RFID (radio-frequency identification) technology is set to bring great benefits for retailers but little return for some manufacturers, according to new analysis from A.T. Kearney, with retailers seeing savings of up to 5% of inventory cost and up to 7.5% of warehouse labour costs, while manufacturers face many of the costs.
According to a report, ''RFID and the Electronic Product Code'', published by management consulting firm A.T. Kearney, retailers can expect extensive inventory and labour cost savings from the adoption of RFID technology, while some consumer product manufacturers will face higher costs and delayed benefits from the technology''s implementation. 220.127.116.11 This article is copyright 2003 UsingRFID.com.
The analysis was conducted as retailers and manufacturers begin to consider the costs and benefits associated with adopting the technology as mandated by retailer Wal-Mart and the US Department of Defense.
The report estimates retailers will see benefits in three primary areas:
Reduced inventory, bringing cash savings estimated at 5% of total inventory;
An annual benefit from a reduction in store and warehouse labour expenses of 7.5%;
A reduction in out-of-stock items resulting in a recurring annual benefit of US$700,000 per US$1 billion in annual sales for retailers who reengineer their current shelf fulfilment processes.
The cost of EPC and RFID adoption to retailers is estimated at US$400,000 per distribution centre and US$100,000 per store, with an additional US$35 - US$40 million needed for systems integration across the entire organisation.
"While these are very significant amounts, the up-side is that most of the costs to retailers are fixed," explained Dave Donnan, an A.T. Kearney vice president, who conducted the analysis. "The story for manufacturers, on the other hand, is quite different, depending on the type of product they make."
Manufacturers will incur the same one-time charges for RFID readers and systems integration as retailers. But they will also be faced with the recurring costs of placing RFID tags on their pallets and cases.
The report breaks manufacturers into two categories: high impact manufacturers who sell lower volumes of expensive products and experience significant out-of-stocks and shrinkage (generally drug and general merchandise manufacturers), and low impact manufacturers who sell high volumes of less expensive goods and experience limited shrinkage (food and grocery manufacturers).
The cost of tagging varies significantly across the two types. The report compares two manufacturers with US$5 billion in sales - one being a low impact grocery manufacturer and the other being a high impact OTC drug manufacturer - and concludes that the low impact manufacturer loses out by some US$155 million from a capital budgeting perspective (assuming the current US$0.15 cost per RFID tag, a 10-year horizon, and a weighted average cost of capital of 12%).
"The hit on manufacturers'' cash flow is not something that can be made up by volume, as the saying goes," Donnan said. "In fact, the high volume manufacturers will see the greatest cash-flow impact."
Long term benefit
Manufacturers will see benefits from EPC and RFID fall into two areas: those benefits they can control and those linked to their trading partners. Among the benefits that manufacturers can control are increased tracking and inventory visibility, enhanced labour efficiency, and improved fulfilment. However, the report notes that most manufacturers are "well beyond the basics when it comes to supply chain efficiency" and there might not be much left to gain from such benefits.
Most of the trading partner benefits depend on retailers taking advantage of improved product information to give manufacturers greater visibility into out-of-stock items, inventory, and items that can''t be sold. This will require retailers to change some of their processes and become more comfortable sharing information that is currently considered confidential.
The report advises low impact manufacturers to closely examine the rationale behind the EPC and RFID tagging, and consider alternative courses to meeting these mandates. Some alternatives include using other technologies, delaying implementation until the per-tag cost drops to a reasonable level (given each company''s business case), and negotiating information sharing with their retail partners to take advantage of the increased inventory and sales information that EPC can provide.
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