Will RFID Deliver ?

Expectations in 2006 and in coming years

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For suppliers of RFID tags and readers 2006 was disappointing. However, there was considerable progress in terms of technologies and all segments of supply chain need to look closely at the Hype Cycle.

At the beginning of 2006, there was so much hype on Radio Frequency Identification (RFID) that, in all fairness, any level of achievement would have been termed inadequate. It’s time to take a good hard look at what it has actually delivered during the year.

What is RFID capable of? What can it deliver? What has it actually delivered? Where is it headed? This update is aimed at taking stock and trying to guesstimate exactly what we can look forward to in 2007.

Let’s start with a brief understanding of what this technology is all about and how it is going to help applications in the areas of packaging and supply chain management.

RFID is the most exciting of several AIDC (Automatic Identification & Data Capture) technologies which include barcodes, smart cards, biometrics, electronic surveillance and product/asset tracking.

RFID technology has actually been around for some time but it is only recently that it has generated enormous interest in terms of potential applications. Primarily, it consists of a tag or label (which is a transponder) that contains an RFID inlay (integrated chip + antenna) sandwiched between two printable substrate layers. The chip can store data and the antenna can receive and transmit radio frequencies that can be tracked by a reader. The RFID tag thus becomes a unique identification medium through which its location and movement can be tracked in real time. Sometimes, the chip is writeable in that encrypted data can be modified and/or added to. Its biggest advantage is that its tracking does not require line of sight (like a barcode) or contact (like a smart card) and its mere presence in a radio-magnetic field generated by an external transmitter/receiver like an antenna is sufficient to read it. Unlike a barcode, which can be used only for generic tracking of a particular kind of product or its variant (like a SKU), an RFID tag can be given an item-level identity. So, every separate package or product (even within a production batch) can be uniquely encrypted and tracked end-to-end across a supply chain.

RFID technology was originally developed in the 1940’s (WW II) to enable identification of friendly aircraft on radar and to differentiate them from the enemy through the placement of a readable transponder.

One reason why RFID technology is complicated (and, hence, expensive) is that the tags need to be placed within designated proximity of readers and data from the readers needs to be up-linked to a network and data management system using radio frequencies to generate and transmit responses. Active tags (which have their own power source, like a battery, and can generate their own radio waves) are capable of operating over a much wider tracking range as compared to passive tags (that have no power source and can, therefore, respond to or generate radio frequencies only when placed in an electromagnetic field). However, they are too expensive to consider for usage in tracking comparatively cheap items like FMCG products.

Usage of RFID tags will need not only the tags themselves but also infrastructure like antennae, readers, communication networks and data processing devices; imagine a mobile phone network or a cable television network where each TV set is mobile and can communicate individually and you get the picture! Costs will, therefore, depend on the type of tags being used, their data capacity and the infrastructure requirements (types/frequencies of radio transmission, extent of network, geographical range of coverage, data processing capabilities, hardware and software).

Applications can range from closed-loop in-house systems (as for regulating access to areas inside a building or tracking assets) to a supply chain that extends over a wide geographical area.

Some broad areas of potential applications are:

  • Tracking assets/documents
  • Tracking goods/cargo/products/containers
  • Tracking goods/cargo/products/containers
  • Tracking people/animals
  •  As sensors for recording and managing data (e.g. temperature, RH, weather information) over a wide territory or inaccessible terrain/locations
  •  Logistics

The most important benefits that RFID will deliver to Packaging and Supply Chain Management are:

  • 100% end-to-end tracking of products in real time
  • More efficient inventory/distribution management
  • Reduced inventory
  • Reduced inventory shrinkage (theft, unauthorised diversion)
  • Significant reduction in store/warehouse expenses (labour, time/operations saved, convenience)
  • Reduction in stock-outs
  • Almost impregnable protection against brand theft and counterfeiting

According to a study conducted by EPC Global, RFID systems can improve demand forecast accuracy for consumer packaged goods by 10 to 20%, deliver a 10 to 30% reduction in required inventory levels and 1 to 2% improvement in sales due to reduced stock-outs. These are in addition to the decrease in direct supply chain operational costs.

Almost all industry verticals, the Government, institutions (healthcare, research laboratories, educational institutions), defence establishments, financial establishments etc. are potential users; applications are limited only by one’s imagination. It is perhaps the most perfect and fool-proof way of countering counterfeiting and brand theft; there is also no better device for monitoring one’s stocks across the entire supply chain and knowing exactly where they are in real time. All in all, the potential for RFID is truly mind-boggling and justifies every bit of hype it has received.

From the 1960’s, RFID started being used for Electronic Article Surveillance (e.g. to prevent shoplifting) and, from the 1970’s, for animal implants. The first industrial applications were for vehicle and parts management in the automotive industry in the 1980’s and the 1990’s saw the introduction of RFID tags for the management of highway toll collection and tracking airline baggage.

One of the usage requirements is that multiple tags have to be read quickly and the system must ideally deliver 100% reading/tracking of tags. Traditionally, the presence of liquids or metals has posed problems in accurate RFID tracking due to signal disturbance. A lot of work is going into technology development to overcome this deficiency.

