September 8, 2003 4:00 AM PDT

Retail takes stock of radio tags

A technology that uses tiny devices to track everything from car tires to clothing is changing how retail businesses work and could generate billions of dollars in revenue for software makers.

The technology, known as radio frequency identification (RFID), tracks retail inventories through computer networks connected with microchips "tagged" to any type of product. Each chip broadcasts a unique ID code that can yield a wealth of information, such as the item's origin, owner, location, expiration date and time of purchase.

That could translate to huge savings for retail operations that currently use a variety of more labor-intensive means to track inventory. RFID also promises to deliver more accurate and detailed information. And as Wal-Mart and other retail giants buy into the RFID concept, software makers and other high-tech companies are salivating over the billion-dollar-plus prospects of this new market.

"They recognize that the floodgates are about to open soon and they see a really good opportunity," said Ed Rerisi, director of research at Allied Business Intelligence, an information technology research firm in New York.

Like any nascent technology, RFID has its share of kinks that need to be worked out before it can become widely adopted--no mean feat when the problems range from storage overload and crossed radio frequencies to privacy concerns and labor union opposition.

What makes industry veterans optimistic, however, is that companies are developing the technology in response to business needs instead of inventing products based on speculation, as so many did in inflating the dot-com bubble. Some industry leaders are so bullish that they say RFID may become a factor in lifting the technology sector from its three-year decline.

Industry experts estimate that the market will create $3 billion to $10 billion in new products and services in just the next five years. Along with this growth would be higher demand for servers, data storage systems, database programs, business-management software, consulting services and other computer infrastructure.

"This is a business problem being solved by technology rather than technology looking for a business problem to solve," said Raymond Blanchard, a research executive at German software maker SAP. "For the first time ever, managers and CEOs will actually understand what is going on in their enterprise. It's a whole new level of granularity--it's 100 percent certainty."

Getting ready for prime time
The technology dates as far back as World War II, when it was used to discern allied from enemy aircraft. What's new is an intensifying interest in the technology among large corporations, particularly retail chains and suppliers, which want to apply RFID to perennial business problems such as shoplifting, inventory shortages and logistical errors.

Commercial interest in the devices has grown in recent years as the prices of RFID chips and readers have fallen and as the data standards necessary to allow the technology to work on a large scale have evolved. The rise of the Internet as an industrial-strength business tool has been a critical development as well because many corporations plan to use it as the backbone of their RFID networks.

Chief among these companies is Wal-Mart, the world's largest retailer, which asked its top 100 suppliers in June to prepare for a major RFID push in 2005. Tens of thousands more Wal-Mart suppliers are expected to follow suit the next year, and nearly 50 RFID field tests now under way at other companies around the globe could similarly advance to full-scale projects.

Dirk Heyman, head of Sun Microsystems' global consumer goods industry segment, estimates that the technology will hit "prime time" in 2006. "Which doesn't give us too much time. Nobody has said, 'I'm betting my whole company on RFID,' but that is going to come," he said.

By placing RFID tags on each piece of merchandise, as well as cases and containers used to ship them, companies could monitor their inventory at a more detailed level than ever before. Executives could identify when problems occur by monitoring signal readers installed at key junctures, such as loading docks, receiving points, distribution centers, backrooms and store shelves.

This kind of detailed tracking would give companies information they could never imagine with current operations, allowing them to identify such problems as "gray market" sales that can erode profits and damage distribution relationships through unauthorized discounting.


News.commentary
RFID's win at Wal-mart
The megaretailer's endorsement marks
the real tipping point for adoption of
radio frequency technology.


Another advantage of RFID, proponents say, is a reduction in manual labor. RFID tags are designed to register the whereabouts of merchandise automatically, which means that workers wouldn't have to perform inventory checks and scan bar codes by hand.

Today, manufacturers, distributors and retailers, collectively known as the "supply chain," are typically hampered by a lack of information about the flow of goods from factory to consumer shopping cart. They are also dogged by mistakes that occur in handoffs from one link in the chain to the next, resulting in misplaced, misdirected and otherwise lost inventory--a phenomenon that the retail industry calls "shrinkage."

