By embracing radio-frequency identification technology wholeheartedly, Wal-Mart Stores and the U.S. Department of Defense have given CEOs across the country reason enough to follow suit. But they’ll be way behind Chris Hornung, whose company, Pacific Cycle, started working with RFID three years ago, has invested nearly $3 million in its implementation and has already begun using RFID in some shipments of its bicycles. “We’re the only bike company that is even beginning to look at this technology,” says Hornung, CEO of the Madison, Wis.-based concern he founded 30 years ago. “We’re light years ahead of everyone else.”
Hornung already has gotten his arms around a technological challenge that many CEOs are just beginning to tackle. The technology is still relatively expensive and many CEOs appear to have refrained from making the necessary investment, waiting to see whether it wins rapid adoption.
Chances are getting better that it will. Improving on traditional bar-code technology, RFID uses radio signals to read and transmit data from electronic tags placed on pallets of goods or even on individual pieces of merchandise, giving companies an unprecedented tool for turbocharging a variety of inventory-management, supply-chain and security functions. Spending on the technology is expected to triple over the next three years, to $3 billion, projects the Wireless Data Research Group. “It’s the next bar code, and because of that, you can’t ignore it,” says Lyle Ginsburg, managing partner of technological innovation for Accenture, the consulting firm. “Many companies don’t really have a choice whether to deploy. It’s more how and when.”
Indeed, some of the economy’s biggest purchasers are forcing much of the action. Wal-Mart is requiring its 100 largest suppliers to be RFID-capable by Jan. 1 for shipments to the retailing giant’s Texas region. The Department of Defense, as well as other major retailers including Target and Metro, the large European mass merchandiser, have set imminent supplier deadlines of their own. Seeing this, IBM recently announced plans to invest $250 million over the next five years and hire 1,000 people to develop and promote RFID applications. Recognizing that small and midsize businesses will have an even tougher time with this technology, Microsoft has been testing an RFID software solution for that market and plans to incorporate it into upcoming releases of its enterprise resource planning solutions.
Compliance incentives aside, many early adopters are acting for strategic reasons as well, confident they can gain big competitive advantages by integrating RFID into their supply chains as quickly as possible. Johnson & Johnson and a handful of other drug companies are in the midst of a $3 million test of RFID for tracking products and protecting against counterfeiting and package tampering. Delta Air Lines is investing up to $25 million to use RFID to track all domestic luggage over the next two years. And Harley-Davidson€¦quot;one of about 30 Wisconsin manufacturers working out their approaches as part of a statewide RFID consortium€¦quot;is considering RFID to better match motorcycle engines with bodies in the assembly process.
After two years, Hewlett-Packard already is so far along in using RFID to track shipments of printers and servers that it is helping some retail customers, even at the CEO level, with their own implementations. “Typically, CEOs don’t want to get into the nitty-gritty of technology like this, but the problem with something as radical as RFID is that if you don’t understand the basics, you’re not going to see the vision,” says Ian Robertson, Houston-based RFID program director for Hewlett-Packard. “You want them to understand that this can allow less buffer inventory and can free up capital, not just that they can save two positions on an assembly line of 50 people.”
But that hardly means it’s a no-brainer for many CEOs and their technical lieutenants to decide whether or how to proceed with RFID. Costing millions of dollars to develop, test, roll out and perfect, RFID systems dredge up bad memories of all those other recent, expensive information-technology acronyms, including ERP, Y2K and CRM. Individual RFID tags still cost at least 25 cents apiece, indicating a significant and continuing added expense that doesn’t attend to bar codes. Stubborn technical issues remain that make it difficult for RFID to operate around some wooden pallets or to read tags on containers made of metal or filled with liquid. Consultants who can help companies plug into the RFID world are in short supply.
Another signal that the technology is in its infancy stage is the fact that RFID systems will produce way more data than companies possibly can sift and winnow for truly valuable insights€¦quot;they generate as much as 100 times more information than traditional bar-code technology. Technical standards still aren’t in place to ensure that an RFID system that works for one customer will work for all the others. The entire field remains in its early stages, meaning the longer CEOs can wait to make outlays on the technology, the more the quality of RFID systems will improve and costs will come down.
CEOs who do commit to RFID will find they can’t be halfhearted about it. “Just like when many CEOs put in their first ERP systems€¦quot;if they simply automated what they already had in place, they didn’t get the benefits,” says Tom Miller, president of Intermec Technologies, an Everett, Wash.-based company that supplies bar-coding and RFID systems. “They found they had to change their business processes.”
Penske Logistics is following the course of many companies so far, hedging its bets. The company handles shipments of a variety of goods from hundreds of manufacturers to thousands of retailers and other end customers. So far, nobody has required Penske to assemble an RFID network, but Vince Hartnett is preparing his company for a dramatic change of tableau in the months ahead. “Customers are saying, €˜We expect you guys to really know what can and can’t be done and help us evaluate and be at the bleeding edge of this thing, so that when we’re driven to deploy RFID, you won’t be found wanting,'” says Hartnett, president of the Reading, Pa.-based unit of Penske Truck Leasing, which is a joint venture of Penske and General Electric. Some important customers, including automakers and the appliance maker Whirlpool, he explains, “would very much like us to come to them with ideas about where we could get trials done and not have them have to knock on our door.”
