Retail`s poor cousin

Radio frequency identification (RFID) technology has been around since the 1940s, but it is only really since giant US retailer Wal-Mart mandated its top suppliers to deliver goods using palettes containing RFID tags by January 2005 that the media and vendors have been in a state of frenzy over this technology.

Widely billed as the killer application of the decade, RFID simply involves various kinds of tags consisting of a chip and antenna being attached to pallets, cases, or individual items to provide real-time wireless communication with readers on the status of the tagged items.

In the retail environment, the electronic product code (EPC) is a unique number used to identify a specific item in the supply chain. The EPC is stored on an RFID tag. Once a reader receives the EPC from a tag, it can be associated with dynamic data held in a secured database.

Together, the EPC, tags, readers and integration software form what is know as the EPCglobal Network that is aimed at enabling immediate, automatic identification of items in the supply chain anywhere in the world.

Initial enthusiasm for the enormous potential of RFID was tempered by the high cost of equipment, low read rates, and various technical challenges.

As the technology has matured, these obstacles have begun to diminish, taking supporter clamour near fever pitch once again.

Of all the applications identified for RFID, the biggest cost savings are expected to come from improved efficiency and visibility within the supply chains of fast-moving consumer goods (FMCG). Promises of huge cost savings have led analyst firms such as Gartner Research to conclude that RFID is likely to have the biggest impact on the retail industry.

In reality, however, apart from market leaders like Wal-Mart, Tesco, Marks&Spencer and Metro, few retailers internationally and even fewer locally are planning implementations any time soon.

Why have most real-world implementations to date not been within supply chains, but aimed instead at high-value asset tracking in the manufacturing, mining and transport industries?

The answer is simple. The biggest reason RFID is yet to be widely implemented in the retail industry is that efficiency, visibility and security across global supply chains cannot be achieved by RFID on its own.

"RFID is merely an enabling technology that needs to be used in conjunction with appropriate business processes, product classifications, technology standards, merchandising applications and backend retail data systems," says Jaco Barnard, retail industry leader for IBM`s global business services.

Henri Slabbert, Edcon CIO, agrees: "RFID technology is a very small part of the whole retail ecosystem. Thought has to be given to the impact RFID will have on business processes, IT infrastructure and individuals who will have to change the way they do things."

RFID implementation across national and global supply chains is clearly impossible before all the supporting elements are in place. Consequently, most players believe that fully automated, accurate, real-time tracking of every product from manufacture to sale is still a long way off.

While believing the ultimate vision is still several years down the line, most people in the retail industry recognise RFID will play a key role in future supply chains and have adopted a strategy of actively engaging with the technology.

RFID is a very small part of the whole retail ecosystem.

Henri Slabbert, CIO, Edcon

This strategy, however, does not include any firm commitments to particular RFID technology, investments in RFID hardware, and implementations on any scale. Instead, most retailers both locally and internationally have decided to watch and learn from the RFID projects market leaders are planning over the next two years.

"A lot of groundwork is being done in SA," confirms Andrew Fosbrook, MD of ProScan Systems. However, he concedes it is still early days for RFID in the retail industry.

Barnard says local RFID initiatives are also still being driven by IT. He believes only when the RFID debate reaches board level will any significant progress be made.

Most retail organisations are wary of investing money in RFID. They believe once issues around RFID are resolved, they will be able to adopt the technology quickly and catch up. However, Gartner says retailers that don`t want to experiment and invest without a clear business case, and opt instead to play catch-up, risk falling behind.

"Pick a standard and run with it, rather than suffer the consequences of waiting," advises Phil Savides, head of Business Connexion`s Western Cape region.

Gartner says planning to play catch-up is a risky approach because market leaders are unlikely to share their hard-learned process-change requirements.

South African retailers appear to fall firmly into the category of these would-be "fast followers", but they have dismissed the Gartner warnings.

RFID has some way to go before being directly commercially relevant.

Jay Currie, group commercial executive, Massmart

"There is nothing that market leaders have learned from costly pilot implementations that we don`t already know," asserts Slabbert.

Like most retail groups in SA, Massmart, a managed portfolio of 11 wholesale and retail chains, is keeping a close watch on the developments around RFID both locally and internationally and is holding discussions with early adopting retailers.

"RFID has some way to go before being directly commercially relevant within Massmart, but we are excited regarding its future potential," says group commercial executive Jay Currie.

Full-scale RFID may be a long way off, but in the meantime, there is much to be done in terms of business process optimisation and preparing the retail industry ecosystem.

