Economic Inefficiency

By Bob Violino

CEOs will tell you their company is super-efficient, but macro-economic studies suggest otherwise.

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Talk to most CEOs of Global 1000 companies and they’ll tell you that RFID won’t deliver many benefits because their operations are already extremely lean and efficient. Yet macro-economic study after study suggests there are massive inefficiencies in the global economy.

Each year, the University of Florida publishes the National Retail Security Survey. The study shows that 1.7 percent of sales are lost in the United States annually because of shrinkage—losses due to employee theft, shoplifting, administrative errors and vendor fraud. With a retail economy of roughly $1.8 trillion in the United States, that’s equivalent to losses of more than $30 billion annually.

RFID is unlikely to have a big impact on shoplifting, which accounts for 30 percent of losses, but it could reduce employee theft, which accounts for 45 percent of shrinkage, or $14.2 billion annually. And RFID almost certainly can reduce administrative errors (such as incorrect inventory counts and pricing), which account for 17.5 percent of losses ($5.6 billion). Some industries report administrative errors well above the average, including books and magazines (35 percent of shrinkage due to administrative errors); jewelry (31 percent); cards, gifts and novelties (26 percent); and home centers, hardware and garden products (23 percent).

Each year, more than 1 percent of food, beverage and consumer products are thrown away, according to the annual Unsaleables Benchmark Report by the Grocery Manufacturers of America and Food Marketing Institute. Unsaleables include damaged goods, out-of-date products and seasonal merchandise, and they cost the consumer products industry $2.57 billion in 2003. Use of real-time data provided by RFID and better collaboration among supply chain partners could reduce such losses.

Damaged goods are a big problem. RFID’s ability to track who had custody of a product when it was damaged means there can be greater accountability for losses, which encourages people to be more careful. RFID could also help reduce the $565 million in annual losses from products that pass their sell-by date.

A recent study by Timothy W. Jones, a professor in the Bureau of Applied Research in Anthropology at the University of Arizona, indicates that 40 percent to 50 percent of all food produced in the United States never gets eaten. Much of the waste is in the household ($43 billion), but the report reveals inefficiency in the food supply chain. It says 26 percent of food in convenience stores and 10 percent of food in fast food restaurants goes to waste. The reason? The inability to match supply and demand. And farmers lose $25 billion a year through spoilage and other problems, much of which could be eliminated through more advanced supply chain technologies.

RFID alone won’t solve all the problems in these industries, but it can help identify the extent of problems, provide data on where the pain points are and help companies begin to implement effective solutions. “What you can’t measure, you can’t control,” says Jonathan Loretto, global technology lead for RFID at Capgemini, a global IT services firm based in Paris. “RFID lets you measure things at a granular level.”