"In the consumer goods industry, shrinkage is one of the biggest problems they have," Heyman said. "The disappearance of a product between a manufacturer and retailer, due to theft, wrong shipments, damage--that's multiple billions of dollars a year."

Bugs and boycotts
For all its promise, however, new technology will not solve such massive problems overnight. A slew of major technical and cultural hurdles could derail or delay the anticipated RFID revolution.

One of the most pressing challenges involves the operation of RFID hardware, particularly how the tags transmit their data to readers. Certain physical conditions in the average warehouse and shipping environment, such as the presence of metal, liquids and competing radio transmissions, can interfere with RFID signals.

That's apparently what happened during one test of the technology at a Wal-Mart warehouse in Tulsa, Okla. When the RFID system was switched on, the whole distribution system at that location crashed because of interference by radio frequency signals coming from a wireless bar code scanning system, said Pete Abell, an analyst at Boston consulting firm ePC Group.

Handling the enormous volume of data generated by extensive retail operations is another problem. One large company in Florida quickly overwhelmed its new RFID data storage and database systems, said Rerisi of Allied Business Intelligence, who would not disclose the name of the business.

The cost of the equipment, particularly RFID chips, is another factor that will determine the success of the technology, as are industry standards that will allow various systems to work together. Security is also a concern, as RFID networks could create a new target for hackers in search of sensitive material, including consumer information.

Beyond the technical issues, the technology faces difficult political obstacles in the form of organized labor. Unions don't want to see warehouse and shipment workers' livelihoods automated away by computers, as evidenced last year when a strike by dockworkers over the introduction of new technology brought commerce to a halt on the West Coast.

Other concerns are being raised by privacy advocates, who fear that the use of RFID chips in consumer goods will eventually lead to a surveillance society. Initial trials by Wal-Mart and Britain's largest retailer, Tesco, to tag individual products with RFID devices were met with boycotts and protests.

Potential versus hype
Perhaps most important at this early stage, companies must be careful not to exaggerate the technology's potential. Unwarranted hype has created confusion and disappointment that has stunted or killed many products related to this type of technology in the past.

"There will be a lot of half-baked software solutions in 2004," Abell said.

No company is more aware of the dangers of hype than Oracle, which was hammered with negative publicity when it released a buggy version of its business-management applications a couple of years ago. With that experience still fresh in mind, the database manufacturer is taking some deliberate steps as its moves toward the RFID market.

"We aren't rushing something out just to say we have something out that isn't real. We're doing it real, and we're doing it as a priority project," said Jon Chorley, product manager for the company's inventory and warehouse management systems. He said Oracle plans to release its first RFID products next year, including a middleware component that gathers data from readers.

Sun Microsystems, which says it is pouring millions of dollars into RFID research and development, also hopes to capitalize on the seemingly infinite uses of the technology. Predicting that RFID readers will someday be found in hotels, gas stations and countless other places, Sun hopes to profit by selling the servers needed to handle the resulting crush of information.

Accenture, Hewlett-Packard and IBM, through its Global Services division, anticipate myriad consulting services for those using the new technology. Already a major supplier of technology to Wal-Mart, Big Blue has assembled a team of thousands to work on its RFID initiative.

Regardless of its affiliations or expertise, any company with designs on this market will have to deal with one name inevitable in any new computer technology: Microsoft. While remaining vague about specific product plans, Microsoft envisions new business applications designed to take advantage of the technology and is thinking of ways to tie it into other software made by the company.

Eric Estroff, a senior product manager at Microsoft Business Solutions, expects his company to make a major push into the market in the next couple of years. "It's about how efficient you can make your supply chain and lowering the total cost of ownership of RFID technology," he said. "And that's where the software companies come in."

SAP also sees a significant role for software developers. The company said it is deeply involved in RFID projects at Gillette, Procter & Gamble and another major retailer that it declined to name.

"It will fundamentally change how computing works," SAP's Blanchard said. "It's a game changer."

 

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