Apr 01, 2008This article was originally published by RFID Update.
April 1, 2008—Retailers and consumer goods suppliers currently see more obstacles than benefits for adopting RFID technology in direct store delivery (DSD) operations, according to new research being presented today by the Global Commerce Initiative (GCI). The study, titled Supplier and Retailer Views on EPC/RFID Technology for Direct Store Delivery (DSD), found 94 percent of retailers and suppliers surveyed say return on investment (ROI) is a high or prohibitive obstacle to RFID implementation in DSD operations, and most companies feel it will remain an obstacle for at least seven years.
Direct store delivery refers to the practice of replenishing supermarkets, convenience stores, drug stores, and other retail outlets directly from the manufacturer, rather than through the retailer's distribution center. Representatives from DSD suppliers visit stores regularly, often daily, to monitor inventory and prepare orders. Common DSD products include soft drinks, beer, snack foods, baked goods, and dairy products.
GCI is a global trade association that develops standards and best practices. Its executive board includes approximately 40 of the world's largest consumer products manufacturers and retailers. GCI has a direct store delivery working group that has developed a variety of business process standards and recommendations.
The GCI DSD Working Group formed an EPC/RFID subteam, which surveyed GCI members about their attitudes about using RFID technology. The subteam includes representatives from some of the best-known food and beverage brands, including Anheuser-Busch, The Coca-Cola Company, Dean Foods, Kraft Foods, Miller Brewing, and PepsiCo. The results were compiled and interpreted in the report, which was presented today for the first time at the GMA Information Systems / Logistics Distribution Conference, and will be available soon on the websites of GCI and Intermec Technologies, which sponsored the research.
The report, based on 36 survey respondents, notes inventory management, replenishment, and other processes are different in DSD than in typical distribution center-based replenishment models, and thus RFID technology does not have the same benefit potential as it does for DC-based operations. It recommends suppliers and retailers pursue RFID for warehouse delivery operations before they pursue it for DSD.
"Because DSD supplier representatives frequently work inside retail stores for delivery, replenishment, and merchandising, they already have a base level of inventory visibility that is higher than that of warehoused products; therefore, there is less potential for EPC/RFID traceability to make a meaningful improvement," the report reads. (Editor's note: The study uses the term "EPC/RFID" instead of the more general and widely used "RFID" for describing the technology. Gen2 and other EPC standards are widely used in the consumer goods and retail industries, and are considered by GCI to be the foundation for RFID activity.)
Retailers were generally more optimistic than suppliers about RFID's benefits and when conditions would be favorable for adoption in DSD. Nearly half (48 percent) of suppliers described themselves as "skeptical" of the technology for DSD, compared to just 17 percent of retailers. Conversely, 17 percent of retailers said they were "optimistic" about RFID, compared to just three percent of suppliers.
Retail and supplier respondents did agree on other topics, however. They identified three major reasons why RFID is not considered a good fit for DSD operations at this time:
- Limited ROI potential. As noted, many respondents feel achieving positive ROI is an obstacle to adoption. Only 22 percent think ROI conditions will be favorable within three years. Thirty-six percent feel it will be at least seven years, and 25 percent expect ROI conditions will never be favorable.
- Unfavorable opportunity cost. Respondents were very clear that they think there is currently much greater value potential in other technology and business strategy initiatives they can pursue. These include: implementation of advance shipping notices (ASNs); Demand Driven Supply Network models; collaborative ordering; increased bar code utilization; and Global Data Synchronization (GDS). RFID was rated last among these and other options in value potential.
- Limited opportunity to leverage RFID investments. Companies say trading partner adoption is very important to their own pursuit of EPC/RFID, which may be creating a chicken-and-egg situation since there appears to be little current adoption momentum. However, the report does not directly mention recent activity by METRO Group, Sam's Club, and the US Department of Defense that could cause more suppliers to implement RFID, or to expand existing systems (see METRO Expands RFID to 200 More Locations, Sam's Club RFID Mandate No Big Deal?, and DLA to Expand RFID Labeling with $8.5M Order).
The report was careful not to be dismissive of RFID technology or its value potential. One passage reads: "While the general outlook for near-term ROI is not encouraging, respondents did acknowledge EPC/RFID holds at least moderate potential to improve some specific processes. The majority of DSD suppliers and retailers said EPC/RFID technology has medium or high value potential for ASN reconciliation, shelf/stock/code date management, delivery and receiving, and returnable asset management."
The report also notes the survey represents a specific point in time (data was collected in November and December, 2007) and that attitudes could change. The conclusion reads in part: "Respondents acknowledged during discussions and interviews that conditions could change and EPC/RFID won't necessarily remain a low-priority consideration...The industry remains undecided about the role and value EPC/RFID will play, and the technology remains largely unproven. These circumstances will certainly change, but how and when are far from certain."
The GCI study paints a more somber picture of RFID's value potential in the consumer goods supply chain than previous reports from other sources, perhaps because it is the only known research specifically focused on direct store delivery operations. A study of RFID systems at Wal-Mart stores issues last month found RFID could improve inventory accuracy and reduce the labor needed to make adjustments (see RFID Yields 13% Reduction in Understated Inventory). The same researchers previously found RFID inventory management applications could significantly reduce retail out-of-stocks (see 30% Out-of-stock Reductions from RFID).
The GCI report is expected to be available free from the Intermec website and shortly thereafter from the GCI site. Representatives from the GCI DSD Working Group are scheduled to present the study again at the U Connect conference June 9th through the 12th in Dallas.
