Radio Frequency Identification
John Thormodsgard, Kirk Lesser, and Kasie Barness
Radio frequency identification (RFID) technology is an emerging technology that has the potential to revolutionize the retailing industry. Like barcodes, RFID tags provide identification of individual items when they are within range of a scanning device. However, RFID technology offers meaningful advantages over bar-coding in that the tags do not have to be ‘visible’ to the scanner and in that some tags can be rewritten as they pass through the supply chain - allowing manufacturers, distributors, and retailers to encode information that is most pertinent to them.
While this technology has the potential to revolutionize any number of industries, this analysis will focus on its use by retailers. RFID offers retailers significant opportunity to reduce inventory costs, point-of-sale costs and delays, and losses due to theft. However, a number of limitations exist that make implementation of the technology challenging. Perhaps the greatest difficulty arises from a lack of RFID standardization; early movers could potentially find their equipment and systems to be incompatible with future standards. Secondly, while prices are falling rather quickly, there is still significant cost for RFID tags and scanners. Finally, as personal data about one’s purchases can be gathered from a distance, one should be concerned about consumer acceptance of the technology and the potential fear of additional loss of privacy.
We propose that RFID technology may initially be best utilized by large retail chains that specialize in electronics or other high value items. All retailers need to be aware and ready to take advantage of RFID technology though. This paper describes the retail environment that these firms operate within, describes the current state of RFID technology, and offers recommendations for implementation.
Brief Background
of the Industry
For the last 30 years most of the retail industry has operated in a fairly similar manner. Merchandise is pushed or pulled through the supply chain to the retail store. From the store's receiving bay, merchandise is noted as received in the stores' inventory database. This process is done through physically scanning merchandise UPC barcodes or by entering data from the shipping invoice received at delivery (Maul, 2003).
Once the merchandise is at the store, it must be
maintained. Filling store shelves is
the first priority. If merchandise is
not on the shelf, customers cannot buy it.
Keeping the shelves full is a balance of inventory on-hand, merchandise
received, and merchandise sold (Maul, 2003).
With merchandise on shelves, customers are able to
make purchases. Customers select
merchandise they desire and proceed to a point-of-sale (POS) terminal or
checkout. There the customer often
stands in a line, waiting for their turn to purchase and take ownership of
their selections.
Others prefer to bypass this step all together by stealing the merchandise they want. To combat these ‘non-conforming’ individuals, stores have invested many dollars into loss prevention divisions. These divisions are responsible for monitoring the unlawful departure of merchandise and inventory from the store (Maul, 2003).
A big problem that the retail industry faces is managing inventories and managing inventory space. Keeping larger inventories is more costly and can be more difficult depending on the space available and the system the company uses. Retailers chose to keep larger inventories than sales would generally warrant for a number of reasons including customer theft, employee theft, and misplaced items (Maul, 2003).
Retailers have attempted many approaches for tracking inventory including bar code scanning and manually counting inventory. These methods require human intervention-and each time there is human intervention; things do not always go according to plan (Texas Instruments-1, para 3). Traditional retail methods for dealing with shoplifting and counterfeiting are often very expensive and not very effective.
For the most part, the customer's shopping experience runs smoothly. There is one place in the process where the customer experiences a bottleneck effect. That place is the checkout. The checkout causes backups for a number of reasons: scanning UPC barcodes is done item by item, the barcode must be in direct sight of the reader and in readable condition, customers demanding checkout procedures exceed the supply of associates, inaccuracies occur in pricing, human errors occur in operating machinery/technology, and a high volume of merchandise is often purchased per customer.
Another big problem that the retail industry faces is inventory shrinkage. Inventory shrinkage can be a combination of employee theft, shoplifting, vendor fraud, administrative error and a few other small possibilities, which in total cost the retail industry over $31 billion last year (about.com, para 1). Both employee theft and shoplifting are on the rise. Employee theft and shoplifting respectively account for 48.5% and 31.7% of inventory shrinkage (about .com, para 6).
After employee theft and shoplifting, administrative errors or paperwork errors
and theft by vendors are the biggest cause for shrinkage (about.com, para 9). Administrative error accounts for 15% of
inventory shrinkage and vendor fraud accounts for 5.4% (about.com, para 6).
Shoplifting also causes vendors to keep small display items locked in closed display cases to prevent theft. Keeping items behind a desk or in a secure location can harm sales. Microsoft Office had a high price point and a compact package, which made it very tempting for theft (Markowski, p42). This resulted in many retailers keeping the Office package behind desks or in secure locations, making it difficult for customers to purchase; ultimately hurting sales (Markowski, p42).
