaluating RFID from the perspective of the individual store, instead of from the perspective of the supply chain.
Supply-Chain View Vs. Four-Walls View
Wal-Mart stores are not warehouses, despite being warehouse-sized. They are retail stores with the staffing levels required of such stores. As such, each Wal-Mart store needs to carry a given level of sales associates to stock shelves and assist customers. Inventory tracking technology can help reduce this staffing level, but the decision to do so is driven by customer-service considerations; the staff reductions do not automatically follow from the introduction of a particular technology.
In the case of Wal-Mart, they are so good at controlling costs that I would not expect anything short of a radical store redesign to reduce their current staffing levels. So, the expectation that RFID technology will reduce Wal-Mart's labor costs is, in my opinion, a misplaced assumption.
I also have an opinion on the source of this misunderstanding: It is the marketing efforts of the RFID industry itself. RFID has been touted as a way to reduce the touch-labor required in warehouses. The claim is that RFID is superior as an auto-identification technology because it does not require line-of-sight access, as does a barcode. Similarly, RFID can support the near-simultaneous identification of many product codes in a parallel-processing mode, whereas barcode technology is an inherently serial process.
These features of RFID technology are supposed to increase warehouse efficiency by speeding product throughput and reducing the labor required to process each carton or pallet. The reality is that such productivity increases have been difficult to achieve within the warehouse, due to the reliability of pallet-quantity reads and the relatively small deployment of RFID thus far in the supply chain.
A focus on reduced labor costs, or increased RFID equipment costs, is driven by an inside-the-four-walls business view. As I have noted previously, it's hard to find RFID justifications on that basis. Wal-Mart, however, has never emphasized that aspect of their pilot program. The Wal-Mart program is oriented to increasing the velocity of sales by reducing product out-of-stocks. This perspective is all about the supply chain -- although it can show measurable benefits within the four walls of a given store by producing increased top-line sales revenue, if the quantity of such RFID-tagged product is large enough.
In a nutshell, Wal-Mart's retail RFID compliance program is aimed at reducing the number of times a given product is not available for sale on a shelf, despite that same product being available in the back stockroom. The reduction in out-of-stocks drives benefit for the store as well as the vendor. Wal-Mart has published reports claiming an average 13% reduction in such product out-of-stocks for RFID-enabled stores. This reduction in out-of-stocks translates into increased sales of a given RFID-tagged product for both Wal-Mart and the product's vendor.
Supplier Benefits Demonstrated
Up until this point, the lesson of Wal-Mart's RFID compliance program has been that it provides benefits for Wal-Mart, but increases costs for the vendors. Therefore I was surprised to see, for the first time in print, two vendors claim a measurable benefit to their Wal-Mart RFID compliance. In a recent RFID Journal article, executives from Campbell Soup and Smucker's claim that the Wal-Mart RFID program has helped them manage their promotional efforts. The RFID data helps them track the success of sales promotions. Such promotions can last for several weeks, so timely feedback on the status of sell-through allows these companies to adjust their deliveries to maximize their benefit from the sales promotion. RFID technology provides such data quicker than traditional supply chain information sharing.
It's significant that both of these companies sell low-price, low profit-margin products. If pallet-level RFID tagging is showing a benefit for the vendors of such products, then the technology is finally beginning to fulfill its promise for the entire supply chain and not just end-users.
The biggest lesson of Wal-Mart's RFID compliance initiative is the power of data-sharing between vendors and retailers. RFID is beginning to show its true value as an information technology. This news makes me more feel more positive about RFID's future than I have been for the past several months.
Paul Faber is a Principal with Raleigh, N.C.-based Tompkins Associates, a supply-chain-solutions consulting firm. As the chief manager of RFID equipment implementation at Tompkins Emerging Technology Center, Faber possesses extensive experience in material handling solutions, systems integration, and installation. He has managed field integration and operations activities at material handling sites around the world.
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