Magazine Article | March 1, 2006

RFID: Value Achieved At The Item Level

Source: Innovative Retail Technologies

Gen 2 standards have been ratified. The cost of tags is 12 cents and falling. Pilot tests are cutting out-of-stocks in half. What are you waiting for?

Integrated Solutions For Retailers, March 2006
Benefits of item-level RFID tagging

Just when the retail industry has been nearly lulled into inaction by all the white noise around RFID (radio frequency identification) technology, we're abruptly awakened by the sound of — silence. Like falling asleep in front of a blaring television only to be awakened by the quiet that follows someone's switching it off, the sudden silence coming from RFID's early and very public retail adopters is causing analysts and retailers — not to mention a few retail technology writers — to wake up and take notice. The PR machines of retailers that once basked in the limelight of the attention given their leading-edge technology adoptions are suddenly going dark. This usually means one of two things — they've either failed miserably, or they've realized some real competitive advantage that they're choosing to hold close to the vest. In the case of the item-level RFID piloting that's currently the rage among several tier-one retailers, we tend to believe it's the latter.

Unseen Inventory Is Unsold Inventory
It's accepted that knowing exactly what inventory is in the store, where in the store it is, and when it will run out is the end goal of inventory management. Bar code technology helped inventory managers get closer to this all-knowing visibility, but keeping shelves stocked and maintaining back room throughput with bar codes is still a largely manual matter. Your manifest may tell you an item was received through the back door last Tuesday and that it hasn't been sold yet. But knowing where in the building it is, and getting to it in a timely fashion when necessary, is all up to the stock boy or customer service representative's legs, eyes, and hands. Industry-wide, out-of-stocks are multibillion-dollar problems. But, they're problems that are addressed by RFID.

RFID Enables Storewide Inventory Visibility
You might argue that the value of item-level RFID tagging has long been clear to retailers. But the focus on tagging of cases and pallets caused by the Wal-Mart mandate has stolen the show of late. As a result, many in the retail community have taken their eye off item-level tagging, the more immediate retail RFID value proposition that's oh, so close to moving out of pilot-level adoption. While the industry's been paying attention to carton- and pallet-level mandates and compliance issues, tags and hardware have become significantly less expensive. The Gen 2 standard has been ratified. Finally, several pilot programs have resulted in significant sales lifts, efficiency gains, and in-stock improvements. In fact, at press time, RFID tag manufacturer Avery Dennison was offering half-million quantities of ready-to-apply RFID tags for as little as 12 cents per tag. Ratification of Gen 2 standards means Gen 2 readers, regardless of manufacturer, will read Gen 2 tags, regardless of manufacturer.

Historically, the hardware necessary to read RFID tags in stores was an expensive proposition. Every reader needed its own antenna, no small investment considering the average $2,000 price tag on readers. Eventually, the technology developed to the point that four antennae could be run off one reader, so if you had 4,000 antennae you would need 1,000 readers, which still requires a significant budget allocation. But Robert Locke, CEO of RFID solutions vendor Vue Technology, says the latest innovation is the ability to multiplex as many as 1,000 antennae off one reader, solving the cost-of-hardware problem. "A multiplexed antenna solution was initially installed in Tesco in the United Kingdom, and the business benefits were off the chart," says Locke. The benefits seen there, according to Tesco IT Director Colin Cobain, included a 50% reduction in out-of-stock merchandise (which had an obvious but unquotable impact on sales figures) and a 75% reduction in restocking labor. "You'd think better-stocked shelves would increase necessary stocking labor," says Locke. "But better data and the efficiencies gained by removing manual processes resulted in drastic labor reductions."

Tagging merchandise at the manufacturing, DC, or store level and wiring the store floor with inventory management system-integrated RFID readers contributes to inventory management efficiency gains. At given intervals, store or stock managers using an RFID-enabled inventory management system can produce a report that indicates everything that's out of stock on the sales floor, if and where it exists in the back room, and the most efficient order in which to procure the merchandise from the back room and restock those store shelves. At Best Buy, it's reported that item-level RFID tagging of this nature improved inventory accuracy from 85% to better than 99% in pilot testing.

During the pilot at Tesco, the retailer discovered that presenting stockkeepers with complete out-of-stock reports — including those that could not be immediately remedied via backroom replenishment due to the absence of inventory — was inefficient. Why give them data they could do nothing with? The report was therefore set to include only those out of stock items that were immediately replenishable by backroom inventory. It was also set for preparation on demand, as opposed to at prescheduled intervals. This way, stockkeepers are encouraged to run the report only when they have the time to act on it and to focus only on the most important task at hand — refilling empty shelves with on-hand merchandise — before worrying about procuring new inventory from suppliers.

Reduce Shrink, Improve Promotions, Customer Service
RFID builds on loss prevention efforts by adding an extra layer of product movement reporting. Locke says the value of DVR (digital video recorder) technology alone is of utmost importance, but that combining item-level RFID tracking with video results in the ultimate view of who's moving merchandise and when and where they're moving it. Catching an associate on camera as he or she picks an item off the shelf only tells you that he or she took it from the shelf. Tracking the location of the item via an RFID tag tells you whether the associate moved it to another shelf, stole it, misplaced it, or otherwise. RFID-labeled associates (badges — not implants) add still another layer of security to the equation.

John Fontanella, senior VP and research director, supply chain services, with research firm Aberdeen Group, points to promotions as a joint RFID value proposition between manufacturers and retailers. "We know that retailers aren't complying with supplier-driven promotions between 65% and 80% of the time," Fontanella says. "CPG [consumer packaged goods] manufacturers spend a lot of money on these promotions, so they're using RFID to ensure their execution." In this case, manufacturers are tagging the actual promotion displays to ensure they make it out of the back room. Beyond that, tagging the promoted items gives retailers and manufacturers alike the ability to monitor and analyze product location, condition, and sales.

Take the promotion of the release of a new DVD, for instance. According to Buena Vista Home Entertainment, in the first four or five days that a DVD is released, it does 50% to 60% of its lifetime sales. Item-level RFID in this category, then, could have a huge impact on sales during the promotion period. For the first few days after a release, a DVD retailer is selling more than 1% of that item's lifetime sales per hour. For every hour the retailer is out of stock, those sales are likely lost forever. Given the industry average of 18% out-of-stock rate for promotional items, if you're advertising an item and you're successful enough to get a customer in the store for it, that customer's chances of finding it on the shelf are 1 in 5. Of those promotional out-of-stock occurrences, it's estimated that the merchandise is actually in the store's back room more than 50% of the time. This is a promotions problem item-level RFID tagging can address.

Having access to exact data on backroom inventory also improves customer service levels. This is illustrated well in footwear, another retail vertical that's adopting item-level tags. Customer service representatives who can confirm size and style availability via handhelds without getting lost in the far reaches of the back room are more efficient (cutting the amount of time it takes to serve shoe customers by 50% in pilots in Asia, according to research firm AMR) and get better points on customer service.

We consider ourselves pragmatists about the value of any new technology. Discerning truth in this competitive market can be a tricky thing. Generally, anything that comes out of a vendor representative's mouth might be true but deserves a healthy dose of skepticism. It's accepted that prognostication from the analyst community contains historically supported validity, but the crystal ball is only so accurate. Retailers, however, are the ultimate litmus tests in the effort to validate a technology's relevance. And the retailers have spoken.