RFID compliance: Year Two

Time's up. A year has passed since Wal-Mart Stores Inc.'s (www.walmart.com) compliance deadline for an initial group of suppliers to affix radio frequency identification (RFID) tags to cases and pallets destined for the retail giant's Dallas-area warehouses. While the impetus was for the retailer to get better control of inventory so that it knew, at least, what pallets it had in the back rooms of its stores and what cartons were on those pallets, the industry-wide scope of RFID has considerably widened over the course of the past 12 months.

For instance, a study by researchers at the University of Arkansas — a study that, admittedly, was commissioned by Wal-Mart — indicates that using the electronic product code (EPC) type of RFID tags "increases how often we put products in the hands of customers who want to buy them, making it a win for shoppers, suppliers and retailers," says Linda Dillman, Wal-Mart's executive vice president and chief information officer. Among other findings, the study states that out-of-stock items with EPCs are replenished three times faster than those with just standard bar codes.

"Our RFID implementation is right on track," says Wal-Mart spokesperson Christi Gallagher. "We currently have over 500 facilities RFID-enabled. We are preparing to have the next top 200 suppliers go live." That will happen this month.

As an international company with operations in more than 15 countries, Wal-Mart has been supportive of the development and implementation of EPC Gen2 tags since they provide a global standard (see sidebar, "Decoding the acronyms"). It expects costs for Gen2 tags to be lower as the standard becomes more widely used. The company is already accepting cases and pallets with Gen2 tags at all of its existing RFID-networked facilities, says Dillman. By mid-year, Wal-Mart expects to stop receiving earlier generation tags, moving to an exclusive Gen2 environment.

During the course of the year, Wal-Mart will continue its rollout, doubling the number of RFID-enabled stores and distribution centers (DCs) that service them. It expects to have 1,000 stores, clubs and DCs using RFID by the end of the year.

The next wave of 300 suppliers are expected to be RFID tagging their cases and pallets by January 2007, which will bring the total of all Wal-Mart suppliers using RFID to more than 600.

Wal-Mart sees RFID as a means to an end — driving down overall inventory. Reducing shelf out-of-stocks is just the beginning as the retailer aims to reduce inventory through its entire supply chain.

Inventory reduction is also one of the carrots being dangled in front of shippers who are currently testing and using RFID technology. While many companies have yet to move beyond the basic "slap and ship" compliance level, some manufacturers are far enough along that they're extending the technology's use to other areas of their operations, with positive results.

Hewlett-Packard Co. (www.hp.com), for instance, has been a pioneer in Wal-Mart's move to RFID. Part of the reason is because the high-tech manufacturer interest actually pre-dates the Wal-Mart initiative. HP started looking at the technology in 2002, according to Gregg Edds, HP's product manager for global supply chain operations.

Deploying RFID throughout its supply chain can deliver return on investment "above and beyond what we're doing with bar codes," Edds says. In fact, HP had already done a proof of concept and launched two follow-on RFID pilots before Wal-Mart's announcement, he points out.

Working with a major retailer like Wal-Mart has helped HP a great deal since it provided a real production focus. By April 2004, HP had already fully integrated RFID into its internal supply chain processes, end-to-end. "We have implemented RFID within what we call our manufacturing and product completion areas, and into our finished goods warehouse and shipping processes as well," explains Edds.

The fact that HP's printer products are serialized provides the company with an advantage over bar codes. Each printer has a unique serial number and typically the company puts one printer in one box. "So even though we're tagging at the case and pallet level," notes Edds, "the fact that we're putting a unique RFID tag with a unique EPC code on a box means, theoretically, we're tracking that unique product at an item level."

At HP, RFID tagging begins in manufacturing. When a printer goes into a box for final packaging, a label is printed for attachment to the box with data that includes product identification, part number, serial number and UPC code, all of which is human readable as a bar code. The difference is that HP has integrated RFID labels with the paper stock labels.

"The label looks like the same old printed bar code label, but the RFID tag is imbedded right behind that paper label," Edds explains. We've implemented RFID tagging seamlessly with our existing process. Operators don't know any difference between RFID product and non-RFID product."

As labels are read, EPC information is moved from manufacturing to the finished goods area, where it is stored for service and warranty purposes.

