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Tracking an advantage: Radio chips a boon where inventory info is power

By Nancy Gohring
Special to The Seattle Times

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Nobody looks twice at bar codes any more. The familiar box filled with vertical black lines is found on just about any product for sale.

Even though bar codes are small and unobtrusive, whole industries popped up to support the method for linking a price to an item and enabling a scanner to automatically pick up that information at the wave of a hand.

But some say that bar codes could become relics soon, replaced by tiny radios that transmit even more data to retailers and manufacturers.

The technology is called radio frequency identification, or RFID, and isn't really new. In fact, it was developed half-a-century ago. But it's been thrust into the limelight now, thanks largely to retail giant Wal-Mart, which recently issued an edict requiring its 100 largest suppliers to place RFID tags on the pallets that carry their products to Wal-Mart.

Software and hardware suppliers have since begun scrambling to develop new types of RFID systems to address Wal-Mart's needs, based on the assumption that other retailers will probably follow suit.

"Wal-Mart is the catalyst," said Dan Bodnar, director of product marketing at Everett-based Intermec, a developer of RFID bar-code products.

Despite Wal-Mart's wishes, RFID has a number of holdups preventing it from becoming widely used in the consumer package-goods world, including technology shortcomings and concerns from privacy groups fearing that companies may misuse the technology.

RFID technology enables communication between an RFID tag and a reader. The tags, some of which are so thin that they can be attached onto a sticker, are made up of a chip connected to a minuscule antenna. Part of the reason some tags can be so small is because they draw their power through the air from the reader.

A handheld device or a stationary gate serves as the reader, transmitting radio waves that sense if RFID tags are nearby. If so, the reader collects the data stored on the chips. That data, which in many cases is a number identifying the product and indicating where it came from, is then transmitted to a computer system where it can be analyzed.

It's nothing new

Even though there has been lots of buzz around RFID recently, it's not exactly a cutting-edge technology.

"RFID was invented 50 years ago by the Army," said Ian McPherson, principal analyst with Wireless Data Research Group, a San Mateo, Calif., research company. The military used it in World War II to determine whether oncoming aircraft were friend or foe.

More recently, RFID is used in a wide range of industries, often to keep track of where goods are traveling through the supply chain. Automobile manufacturers, for example, use RFID to track components of a car as they move through the assembly line. Knowing which cars contain a specific batch of a certain part could be helpful in a recall situation.

RFID tags in identity cards let people who frequently cross the border to Canada at Blaine use a shorter line that gets them through quicker.

Hospitals, including a Navy facility in Iraq, are using RFID tags in patient wristbands to hold information about patients and their treatment.

RFID hasn't been widely used in the package-goods market, however, mostly because of cost.

"The first problem is that microchips are too expensive today," said Mark Hurd, president and chief executive officer of NCR, based in Dayton, Ohio.

The average cost of the type of RFID tag that Wal-Mart wants is $1.32, according to the Venture Development, a Natick, Mass., research company. IDC, another market researcher, and others say that the cost per tag will have to drop to 5 cents before mass adoption is possible.

World around a chip

Hurd describes a futuristic — or disconcerting, say some privacy advocates — view for how retailers may want to use RFID if the price drops.

He envisions a day when every product in a grocery store has an RFID tag. Sensors that read the tag would be scattered nearly everywhere, from the store to the home, tracking where that product is at any given time.

A reader on the shelf in a store would detect when a shopper picks up a product. The tag on the product would sense what other products are in the shopper's cart. To check out, the shopper need only roll the cart through a gate, which would instantly tally the total cost of everything in the cart.

Once the shopper gets home, sensors in the kitchen cupboard know when a product is half consumed. A tag reader in the refrigerator knows when there's no milk left.

Retailers would access the data collected by the sensors to market products to consumers. Consumers might be able use a cellphone while they're in a store, for example, to access the data stored in the refrigerator, checking if they're out of milk.

Even Hurd admits, however, that there are quite a few wrinkles that must be smoothed out before this idea becomes a reality.

