Summer 2006
RFID: Precision Inventory Management

RFID, Personally

Amal Graafstra and Jennifer Tomblin's affection for each other is more than just skin-deep. The couple had RFID devices implanted under their skin that allows them to enter each other's homes and computers by swiping their hands near a sensor.

Graafstra, 29, of Bellingham, Wash., who works in tech and was tired of dealing with keys, had a device implanted in each hand (to control different devices) and wrote his own software to control functionality. He's also the author of a do-it-yourself guide to building RFID-based projects called RFID Toys (RFIDToys.net).

"I decided I'd prefer [having the chips implanted] than carrying an RFID access card, which I would probably lose or forget, " he says. After witnessing the ease of Graafstra's keyless existence, Tomblin, 23, of Vancouver, B.C., decided to get her own chip. "I think it takes a special trust on her part, " said Graafstra. "Since she's not [in the business of] building RFID solutions, it was a bigger deal for her to get one than it was for me. I feel really honored that she trusts our relationship enough to take that step."

Photos of the surgery (including x-rays post-implant) are available at Amal.net/rfid.html.

Wal-Mart is spearheading the adoption of radio frequency identification in retail, but that doesn’t mean smaller retailers can’t benefit from this emerging technology. Here’s how, starting with a little background on the technology itself.

What is RFID?

Radio frequency identification, or RFID, is often compared to the Internet because both involve electronic networks and both are “enabling technologies.” That is, they don’t do anything by themselves, but they enable other applications, such as online shopping, or, in the case of RFID, the tracking of merchandise. But unlike the Internet, which was initially used by small retailers and then adopted by larger companies, RFID is being adopted by large retailers first.

RFID is a broad term that describes technologies that remotely identify and track an object using radio waves. There are many types of RFID systems. Some use microchips; others don’t.

There are two basic systems: active and passive. Active tags use a power source (a battery) to broadcast a signal—typically a product’s identifying information and location—to an RFID reader. One example of a commonly used active tag is a windshield sticker that allows a driver to pay a toll without stopping at the tollbooth. Passive tags, which are the types of tags that are now starting to be widely used to track products as they progress through the supply chain, work without a power source. They have a microchip, but no battery, which makes them cheaper.

In a passive tag, the microchip is attached to a radio antenna (there are many sizes and shapes), which is sandwiched between a layer of thermal paper and an adhesive to create an RFID label, sometimes called a “smart label.” When an RFID reader bombards the tag with radio waves, the antenna captures the waves, which are converted to energy and used to power the microchip. The chip then sends back to the reader the product’s unique identifying information and location.

Benefits over barcodes

RFID’s capabilities make it far superior to barcodes for some applications. For example, RFID tags can be read through radio-frequency-friendly materials such as paper, plastic and cardboard (but not metal or water). Unlike barcodes that must be placed directly in front of a barcode reader, no line of sight is needed with RFID labels—they can be read even when the product is not facing a reader.

This means that an RFID reader can automatically identify and track an item—a carton of orange juice, for example—traveling along a conveyor belt, regardless of which direction the item is facing, with no human involvement (again, unlike barcodes, which require point-and-scan human interaction).

Ultimately, RFID technology provides retailers with supply-chain visibility. It lets retailers know where their goods are at all times. Obviously, retailers can’t hire armies of people to scan barcodes each time a product moves from a distribution center to a loading dock to a truck to the store’s back room to the retail floor. Consequently, retailers don’t know precisely where the merchandise is, and sales are often lost because goods aren’t on the shelf when a customer wants them. More often than not, especially in big stores, the product is in the store but isn’t on the shelf, largely because retailers have limited tracking capabilities with barcode technology.

To make maximum use of these RFID benefits, in January 2005 Wal-Mart began requiring its top 100 suppliers to start putting tags on pallets and cases of goods shipped to Wal-Mart distribution centers and stores. Other retailers, including Albertson’s, Best Buy and Target in the US, and Tesco and Metro in Europe, have similar requirements. The Department of Defense is also moving to require RFID tagging, and the Food and Drug Administration recommends it for tracking shipments of pharmaceutical drugs.

Wal-Mart has installed RFID readers at the receiving and shipping docks of three distribution centers in Texas, and at the receiving docks and “impact doors” (the doors between the back room and retail floor) in several hundred of its stores. Suppliers put tags on cases, and Wal-Mart reads tags automatically at five points along the supply chain: when a case arrives on a pallet at the distribution center, when the case leaves the distribution center, when it arrives at the store, when it’s brought out to the retail floor, and when the empty case goes in the trash.