So Hartnett has created a five-person RFID task force that is evaluating tags, readers and other equipment and searching for a suitable spot within Penske to run a pilot. He wants to test RFID in a cross-dock center where the structural elements would put readers to the test and within a “closed-loop process” in which the company could retain and reuse the tags. He has concerns about whether RFID readings can be accurate, and how RFID will fit with existing bar-code systems and other tools that are meant to improve the order-to-delivery cycle. “We have to develop demonstrable confidence in the field,” Hartnett says. “Then we can bring people in and show them, in a real production environment, that we can attach tags and make them work, that we can leverage this technology for them.”
Hartnett clearly remains wary of having to meet yet another technological imperative. “We’ve seen this sort of excitement before, so we’re not going to be fooled by another laboratory approach,” he says. “I can tell you that our purchase decisions will be a lot smarter than with some other technologies that have come along.”
He still wonders what the payoff will be for Penske besides satisfying customer demands and acceding to the realities of the marketplace€¦quot;a burden that some have taken to calling the “Wal-Mart tax” on RFID. “What is the ROI for this?” Hartnett asks. “What kind of information is this going to provide? Can I use it for other tasks besides simply knowing where something is sitting on a shelf? Where are the productivity advantages? That’s what CEOs are supposed to be thinking about 24 hours a day. This will be a tool, but I don’t think it’ll be a disruptive tool.”
Following Wal-Mart’s Lead
Bill Zollars made his decision about RFID four years ago, when Yellow Roadway participated along with Wal-Mart, Gillette and other prime movers in an early RFID consortium at the Massachusetts Institute of Technology. “There was a lot of excitement about the potential of this technology, and it was consistent with all the other wireless technologies that were becoming pervasive in our business and personal lives,” says Zollars, who is chairman and CEO of Yellow Roadway, one of the nation’s largest shippers, based in Overland Park, Kan. “Besides, early on we realized that we were much better off if we were on top of what Wal-Mart was doing and prepared to support them.”
Besides the benefits to Wal-Mart and its suppliers, Zollars believes his company will gain from the more accurate readings of shipment contents and status that RFID will yield compared with bar codes. He’s also pleasantly surprised to be learning that RFID could bring a palpable “security impact” for Yellow and its partners in this terrorism-conscious era. “We could have sensors that would determine whether there was an explosive or biological or radiological kind of threat within a shipment,” he says.
So far, Yellow has invested several million dollars in pilot applications. Within the next year, Zollars expects the company to have to invest as much as $50 million to install RFID scanning equipment at each of its 700 locations. But he believes once that process is complete, Yellow will gain a decided advantage. “Still, at this point most companies haven’t made an investment,” he says. “What will happen when Wal-Mart finally throws the switch is that some companies will be unwilling or unable to make the investment, and we’ll have a competitive differentiator.”
Goal: Faster Turnover
Pacific Cycle’s Hornung believes he already has a leg up on major competitors€¦quot;including Trek, just a half-hour east of Madison€¦quot;with RFID. He says that bikes are “a natural” for early implementation of RFID because there’s only one product to a container, making tracking simple. At the same time, bicycles come in a variety of colors, styles and option levels, imparting the tag with details that are crucial to proper inventory management.
The company, with sales of several hundred million dollars a year, also was an industry pioneer in using bar codes. “RFID was a very natural decision for us because we could see the opportunity to increase our number of turns,” says Hornung, whose goal is to increase inventory turnover from six times a year to seven. “Inventory management, particularly when dealing with large customers, is absolutely critical.”
In the case of RFID, Pacific Cycle has installed tag readers on a couple of its dock openings and in September, began shipping some bikes to Wal-Mart that bore RFID tags. By December, the company will broaden its usage of RFID to include all products shipped to Wal-Mart’s Texas operations, where the retailer is implementing RFID first. Assuming the success rates Hornung is projecting, he expects to pay for Pacific’s $3 million investment in RFID fairly quickly. After that, he says, he’s been asked to spearhead RFID implementations for other divisions of Dorel Industries, which now owns Pacific Cycle.
Meguiar’s, another supplier to Wal-Mart, ships car-care liquids and related products. And even though Meguiar’s is way too small to come under Wal-Mart’s mandate to its top suppliers to become RFID-compliant, company executives have been asking Wal-Mart contacts what the retailer might expect of them. But Barry Meguiar, president and chief executive of the family-owned company based in Irvine, Calif., is reluctant to involve Meguiar’s in RFID investments before he has to. “RFID certainly will bring a lot of advantages in managing our own inventory,” he says. “But there’s an expense to do it, and there’s just no need to do it before anyone is actually requiring it. So we’re just watching the trends. Wal-Mart is large enough that when they decide they want us to do it, we’ll move ahead with it.” Besides, Meguiar says, when his company takes the plunge into RFID, he wants the investment to be optimal. “We want to have the latest stuff.”
Indeed, with an investment this significant, smaller companies can’t afford to adopt something that will be made obsolete in a year by the later, greater version. Which is what makes RFID a particularly steep challenge for small and midsized company CEOs, who don’t quite know how to get their arms around the scope or the cost of implementation, but know they’ll have to comply at some point with the companies they supply.
But Meguiar doesn’t resent the inevitability of it. “There’s no other retailer with the clout to make RFID happen the way that Wal-Mart can,” he says. “At the same time, I think they’re going to be sensitive enough about it. They’re not going to push so hard that it’s impossible for us to comply. There are going to be enormous demands, but I think they’ll be within our reach.” If only every chief executive were so confident.