Bodnar thinks there are more than just a few wrinkles. "The vision is commendable, but is it realistic?" he wonders. "Probably not any time soon, or any time."

Road blocks

The cost of the RFID tags isn't the only hurdle. Shelves in the stores that can detect what products are on them are also prohibitively expensive. "You'd be looking at $2,500 for every 4 feet of shelving," said Jeff Woods, a principal analyst with the Gartner Group. "In some cases, that's more than it costs to build the store in the first place."

The technology also isn't quite accurate enough for applications that depend on tags placed on individual items. Hurd said that in tests where a cart full of products is rolled through a sensor gate, the reader picks up on average 92 percent of the items.

But some proponents argue that the technology can get better and the cost will go down. With those improvements, the benefits of RFID may outweigh the cost.

"With RFID you can move from tracking a class of product to individual-item tracking," McPherson said. "It's like DNA." By contrast, a bar code identifies that something is a can of a particular kind of soda, but not exactly which can of soda.

Another benefit over bar codes is that RFID tags can be read from farther away — 15 feet or more, depending on the gear — and the reader doesn't have to be lined up directly in front of the tag. That benefit makes RFID tags especially useful on pallets.

In a warehouse, workers taking inventory must bar-code scan each box. With RFID, the boxes with tags can be automatically detected as a forklift drives through a gate equipped with an RFID scanner, said Intermec's Bodnar. "You get labor savings," he said.

Georgia-Pacific is testing such an implementation from Intermec in its research and development facility.

Wal-Mart is asking its biggest suppliers to put the tags on their pallets by 2005 so that when those pallets enter Wal-Mart stores or distribution centers they can be automatically accounted for.

Because the value of the contents on an entire pallet is relatively high — even if the item is, say, only toothpaste — the current cost of RFID tags can make it worthwhile. "It pays at the pallet level," Bodnar said.

Meanwhile, even if retailers start using RFID on pallets, it's less likely they'll use them on individual products. Wal-Mart and clothing maker Benetton have backed down from announced plans to place RFID tags on individual items after a group called Consumers Against Supermarket Privacy Invasion and Numbering staged protests around the world. The organization is concerned that companies may misuse the data they collect, especially as they relate to consumers.

In addition to privacy, there's the whole issue of who will pay for the tags. Wal-Mart is asking its suppliers to absorb the cost of placing the tags on their pallets. But while Wal-Mart has clearly discovered that it can save on labor costs by using RFID, it's not totally apparent how the consumer-goods manufacturers can benefit — aside from continuing to supply goods to the world's largest retailer.

"People have to figure out how they can create an RFID-centric business process," said Gartner's Woods. He encourages clients in the consumer package-goods business to change the way they warehouse and distribute products around RFID so that they can benefit, too, from implementing the tags on pallets or products.

"As it stands now most manufacturers would get nothing. It's a negative (return on investment) for them," Woods said.

Beneficial fallout

But hardware, software and consulting businesses may stand to benefit from Wal-Mart's decision to move toward RFID. The size of the market for RFID services and goods this year is around $1.3 billion, said McPherson of the Wireless Data Research Group, and that's expected to grow to more than $3 billion by 2007.

He sees the biggest opportunity for professional-services companies such as Accenture and Cap Gemini that would help companies learn how to use the data generated from RFID tags. Currently, McPherson puts that market at worth about $270 million but expects professional services to account for nearly $1 billion by 2007.

"While you see all these hardware vendors killing themselves to get to 5 cents a tag in five years — and they'll be really challenged to make a sustainable margin — meanwhile Accenture will have the gravy train," McPherson said. He expects the fees from professional services will outweigh the cost of all the other elements of the system combined.

"Which is why you see Accenture and Cap Gemini very interested in seeing this technology adopted," he said.

Nancy Gohring, a Seattle free-lancer, writes frequently about wireless and telecommunications issues.

Copyright © 2003 The Seattle Times Company