RFID Costs Still Problematic

Feb 18, 2013

I was disappointed recently to read of JC Penney’s (JCP) decision to defer its plans for RFID (Radio Frequency Identification) implementation in its retail stores. Following steady success by retail giants Wal Mart, American Apparel, Marks & Spencer and others in recent years, JC Penney appeared to be adopting an RFID leadership position with reported claims last year it would be 100% RFID enabled by February 2013.

In an interview with Forbes Magazine, JCP CEO Ron Johnson (former retail executive with Apple & Target) laid out an aggressive plan to streamline the customer experience by combining RFID, high speed WiFi and mobile POS systems in order to reduce the number of cash transactions at store level.
Besides speeding up the customer checkout process, one of Mr. Johnson’s main objectives in implementing comprehensive RFID ticketing was tackling the labour-intensive retail checkout process, estimated to account for 10% of JCP’s in-store labour costs, to the tune of approximately half a billion dollars annually. Building on JCP’s past RFID experience, he saw a win-win in going for full end-to-end integration: improved customer service, increased efficiencies related to information availability, and lower overhead cost.

Those of us who embrace the concept of RFID as a supply chain enabler see past the retail advantage here and appreciate the impact on inventory management (item level identifiers, in-stock ratios, locator advantages) and vendor management (procurement, data sharing, demand management forecasting, etc.). In other words, RFID still holds tremendous potential for overall supply chain efficiencies.

While size limitations, and costs, of RFID tags were frequently cited as the main barriers for robust RFID implementation by many companies, manufactures like Hitachi and Murata have successfully designed tags small enough to be easily accommodated in product labels. And with the costs of some passive tags (non-transmitting) heading below $0.10, Mr. Johnson felt those costs had declined enough in recent years to make the benefits of RFID worthwhile.

He was also leapfrogging the problem of waiting for (additional) vendor implementation as a first step, deciding instead to implement RFID at retail and push it back through the supply chain as an incentive for suppliers to begin full-case tagging. Using his Apple experience as a blueprint, he also envisioned the eventual end of traditional cash registers by enabling customers to check out on their mobile devices.

Surprising then, when just last month JCP announced an abrupt about face, stating that the full RFID initiative would be deferred, and only implemented for selected clothing and fashion jewelry items. The reason? Cost, not tag costs, but infrastructure costs.

In essence, a department store is really a warehouse, a storage location farther along the supply chain than the traditional distribution centre. And like a warehouse, goods are sometimes misplaced, or in the case of a department store, picked up from one location by a customer and put down in another. One of the challenges facing JCP was that using an RFID reader in one department to verify inventory was only half the problem, the other half was locating the item if it wasn’t there. And to solve that problem, JCP would need a far more extensive network of RFID readers throughout their stores, along with supporting hardware and software requirements.

The additional infrastructure costs were apparently more that JCP was willing to absorb, a decision undoubtedly influenced by declining sales and a third quarter loss last year of more than $100 million.

Despite the ongoing, if incremental, success of RFID implementations, the issue of cost remains pivotal for many organizations, with initial concerns over tag costs replaced by fears over escalating infrastructure costs, and with good reason. Recent studies for data capacity related to RFID reveal that organizations may have to accommodate 10 – 100 times the amount of information that could be generated by barcode systems (Winans, 2005), and the resulting infrastructure costs can be as high as $13 – $23 million for a large manufacturer (International Journal of Management and Information Systems, 2010)

Regardless of JCP’s delayed start, Ron Johnson accomplished more in 6 months than the organization did in the previous 6 years in terms of laying out an RFID game plan. He identified a vision, showing customers, employees, and observers alike, what’s possible.

Like all of us enamored with the concept of RFID, Ron Johnson gets it, more than most. RFID is the missing link, the technology that holds the potential for truly integrating business processes, redefining the meaning of communication, and transforming the supply chain by making questions like “who, what, where and when” redundant.

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