There is broad agreement that RFID is inevitable and worth considering in any activity that would benefit from automatic data collection from massive throughput of goods. This is because it removes the need for more time-consuming tracking methods such as bar coding.

"RFID sceptics who see significant technical and regulatory challenges and no return on investment are out of touch," says Marius Krige, market management director at Unisys Africa.

Krige says the same was true with bar code technology 30 years ago.

Pick 'n Pay group executive Ronnie Herzfeld concurs: "It took time for the manufacturer and consumer benefits to be appreciated."

Herzfeld says he fully expects a repeat of bar code adoption history with RFID. "There is bound to be a mix of enthusiasts, sceptics and those who are in denial, but the overall adoption rate of RFID should be quicker than it was with bar coding."

As RFID technology has matured, the lack of appropriate business processes has emerged as the greatest barrier to implementation in the retail industry.

A key finding of a Gartner report on RFID in retail confirms that business process changes are necessary for consumer goods companies to share and use product information. The report says process change is a prerequisite for RFID initiatives.

Yet IBM`s Barnard believes many companies will be able to achieve acceptable levels of efficiency through process optimisation alone.

"There is a lot that can be done today in terms of optimising processes to realise cost savings before even considering RFID," says Barnard. He believes RFID should be considered as an option only once 97% stock accuracy is achieved.

Allied to the need for process optimisation is the need for a standard way of referencing goods moving through supply chains.

"Product data uniformity is the first step towards making RFID implementation in the retail industry a reality," says Fiona van der Linde, EPCglobal unit leader within the Consumer Goods Council of SA (CGCSA).

As part of process optimisation, data uniformity is an important prerequisite for implementing RFID-enabled systems, maintains Van der Linde. Pick 'n Pay`s Herzfeld emphasises the point by saying RFID-enabled systems will be worthless if the data they collect isn`t clean.

The retailers and wholesale members of CGCSA set a mandate for all FMCG manufacturers to register their products on the SA Product Data Catalogue (PDC) to help achieve global data synchronisation based on GS1 product data standards.

EPCglobal SA and GS1 SA are divisions of CGCSA and are affiliated to the internationally recognised organisations EPCglobal and GS1, which are responsible for the development of standards and systems for supply chain efficiencies.

"Only once retailers are committed to data uniformity, and the changes that entails, should they begin formulating a strategy for implementation," says Van der Linde.

"Retailers can`t really even begin serious work on establishing a business case before achieving data uniformity, alignment and accuracy," she emphasises.

Another significant challenge to RFID adoption across global supply chains is there is no single RFID technology and, consequently, no single standard for the way tags and readers communicate. Rapid international growth has led to a highly fragmented environment.

Uncertainty around RFID standards and disparate ranges of tagging products is still a significant barrier to adoption. "Ideally, any RFID reader should be able to read any tag," says Herzfeld.

Although widely agreed that a single RFID standard is necessary for global supply chains, there is little consensus around what the characteristics of that single standard should be.

Wal-Mart has mandated its top suppliers to adopt the new EPC Class 1 Generation 2 RFID specification. Although the Gen 2 spec improves on the speed, reliability, efficiency and security of previous protocols, the EPC protocol is merely one of several that have been developed around the world.

"Those with vested interests in the EPC Gen 2 specification are obviously keen to see it adopted as the international standard, but it was developed in the US and is, therefore, not viable in its current form for use in Europe and other regions of the world where bandwidth is limited," says Alwyn Hoffman, executive VP of iPico.

Despite various misgivings about the EPC Gen 2 standard, it is still one of the strongest contenders to become the global standard due to the powerful support it has received from Wal-Mart and the US Department of Defence.

In addition to the need to optimise processes and fix standards, the lack of RFID-ready IT systems and applications as well as the lack of collaboration within the retail industry have been identified as another two major stumbling blocks.

"Most backend systems are not ready for the volumes of data RFID-enabled systems will collect and RFID data does not integrate into most retail systems," says Tom Borkett, executive consultant to the Afritag forum within the Smart Card Society of Southern Africa.

Gartner says FMCG manufacturers will be challenged to scale the use of near real-time alerts generated by RFID tags beyond pilot programmes for select stock-keeping units and stores. It also says data management issues must be addressed to enable information sharing.

While technology standards, maturing of the hardware and price issues are important, Doug Hunter, supply chain management solution manager at SAP Africa, says the real challenge to mass take-up of RFID is collaboration across the supply chain.