Does all of this tracking make a difference? Yes. In a study done for Wal-Mart, the University of Arkansas showed that even in its early stage, RFID has helped Wal-Mart reduce out-of-stocks by 16 percent in the stores that use the technology. Studies show that all retailers on average are out of stock about eight percent of the time. Wal-Mart has the potential to reduce that to 6.72 percent. And if that improvement leads to an improvement in sales of even one-tenth of one percent, Wal-Mart would boost its annual revenue by $285 million—without hiring more staff or opening new stores.

On the road to adoption

Although the benefits are many, widespread adoption of RFID will take years. One reason is the cost. The tags that Wal-Mart and the Department of Defense want to use cost about 15 cents each. That’s down from the $1 or more cost of just a few years ago, but it’s still too expensive to use RFID tags to track a box of cereal or a pack of gum. So for many consumer items, tagging will be done on cases only.

In fact, in its current state, RFID with microchips might never be cheap enough to put on some individual items. But for other products, it’s already happening. Pfizer is tagging Viagra (not each pill, of course) to reduce counterfeiting, and a number of high-end apparel companies and retailers are starting to look at RFID for the same purpose. In the years to come, more and more companies will look at tagging individual items, particularly items that are high-end, often out-of-stock or frequently stolen. Apparel manufacturers and retailers are also exploring RFID to improve on-shelf availability. The cost of a 15-cent tag is easier to absorb when you’re selling a $50 pair of jeans.

Concerns have been raised about the potential to track people based on the unique serial numbers on the items they buy. But retailers can allay privacy concerns by disabling or removing the tags in the items as they are sold. Or retailers can simply not link the unique serial number to the person who buys the item. Instead, the retailer can get the product-tracking information that’s needed simply by linking the stock-keeping unit, or SKU, as they do with barcodes today.

RFID’s chief benefit is that it lets companies keep track of millions, even billions, of items by reading tags automatically and updating information via remote networks. So RFID is likely to proliferate among large retailers and their suppliers, and will filter down to smaller retailers as more and more goods are tagged.

It’s hard to know exactly when small retailers will begin to feel the impact—it could be three years before individual sunglasses and leather wallets are tagged. It could be 10, 15 or even 20 years before individual greeting cards are tagged.

Beyond supply-chain visibility

As an “enabling” technology, RFID enables retailers to do more than just find out where a product is in the supply chain. The technology also can be used for maximizing customer service. RFID can even be used for marketing and upselling.

The high-end retailer Prada, for example, pioneered an RFID system that lets a customer swipe a tag near a reader to get information about the product (additional colors, shapes and sizes, for example) and a list of available accessories. IMX Cosmetics uses an RFID keychain fob to improve its customers’ buying experience at IMX custom-cosmetics counters in stores like Barneys New York in Manhattan, Nordstrom in Las Vegas, and Fred Segal in Santa Monica.

At the IMX locations, customers can create their own custom lip-glosses, which sell for $20 each, using a high-tech custom-mixing machine. At the create-it-yourself kiosk, the customer selects from among 40 lip-gloss colors, eight finishes and a host of flavors and fragrances. The recipe is sent to the IMX mixing machine, which creates the custom-made lip-gloss on the spot.

After the purchase, the customer’s unique lip-gloss recipe is stored digitally, and IMX gives the customer a plastic keychain fob. The fob contains a Texas Instruments RFID transponder and is designed to look like the IMX lip-gloss mixer (a nice marketing tool in itself).

The next time the customer visits the store, the customer can wave the fob near the reader in the kiosk, view her custom-mix recipe and order more. Or the customer can create a new recipe and add it to the custom-recipe list. IMX is also using software to identify some frequently created mixes. The company plans to use those recipes to create prepackaged glosses and sell them at “Grab and Go” counters.

IMX founder Julie Bartholomew says the technology allows her company to target and satisfy the needs of two different demographics: teenagers and twenty-somethings who want something new, and older shoppers who know what they want and want to have it made for them quickly.

Moving into the future

While retailers can use RFID self-service kiosks to reduce the staff needed to serve customers, that wasn’t Bartholomew’s original goal. She wanted to create a high-tech buying experience. “Customers want to be part of the technology,” she says, “and RFID gives them the feeling that they’re moving into the future.”

There’s no doubt that retail is moving into the future—a future that includes RFID, with its ability to make the supply chain visible and help retail entrepreneurs create unique buying experiences for customers of all kinds. As RFID technology becomes cheaper and more widely used, enterprising entrepreneurs will surely invent more ways to harness its power.

Only time will tell how many specialty retail entrepreneurs will take advantage of this new technology to introduce new products and retail concepts in high-traffic retail venues everywhere. Perhaps you will be one of the first!

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