An emerging technology that may address the problems faced by the retail industry is Radio Frequency Identification (RFID) and Electronic Article Surveillance (EAS). RFID tags, like barcodes, are principally there as an identifying mark (Fildes, para.4).
RFID allows the item to be scanned/read at varying distances and at all angles and without being manually handled (Fildes, para. 4). An item with an RFID tag can be read even if the item or the tag is not visible. Basically the RFID tag could replace the bar code plus offer significantly greater convenience.
The tags are always on - ready to broadcast their identity to any reader within distance (Fildes, para 4). If a network of readers is set-up one could automatically track anything that has a tag all the way through the supply chain. One can have real time inventory everywhere in the system, tracking not only the quantity but also type and location of each item. (Fildes, para 4).
The principle behind RFID goes back to the Second World War where a similar system was used to identify friend or foe (Fildes, para 7). Since then the tags have found their way into numerous applications. RFID tags are readily available today and you can buy them from several vendors including 3M, Checkpoint, VTLS, Codeco, Lucatron and Tech Logic (Schuyler, para. 4).
RFID tags come in a variety of shapes, styles and sizes. Some are the size of a pencil lead and less than a half inch in length and some are heavy duty 5”X4”X2” rectangular transponders to track heavy machinery (Markowski, p. 44).
RFID first appeared in tracking and access applications in the 1980’s (Markowski 2003). RFID systems are wireless automatic identification and data capture (AIDC) devices that allow for non-contact reading of the device. The basic RFID system includes three components: 1. antenna, 2. a transfer or receiver with decoder and 3. a tag that is electronically programmed with unique information (AIM, para. 1).
EAS is a technology used to identify items as they pass through a gated area (Markowski, p. 33). Typically, this technology is used to prevent someone from unauthorized removal of an object from a store, library or data center (Markowski, p. 33). EAS tags differ from RFID tags in that they do not contain any data. EAS is a very simple addition to the RFID tags currently being developed and there are numerous advantages to a combined EAS/RFID system (Markowski, p41). They would not only be able to trigger the alarm but could identify the item. They could be turned on and off, and the EAS can be incorporated into the RFID tag with virtually no additional costs (Markowski 2003).
RFID tags are either passive or active. An active RFID tag is powered internally by a battery and is typically a read-write device (meaning it can rewrite and restore data) (AIM, para. 4). The memory size of the active tag can be up to 1 MB of memory but can be less depending on the application (AIM, para. 4). The battery of the active tag generally gives it a longer read range, but also a larger size and greater cost (AIIM. Para 4).
Passive RFID tags operate without an external power source and obtain operating power from that generated by the reader (AIM, para 5). Passive tags are generally lighter, less expensive, and have longer operational life because they do not have a battery (AIM, para 5). They do however have shorter read ranges and require a high-power reader (AIM, para 5).
The antenna emits a radio signal to activate the tag and read or write data to the tag (AIM, para. 2). Antennas can be configured many different ways. They can be built into a doorframe, mounted on an interstate tollbooth or any other possibility (AIM, para. 2). The electromagnetic field can either be active all the time or it can be activated by a sensor device - depending on the application (AIM, para. 2). The antenna can even be constructed in buildings and along transportation routes to track real time where the product is. Gillette is planning on piloting the RFID tags in stores with “Smart Shelves” that are fitted with tag readers (The Economist.com, para. 7).
One of the biggest strengths of RFID is easier inventory and supply chain management. With real time tracking of the exact location, inventory management is much easier. Less inventory can be kept because the exact inventory is known with precision. The administrative costs of managing the inventory are reduced and the chances for mistakes are virtually eliminated.
Another advantage to RFID is shorter and faster check out lines. With RFID multiple items can be scanned at once and they can be scanned at any position or angle. The price of a whole cart of items can be calculated in seconds - making check out much faster.
Shoplifting and employee theft can be minimized with RFID. The tags can be small and hidden and are better able to track theft than traditional security systems. Employee theft can also be curbed if all entrances are equipped with antennas and security equipment. Because RFID tags can be incorporated into electronic goods with particular ease, dishonest employees are not able to avoid detection by removing the tag.
One limitation of the RFID technology is the personal privacy issues. Civil liberty advocates say that RFID could create an Orwellian world where sales clerks and police, with the wave of a wand, can determine all your possessions (Sullivan, para 3). Customer safety is also an issue because thieves could scan people exiting the store to determine which customers have the most expensive items. One way to combat this is to further develop the technologies to deactivate the tags after they are purchased.
Another current limitation is the lack of standard in the RFID industry (Wibberley, para 25). However, the industry is aware of the limitation and many of the big manufacturers are working hard to develop standards (Wibberley, para 26). Current expectation is that most of the standards should be in place by the end of the year in 2003 (Wibberley, para 26).
