Apr 01, 2006Two or three years ago, it was commonly said that one of the biggest obstacles to using radio frequency identification technology to track cases and pallets in the supply chain was the cost of the tags, which was then a dollar or more apiece. The price wouldn't get down to the point where there was a return on investment until companies were tagging massive numbers of cases, but companies couldn't track massive numbers of cases until the price of the tags got low enough.
The chicken-and-egg problem was resolved, in part, when Wal-Mart required its top suppliers to start tagging pallets and cases in January 2005. By driving up the volume of tags consumed, Wal-Mart helped drive down the cost of the tags. But as companies look to get the benefits of RFID at the item level, they face a new chicken-and-egg problem. Manufacturers have to apply the tags for item-level tagging to take off, but manufacturers won't get the benefits of putting tags on products until RFID is widely adopted at the item level.
Take the case of a typical pharmaceutical manufacturer. If it tags all its products at the item level, fewer counterfeit bottles will get into the legitimate supply chain, which will improve patient safety, protect its brand and perhaps improve sales. The company might also achieve internal supply chain efficiencies. But it won't tag its bottles until distributors, wholesalers and pharmacies all install interrogators to read the tags and authenticate drugs by comparing the Electronic Product Codes on them with the EPCs stored in electronic pedigrees. (See E-Pedigree Pioneers for details on a Purdue Pharma pilot with H.D. Smith that shows how this can secure the supply chain.) But distributors, wholesalers and pharmacies will be reluctant to install RFID systems until manufacturers are tagging a significant number of items.
This is going to be an issue not just in the pharmaceutical industry, but in any industry where it makes sense to tag large numbers of items today, including entertainment (tracking DVDs, music CDs and computer games), apparel and footwear.
There are several ways the chicken-and-egg problem might be resolved.
In some industries, government regulators might step in and require all players in the supply chain to adopt RFID simultaneously. This is most likely to occur in the pharmaceutical industry. Several U.S. congressmen introduced legislation on March 1 that, if enacted, would compel the U.S. Food and Drug Administration (FDA) to require drug companies to integrate "RFID tagging technology, or similar track-and-trace technologies that have an equivalent function" into their packaging.
The FDA plans to release a report in May on the obstacles to faster adoption and measures that might be taken to overcome these obstacles. Pressure from Congress could cause the FDA to require the industry to use track-and-trace technologies. During the year, the FDA will also announce whether provisions of the Prescription Drug Marketing Act of 1988 requiring wholesalers to provide drug pedigrees should go into effect in December. (The industry got a stay of these provisions because of concerns about how they would be implemented.) If the FDA requires the pedigrees, that could push the industry to adopt RFID simultaneously.
Customer Mandates
Just as Wal-Mart solved the first chicken-and-egg issue, the item-level problem could be resolved if a powerful industry player issues an item-level tagging mandate. Wal-Mart or a group of retailers, for example, could require item-level tagging for certain categories of goods, such as apparel.
Boeing and Airbus are already trying to do this in the aerospace industry. They have agreed on a tag standard and will require their suppliers to put the tags on parts and subassemblies. Any company that makes airplane parts will need to comply with these mandates.
CVS and Walgreen Co., which dominate the U.S. pharmaceutical retail market, could get together and require RFID tagging. Best Buy and Circuit City could insist that suppliers tag DVDs and computer games. The combined clout of these companies could drive adoption at the item level.
Voluntary Tagging
If manufacturers find enough benefits to justify tagging at the item level, that could drive adoption. DVD manufacturers, for example, are exploring ways to reduce diversion by embedding RFID tags in DVDs and using them to activate the product. DVDs shipped from the manufacturer would not work without a special code that would be sent to the RFID tag at the point of sale. Any DVDs stolen or diverted from the legitimate supply chain would not work without the code. Retailers would be forced to purchase interrogators to activate the DVDs; otherwise, they would not be able to sell them.
It's likely that different industries will move to item-level tagging at different rates, driven by different forces. Some technologically sophisticated retailers are already tagging certain items likely to become out of stock, counterfeited or stolen. But item-level tagging won't be widely adopted until tag and interrogator prices fall further, applications become more mature or manufacturers tag items when they are produced. In other words, it will take time for the chicken to lay the egg.