Frequencies

RFID tags can be tracked using a wide range of radio frequencies (120 KHz to 2.45 GHz). The most commonly used frequencies and typical read ranges for passive devices are:

  • 120 – 150 KHz: Low Frequency (LF); Read range < 0.5 m
  • 13.56 MHz: High Frequency (HF); Read range around 1 m
  • 860 – 960 MHz: Ultra High Frequency (UHF); Read range 4 to 5 m
  • 2.45 GHz: Microwave (uW); Read range 1 m

Each has its own advantages or disadvantages. The higher the frequency, the faster is the multiple tag read rate and the smaller is the tag size requirement but the ability to read near metal or liquid (wet) surfaces diminishes. Right now, LF has the largest installed base due to its being a mature technology but it will soon be overtaken by higher frequencies. The allocation of radio frequency bands is also an issue because this is controlled by governments and often there is conflict with the needs of priority sectors like defence and telecommunications. Therefore, the whole business of universal application of RFID tracking across national frontiers involves extensive global harmonisation, standardisation and protocol development (similar to what was necessary for barcodes or the internet). A major achievement has been the development of a universal electronic product code (EPC) system and one of the most interesting highlights of this code is that the last field (Serial Number) provides a unique identifier for up to 296 products. It is, therefore, possible to assign an identity to every individual product or package even within a SKU batch. The first generation of technology/specifications has already been upgraded to a second generation (designated Gen2) to take care of some of the shortcomings of Gen1.

So, why do we not see RFID being used all over the place? The limiting factor has been cost. Apart from the need to set up expensive infrastructure, tag costs and reader costs are still way too high. In the USA, for example, a typical Gen2 passive tag today costs around 15 cents if order sizes are in millions of units. Analysts predict that if this can be brought down to 5 cents, then it starts making sense at the item level and this could lead to a veritable explosion in usage. As it is, it is barely affordable at the case or pallet level (transport packaging containing multiple units of items). At the item level, which is everybody’s holy grail, it is presently viable only for very expensive products or for high-margin brands that are prone to brand attack through counterfeiting (e.g. Pfizer’s VIAGRA, which is conducting a pilot project on RFID tags).

The big thrust for RFID use in supply chains came in 2005 when Walmart (the world’s largest retailer with 2005 revenues of $ 316 billion) and the US Department of Defense (the world’s largest company with an annual budget of $ 401 billion in 2005; 2,038,000 employees) mandated that their large suppliers had to provide RFID labels or tags on all pallets or cases (which contained multiple units of individual products) so that they could be tracked end-to-end. This was followed by initiatives from a number of other large retail chains and pilot projects from several large consumer goods manufacturers.

Walmart has reaffirmed it’s commitment to RFID and plans to extend usage to an additional 500 stores by end-January 2007 bringing the number of RFID-equipped locations to over 1,000 (it has roughly 3,900 locations in USA). Although it started with Gen1 tags, these have now been phased out and replaced by Gen2 tags. According to an independent study by the University of Arkansas, Walmart reaped a number of economic benefits from RFID implementation, the most significant of which was a 30% reduction in stock-outs. Other retailers also announced fresh plans for RFID tagging. Marks & Spencer will extend item-level tagging of apparel from 42 to 120 stores with the tags being integrated into existing barcode labels. They have been tracking clothing at their distribution centres and stores since 2003 and have reported considerable success in improving stock accuracy and size availability.

The US Department of Defense (DoD) RFID deployment in the first phase spanned 19 bases comprising 69 facilities, all in continental USA. Their acceptance criterion was 100% read rates on pallets containing 20 tags each when passed through a portal ten times, which has reportedly been achieved. Their second phase involves extending RFID use to an additional 7 bases outside the continental USA. DoD requirements are, of course, much more complex and stringent than those of Walmart.

Gen2 in 2006

In terms of technology, there was considerable progress during 2006. Gen2 demonstrated significant improvement over Gen1 and overcame many of the shortcomings of the latter. The debate on whether HF or UHF should be the way forward continues although everybody agrees that, ideally, only one common technology should be used for both pallet-level and item-level tagging. Developments using near-field UHF technology were very promising for item-level tagging as they seemed to overcome the problems posed by the presence of metals and liquids. One way of tackling the problem of tracking packages containing liquids was to use tags embedded inside the walls of moulded plastic containers. Even case-level tagging saw the advent of RFID tags embedded in corrugated fibreboad cartons.

RFID technology had a mild scare when researchers at Vrije Unversity in Amsterdam released a paper that concluded that RFID systems are vulnerable to malicious viruses and worms. Fortunately, this proved to be unfounded and the study assumptions were termed exaggerated as tag data in an RFID system are just that raw data- and not executable instructions. However, it did wake everybody up to the need to build in a high level of security.

Questions were also posed on privacy issues but these were not considered too problematic since RFID tags can be designed to be deactivated at the purchasers’ request or torn off and discarded by the purchasers themselves.

The Hype Cycle

So, did RFID deliver as promised during 2006? At the beginning of the year, large capacities were put in place and both tag and reader manufacturers reduced prices substantially so that volumes could grow in the wake of the DoD and retailer mandates. However, the volumes never came. Industry estimates that only some 250 to 300 million tags were actually supplied during the year despite much higher projections at prices that were clearly uneconomical. And, this situation is not likely to improve in the short to medium term as there is oversupply. Most manufacturers believe that they use RFID only because of a mandate as the payback or ROI is still patently unattractive. Most end-users believe that this can only come when tag prices are low enough for use at the item level (where high volume products generally tend to be low-margin items); if they are using them now, this is only because of mandates and, quite often, tag application costs are prohibitive unless manufacturers adopt them across all product lines and not for supplies to only the Walmarts and the DoDs.

According to analysts, while retailers and the DoD have gained, their suppliers have incurred an aggregate loss of $100 million over the last 2 years.

One would have to conclude that, in so far as suppliers of RFID tags and readers are concerned, 2006 has been quite disappointing. While no major supplier has exited the market, how long they can continue to sustain losses if volumes don’t pick up is open to question.

At the recent Info Label 2006 conference, Paul Berge – a leading international specialist in RFID – projected the position of RFID on the Hype Cycle developed by Gartner Group as given in the graphic show above.

Every issue will have a separate column dedicated to RFID to cater to its importance and the interest in developments and trends in this sector. This column will feature specialist articles and papers written by well-known industry professionals