The last big limitation of RFID technology is cost. The cost of the RFID tags is still in the $0.10 range when purchasing mass quantities of tags. Smaller quantities are significantly higher. Gillette reportedly paid less than $0.10 per tag for half a billion tags (Bonasia, para 15). The cost of bar codes is very negligible - almost free. Until the tags get to be a few pennies a piece the cost may be a limitation.
Principle Impacts on the Industry
Principle impacts
associated with the use of EAS/RFID are an improved return on investment (ROI)
for the retailer and an enhanced customer shopping experience. ROI will improve due to improved sales - as
items are more likely to be in stock, increased productivity through
elimination of labor-intensive scanning, reduced losses from shoplifting and counterfeiting,
and real-time visibility that decreases shoplifting and scrap and reduces
inventory (Texas Instruments-2, para 18).
Numerous other advantages
have to potential to similarly transform the industry. Transaction times decrease, risk management
is lowered, and customer loyalty creates greater profitability (Texas
Instruments-5, para 2). Time-consuming
hand scanning is eliminated as the position of the tag is irrelevant and tags
can be read at 96 tags per second (Texas Instruments-1, para 5). Early pilot programs and implementation have
shown a 3% to 5% reduction in supply chain costs and 2% to 7% increase in
revenues attributed to inventory visibility (Texas Instruments-1, para 9).
Savings from using
EAS/RFID will come from the ability of retailers to keep shelves stocked,
reduce theft, and reduce counterfeiting (Texas Instruments-2, para 12). Shoplifting could become a thing of the
past. Pocketed items would be charged
to the customer’s credit card upon exiting.
If billing information is not available, this will be signified by alarms
and through merchandise that sets off warning lights and sounds (Killian, para
18).
The day could soon be upon
us when shopping does not end with a trip to the checkout line. With EAS/RFID technology, shoppers will
never have to grab for their wallets or worry about the safety of their credit
card numbers and signatures (Texas Instruments-5, para 1). Combined with the increased availability of
in-stock merchandise, the customer’s shopping experience is clearly enhanced.
The GAP has piloted a
project in which they had denim jeans tagged and tracked through the entire
supply chain to the store shelf. They
had antennas built into store shelves so an inventory count could instantly be
taken at any point (Hill, 2002). RFID
tags in GAP denim apparel increased customer service and supply chain
efficiency. Sales in the pilot store
were higher than in other stores. As
soon as a shipment was received, associates knew what merchandise needed to go
to the floor. Overall, inventory was
better managed. Customers did not leave
the store because the item they wanted was in inventory, but could not be found
(Texas Instruments-3, para 2).
According to Neco Can, Director-Project Management, The GAP, during
GAP’s three-month test pilot using RFID they achieved a 99.9% inventory
accuracy rate (Texas Instruments-4, para 3).
Accuracy was attributed to the individual tracking of each item. At anytime, every single item could be
accounted for through its RFID tag.
In a pilot program carried
out by McDonalds, customers carried a transponder on a key chain. At the POS - the drive-thru window or inside
at the counter - the customer waved their transponder at the reader. The reader picked up the transponder’s
unique signal and passed the information to verify the customer's profile and
credit information. Once authorized,
the transaction was processed, receipt printed, and the sale complete. The system automatically billed purchases to
the customer's credit/debit card or account they have chosen (Texas
Instruments-5, paras 3, 6). A similar procedure could be implemented for
self-service checkout using RFID identified product.
When Microsoft performed a
three-month open merchandising test using source tagged Office 95 packages,
unit sales increased significantly because customers could easily find the
product and shrinkage declined (Markowski, p42). Microsoft was the first major company to employ source tagging
and introduced this with the launch of Office 97 in January 1997 (Markowski,
p42).
While a combination of RFID and EAS technology offers promise throughout the retailing industry, implementation of this technology will certainly become more attractive over time as standardization occurs, costs decrease, and potential consumer concerns are alleviated. For many retailers, the best course of action could very well be to wait and see what happens and react after the technology has matured. However, early movers that are able to implement successfully will be at an advantage in terms of lower costs, increased knowledge of the technology, and improved consumer perception of their stores.
It is our opinion that large retail chains are most suited to early adoption, because they are better positioned to negotiate with suppliers and because the initial costs associated with learning and applying the technology can be absorbed by many locations. Because the price of RFID chips remains relatively high, merchants that sell relatively expensive items seem better suited than those that sell high volumes of low-cost, commodity goods. As such, it is our recommendation that large retailers of electronics goods - such as Best Buy or Circuit City - are best suited to early adoption. Wal-Mart could be another reasonable early mover because of its size and tremendous bargaining power with suppliers. However, because their strategy is to be a low-cost leader, the added cost of early adoption may not be fitting with their strategy. Thus, this discussion of implementation is tailored to large retail chains specializing in electronics goods.