RFID has been a catalyst in changing HP's shipping process, enabling a move from manual work. "In the warehouse we built a portal of RFID readers, and we can drive a loaded pallet through the portal where the EPC codes are automatically scanned and read," Edds notes. "A printer sits adjacent to the portal and prints the shipping address labels. Operators don't have to get off the forklifts to tear off the labels, which are sitting at their level. All operations from scan to confirmation to printing the labels happen within 20 seconds or less. Operators then drive pallets to the dock door, drop them and slap on the address labels."

Since HP decided years ago that these warehouse functions were not core competencies, all of this work is being done by third-party logistics providers (3PLs). "All of the RFID systems we've put in place have been done in cooperation with third parties who have their own shop floor systems, their own ERP [enterprise resource planning] systems and their own warehouse management systems," says Edds. "We aren't tagging 100% of our products at these facilities." Much of the work has been done to enable the company to study volume operations and to understand costs.

In fact, HP is presently in discussions now with its 3PLs on what the numbers are and what the ROI is, Edds says. "The price of the tag is a big factor." He has noted price reductions on RFID labels and wants to work with suppliers to see what opportunities may now exist for process changes as a result.

HP has done some early testing with Gen2 tags from several suppliers and has seen some definite improvements in performance over first generation tags. Edds has seen improvements not only in the greater amount of data the tags may hold but in greater distance of reads as well as reductions in the time it takes to get reads. Most of this testing has been at the pallet level, which currently offers HP its biggest opportunities.

HP has 26 sites worldwide that are running and tagging RFID to meet Wal-Mart's requirements. "Just about all of those are 'slap and ship' operations," admits Edds. "Part of that is because in the early pilots we were doing a lot of testing of vendors. All we had time for at these other sites to meet the Wal-Mart mandate was to do slap and ship. But what we're looking at doing now is sharing our experience with these other sites — working with them to take that next step and make changes within their process to take advantage of the technology."

Though its involvement in the RFID movement has been less dramatic than Wal-Mart's, specialty retailer Best Buy Co. Inc. (www.bestbuy.com) has been working on RFID for four years and in earnest for the past two years. Best Buy expects the bulk of its benefit will come from item tagging, notes Paul Freeman, the company's EPC RFID program director. If it does work at that level, Best Buy will have leaped over those who are strictly focused on pallet and case level identification.

When Best Buy began investigating RFID, the technology didn't seem far enough along to present a valid business case for the company. Even when Wal-Mart announced its implementation plans, the project didn't appear broad based enough to encourage Best Buy efforts. As Freeman points out, the business models of discount retailers Wal-Mart and Target Stores are quite different from Best Buy's.

"We spent a fair amount of time analyzing all areas of Best Buy where we could use RFID," says Freeman, "and we came up with many areas where the technology will enable improved process with better accuracy of information, delivered faster and at more read points. We mapped it in more than 35 different areas of our operational blueprint, and each area has the process steps and flows showing where and how RFID can help." The analysis indicated Best Buy could enjoy significant ROI, which motivated the company to go ahead with its RFID plans.

Best Buy embarked this month on a case and pallet pilot with its major suppliers. Freeman says that virtually all of the company's suppliers — which make up 80% of the company's revenues — are joining the EPC Global standards group and participating in the pilot. The pilot is structured as a partnership; it's not mandated as something suppliers must do in order to continue to do business with Best Buy.

"We are going to share all we learn with our suppliers and try to figure out how our value chain should work and how it should best be designed," Freeman explains. "It's a great opportunity for our suppliers to make a moderate investment and learn quite a bit."

Freeman feels that at this point RFID technology has not been engineered to go to the item level on the store shelf. However, Best Buy did a smart shelf test this summer with integrated radio frequency data networking hardware and EPC management software from Vue Technology (www.vuetechnology.com). "It worked well," claims Freeman, "but we have to see how we can scale that, make it flexible and execute in many different categories and many different product and shelf sizes and shapes."

As this year's pilot project moves forward, Best Buy will evaluate results every 60 days. "Then we'll convert to Gen2," says Freemen, "and see if that improves some of the physical attributes. We'll focus heavily with Vue and any other smart shelf and store execution item-level suppliers. We want the EPC Global community to also set some standards around item level and to help drive adoption."

Best Buy knows where and how RFID will be used and the price points it's willing to pay based on returns. But, as Freeman notes, "For us it's all about customer service improvement. Number one, we want to make sure items are shelved and ready for sale. Past that, we are thinking of all the things we can enable within the store once the products can talk."