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Auto-ID Center Makes Its Case

White Papers say a retailer with 800 stores could save $150 million per year from tracking individual items.
Sep 05, 2002September 5, 2002 -- The Auto-ID Center has released three White Papers that spell out the business case for adopting the low-cost RFID system it is developing. The papers, prepared by PwC Consulting and Accenture, concluded that both retailers and manufacturers can achieve huge benefits from tracking pallets, cases and individual items.

A paper prepared by PwC Consulting, entitled "Focus on Retail: Applying Auto-ID To Improve Product Availability at the Retail Shelf," looks at the problem of out of stocks, which cost retailers 3 to 4 percent of sales per year. PwC used as its model a theoretical value chain consisting of a retailer with 800 stores, 100 dock doors, and five distribution centers and a manufacturer with four plants producing a total of 400 million cases.

The paper spells out eight "pain points" where weaknesses in existing systems contribute to out of stocks. These include receiving of goods at the store, replenishing shelves from the back room, manual inventory counting, and inaccuracies at the point of sales. The paper then looks at how RFID tracking could help alleviate those problems.

PwC concludes that the theoretical retailer would gain approximately $78 million from increased sales and labor savings across all 800 stores by implementing the Auto-ID Center's technology for tracking cases. It could achieve benefits of nearly $150 million from tracking individual units. The manufacturer would get about $19 million in benefits from tracking cases and $33 million from tracking items.

Anthony Bigornia, a manager in PwC Consulting's consumer products strategy group says the company used moderate to conservative numbers when assessing the benefits that could accrue from such a system. "We've actually had some feedback from a number of folks that our numbers are actually too conservative, based on a typical retailer and manufacturer," he says.

The benefits don't come cheap, however. It would cost $465,000 to track cases at the first store and an average of $62,000 per store for the entire system (since the software and integration costs get spread out among all the stores). To track units, it would cost $827,000 for the first store and $353,000 per store for the entire system. That's an investment of $282 million for all 800 stores.

The second PwC paper, "Focus on Supply Chain: Applying Auto-ID within the Distribution Center," looks at how RFID can reduce labor costs, improve accuracy and boost throughput. Again, the paper lays out the benefits of tracking pallets, cases and items for the retailer and manufacturer described above.

The report concludes that at the pallet level, the manufacturer would save $2.7 million annually in reduced labor costs, less theft, and fewer claims and returns. At the case level, the manufacturer could expect to save $12.3 million annually and get a one-time cost reduction of $7.8 million resulting from permanently lower inventory levels.

At the unit level, the savings jump to $39.8 million annually and a one-time benefit of $15.5 million. The system would cost the manufacturer about $800,000 per distribution center for readers, tags, IT infrastructure and integration with existing systems, according to PwC.

"There is no doubt that there are tremendous inefficiencies still remaining up and down the supply chain," says Kathryn Gramling, a senior manager in PwC Consulting's consumer products strategy group. "Can an RFID technology like the Auto-ID Center's system take out huge costs and inefficiencies? Absolutely. When will that happen? We don't know. The technology is still being worked through."

The Accenture paper, "Auto-ID Across the Value Chain: From Dramatic Potential to Greater Efficiency and Profit," looks at the benefits that manufacturers, third-party logistics providers and retailers can get when RFID technology is applied across the value chain in the CPG industry. The report points out that individual players can't achieve the huge benefits that are possible until there is widespread adoption.

The report lays out strategies for aligning business needs with adoption methods. It concludes that the Auto-ID Center's RFID system "promises to dramatically transform industry value chains" and says companies need to start looking at auto-ID technologies soon to get these advantages.
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