RFID Strategy -- RFID And The 'Network Effect'

Oct. 30, 2006
What your partners, competitors and customers do drives your RFID strategy.

My most recent work in RFID is geared towards preparing a webcast on the subject of retail supply chain initiatives. I've been digging through the data from our Benchmarking & Best Practices initiative, which conducted a survey of more than 100 retail, consumer products companies and other organizations.

What I've found substantiates recent news reports of a slowing of the EPC Gen 2 retail market. However, this contrasts sharply with the expansion of other, proprietary forms of RFID technology, such as systems to track oceanic shipping containers. The different experiences of these two markets present a classic illustration of the "network effect."

The Network Effect

The "network effect" is a term used by technologists to describe the way some devices grow more useful as more people use them. The classic example is the telephone. In the early days of telephone technology, nobody had them except for a few wealthy households. This limited the usefulness of the device, so urgent communications still relied on the telegram. As the telephone network expanded, behavior changed and the expectation rapidly developed that everyone would have a telephone. The phone pushed out the telegram and created a new assumption of normal behavior -- the assumption that anyone could be reached by voice in real-time.

More recently, e-mail has followed the same trajectory in going from a device used primarily by university researchers in the 1970s to ubiquitous public use in the 1990s. Therefore, the two key characteristics of most "network effect" technologies are: 1) they create a productivity-bonus tied to the social behavior of groups of people (i.e., the network users); and 2) they create a new expectation for the amount and quality of data available to the network users.

Current State Of Retail RFID

Wal-Mart has created their own network of RFID technology to achieve their own goals of reducing retail out-of-stock occurrences. They pursued an admirable strategy of promoting open standards (via cooperation with EPC) while building what could easily have been a closed Wal-Mart proprietary network. However, even with the market dominance of Wal-Mart, the expected explosion of the RFID technology market has not occurred.

As a case in point, consider this month's Baird Report. It describes the customers of RFID technology as still focused on pilot-programs and educating themselves. It goes on to summarize manufacturers as concentrating on new technical development (technology evolution, not production). In a parallel development this month, RFID reader manufacturer Sirit announced layoffs of 25% of their workforce in recognition of a weak market for retail RFID sales.

The fact is that retail RFID initiatives have delivered payoffs for companies that can create their own "RFID ecosystems," but the market has not progressed to the point that a true network effect can drive EPC Gen 2 technology adoption. The EPC has laudable goals in creating such a network, but there is still much to be done to make it a reality. The RFID market is still mandate-driven, not driven by demand from companies eager to adopt the technology to get in on the expanding network of users.

RFID Use In Shipping Logistics

In contrast to the situation for Retail RFID, recent press reports about ship-container tracking have all been positive. I've previously written how Savi Technology, Inc., signed the largest single RFID contract in history with the DoD for tags to track freight containers. This month saw a similar announcement that British automotive firm Jaguar had adopted Savi technology (Savi is now a part of Lockheed) to control their import / export containers. The British port of Felixstowe joins 19 other ports in Europe, the U.S. and Asia in using Savi's proprietary mix of active and passive RFID technologies to track shipping containers.

Savi is not the only player in this area. In the same week as the Jaguar announcement, the European 3PL Jobstl announced that they were buying container-tracking technology offered by WhereNet. In both the Savi and WhereNet examples, RFID technology is pushing out GPS-based container tracking.

The important observation from the Savi press release is the description of the factors that drove the Jaguar acquisition. They observed that as more customers came on-line with container tracking, it created a new expectation of accuracy, forecasting, and available data for each container. A detailed view of container shipping data is now considered the "new normal" in the shipping industry.


Despite the heavy reliance of proprietary technology in tracking shipping containers, this market is growing as clients eagerly adopt the technology. Retail RFID, on the other hand, has adopted an open-standards approach to spurring the market; but despite this growth is slow and imposed primarily by big-box retail mandates. The root cause is the network effect. Due to the incomplete infrastructure of EPC RFID tools, the retail RFID market is currently not big enough to drive significant value-add to all participants in the supply chain. Companies are right to moderate their investments in this area while carefully choosing pilot programs to prepare themselves for the future.

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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