The first step we recommend is the retailer should establish a group to investigate the technology and to become involved in industry discussions regarding standardization. The primary purpose of this group is to anticipate how the technology will evolve and to develop an implementation timetable based on their expectations. Second, the group is to work with manufacturers, suppliers, and trade associations to push standardization of the technology. Technical IT staff should be involved to learn about the technology while members of business development and supply chain development should guide the group from a business needs standpoint.
After investigation is complete, we suggest that the initial team be expanded to create a strategy development and implementation team. This group is charged with developing an RFID strategy that can be used throughout the organization. The team will be represented by all organizational functions including supplier management, unit level management, loss prevention, finance, human resources, etc. While IT staff will be a major part of the team, the team will be led by non-technical executive management because the scope of the project has the potential to effect all aspects of the business and IT implementation is a tool toward a much larger end.
The optimal schedule for this development is largely based on the investigatory team’s expectations for standardization. If the end of 2003 is a realistic timeline for a meaningful standard to be in place, it is best that the project be delayed until this is realized. If this timeline is not realistic, quick action may provide the greatest first mover benefit -although the risk of equipment or systems that are incompatible with future standards must be weighed heavily.
Given that this technology is evolving, the strategy team must give careful consideration to how many in-store functions should be changed to utilize RFID tags. Should theft management, point of sale processes, and inventory systems all be addressed at once or should implementation focus on one aspect that provides the greatest advantage? Our recommendation is that all possible advantages should be considered during strategy development and Beta testing at one or two stores. Because early decisions will have a major impact on later capabilities and the final system will be used chain-wide, the final product should be realized prior to going ahead with the project at all locations.
We also recommend that all products in the store utilize RFID tags upon introduction company-wide. A reasonable alternative to this would be to initially incorporate RFID tags only onto items that are most expensive or easiest to conceal - with the expectation that other items would be incorporated later. While this would provide benefits related to inventory management and loss prevention, redundant systems would still be required for all other goods. Furthermore, point of sale advantages cannot be realized unless all goods incorporate the technology.
A primary consideration of the project is how, when, and where the RFID tags are placed on product. As chips can be easily imbedded directly into electronic goods, the ultimate goal is to have RFID incorporated into products at the manufacturing level for all goods that are sold. Given that the technology is evolving, it is unlikely that suppliers will be willing to incorporate these chips for one customer in the short term. We recommend an intermediate solution that is much more feasible: have the manufacturer incorporate the chips into the packaging prior to shipment. It is already common practice for manufacturers to package and label identical products differently for large retailers (Lilly), and this approach would provide much of the benefit of in-product placement. In cases that manufacturers are not willing to do this, RFID tags must be placed onto or into the packaging by the retailer or wholesaler at the earliest possible point.
Approaching the project this way can be extremely challenging given that the technology is not familiar and the goals of the project could very well change over time. To reduce the risks associated with the project, we suggest that Beta testing must be very thorough and the firm must be willing to change the project scope prior to full-scale implementation. Because the technology is likely to change at some point, an iterative approach may be best to evaluate new possibilities and ideas without expending significant time and money. While our recommendation is aggressive, we feel that the risk is better focused on the front end of the project – prior to ‘going live’ at multiple stores.
If Beta testing is successful and rollout to all locations is approved, we recommend that the store begin a communication plan to all associates to educate them about the changes. This must include communication from the very top of the organization and the message must be delivered repeatedly and through a number of channels. Discussions with manufacturers and other suppliers will have been in process for some time, but these individuals should also be formally informed of the decision to move forward. The project should then be communicated to the public through in-store communication and perhaps an advertising campaign that portrays an easy point-of-sale experience. These efforts should also aim to reduce fears of those who may have concerns about privacy or ‘big brother’ issues. If privacy issues begin to impact the bottom line the stores need to be able to quickly respond. The ability to deactivate tags before exiting the store should be available in case customers begin to demand that function. The store should be ready to deal with all issues of privacy and have a plan to combat issues as they develop.
In conclusion, a project of this size has significant risks and potentials for failure. These could be reduced by implementing RFID tags on a small number of products or by only addressing a small part of the business – i.e. only inventory management - or only point of sale efficiencies - or only theft prevention. The disadvantage with this approach is that decisions made early on could have large impacts on future capabilities. Expanding the scope of the project once equipment is in place at all stores could be much more expensive than spending time and money during development. The time spent at the front end will also increase the chances that final RFID standards are known and incorporated prior to rollout at all stores. Considering the tremendous cost of scanners and tags for products at every location, the costs and risks of developing a fully capable system from the beginning are most likely well worth it.
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