Hunter says RFID`s main usefulness lies in the speed, accuracy and visibility it confers on the handling of goods through the extended supply chain, but it will require collaboration in terms of sharing the costs and benefits of the technology to ensure support.

"RFID is going to compel business to go where technology`s integration capabilities have been indicating they should go: into a mindset where mutual benefit outweighs individual short-term gains," says Hunter.

"In the South African context, no single retailer can mandate suppliers in the way Wal-Mart has done. Instead, it will have to be an industry-wide initiative aimed at achieving the required level of collaboration," says Edcon`s Slabbert.

Collaboration is one of the key aims of the EPC RFID steering committee initiated by the local division of EPCglobal within the CGCSA.

"The working group examining ways to enable RFID adoption in SA enable competitors to meet, discuss challenges facing local implementation and build the foundations for collaboration," says EPCglobal`s Van der Linde.

Edcon`s technology executive Frank Pinto says industry-wide initiatives such as the one being driven by EPCglobal and Afritag are vital to promoting dialogue between all the players in the retail industry. He says it`s also important for local companies to participate at an international level to present local perspectives and help keep standards relevant to local conditions as they evolve.

"EPCglobal is a non-profit organisation that is driven by its members who all have the opportunity to contribute to the further development of the EPC specification for RFID," says Van der Linde.

Implementation of RFID across global supply chains is still facing a number of challenges, but that does not mean there has been no progress in using closed-loop RFID systems within the retail environment.

Such implementations effectively sidestep the single RFID standard issue by enabling organisations to choose the technology they wish to use for internal systems.

A good example of this is Marks&Spencer`s use of a non-EPC communication protocol for its RFID stock management system within its own supply chain.

In the continued absence of a single global standard, companies like iPico have chosen to concentrate on niche implementations such as the one being used by Marks&Spencer.

Within retail, RFID implementations for the next two to three years are likely to be confined to single supply chains or single retail outlets. But that will not prevent retailers from tackling the problem of on-the-shelf availability, which Wal-Mart cited as one of the main reasons for adopting RFID.

Gartner research shows the top issue for the consumer is out-of-stock merchandise and 47% of customers will go to another store if a product is unavailable. Research has also shown that in 25% of out-of-stock events, goods are not on shelf even though they are in storeroom stock. RFID systems could easily help overcome this problem.

Wal-Mart claims to have reduced out-of-stock events by 30% using RFID. The company believes even higher levels of efficiency will be achieved with the introduction of handheld readers and, eventually, item-level tagging, but this is commonly believed to be about 10 years away.

"There are still no specifications for item-level tags and the tags are still way too expensive to be used on relatively low-value volume goods," says ProScan`s Fosbrook.

In addition to the challenges faced by the rest of the world, SA is facing the immediate challenges of insufficient bandwidth to transmit huge volumes of real-time data gathered by RFID tags, as well as being in the dark about frequencies that are legal for use by RFID equipment.

Although two frequency ranges were gazetted for RFID use in 2004, the Independent Communications Authority of SA (ICASA) plans to revise these provisions. This has resulted in delays for some pilot projects.

RFID vendors have complained that they are unable to import equipment until the new regulations are fixed. ICASA emphasises the need to review regulations in the light of recent rapid advances in RFID technology.

ICASA has compiled, but is yet to table, a discussion document it says is designed to get industry feedback on all the pressing issues pertaining to RFID frequency allocation, including whether SA should align with European frequency regulations.

RFID vendors such as Symbol Technologies Africa and iPico agree it would make sense to align with the regulations that apply to SA`s biggest trading partners.

"Alignment with Europe would also enable vendors to import RFID equipment directly without having to adapt it for local use," points out Andrea Sada, systems engineer at Symbol.

Despite several delays to the tabling of the RFID discussion document, Abel Thoobe, ICASA`s RF specialist for frequency management, is confident a new set of regulations will be gazetted by the end of the year.

"There are very few issues around which we do not already have a rough consensus," he says.

Assuming that any retail organisation wishing to continue trading in future will have to be RFID compliant, Gartner makes several recommendations.

The research house says market leaders should use RFID to improve availability, but also make short-term process improvements in replenishment processes in stores and the supply chain.

Consumer-goods manufacturers should focus pilot projects with retailers on improving floor out-of-stock problems and new product introductions. They should also determine the requirements for managing the additional volume of data generated from RFID reads and linking them to other data elements.

Fast followers should assess replenishment processes` key performance indicators and take action now while RFID matures to counter any advantage the market leaders gain from using RFID to improve their stock availability.