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Europe Finds Its Own Path to ROI

Forget hard-charging tagging mandates and big-bang supply chain rollouts. Europe is taking a different road to RFID adoption, and some say the real ROI is at the item level.
By Jonathan Collins
Oct 01, 2005—In early 2001, Wal-Mart joined a fledgling research effort at the Massachusetts Institute of Technology to support the development of the Electronic Product Code, a low-cost radio frequency identification system designed to track goods globally. Across the Atlantic, Marks & Spencer, one of the largest retailers in the United Kingdom, was examining the possibility of putting RFID tags on reusable trays in its supply chain. Both companies began field trials a year later, and today, both are rolling out RFID technology in stores and distribution centers. But the two retailers are taking vastly different approaches.

Wal-Mart, of course, required its top 100 suppliers to put UHF EPC tags on pallets and cases beginning in January 2005, and it has set an ambitious goal of having all suppliers ship tagged pallets and cases by the end of next year. The retailer has deployed interrogators in three distribution centers and more than 125 stores so far, to better manage inventory and reduce out-of-stocks.

Europe is taking a different road to RFID adoption.
Marks & Spencer, by contrast, has eschewed UHF EPC technology and the tagging of pallets and cases in the supply chain. Instead, it put 13.56 MHz tags on more than 3 million reusable trays to improve productivity in its grocery supply chain. It's also using proprietary UHF technology to tag individual clothing items, to improve on-shelf product availability.

While these two retailers have similar goals, their divergent paths reflect deep differences in the way RFID—in particular, UHF EPC technology—is being harnessed in the supply chain on two different continents. Retailers are driving adoption in Europe, as they are in the United States, but until recently, restrictions on UHF interrogators in Europe kept them from moving aggressively to adopt EPC. Also, the nature of European retailing has led companies to focus less on tracking pallets and cases and more on returnable transport items (RTIs), such as shipping trays, to improve visibility. And they are moving to item-level tagging in specific categories of high-value goods to achieve greater efficiencies.

Others industries, including aerospace, defense and pharmaceuticals, are also moving to adopt EPC (see "RFID Spreads Its Wings in Europe" subhead). As a result, the market for RFID technology in Western Europe (defined as the European Union plus Switzerland) will grow to $1.9 billion in 2008, from $164 million last year, according to a study by Juniper Research.

Technical Hurdles
When EPC technology was in the early days of development at the Auto-ID Center at MIT, Europe was already ahead of the rest of the world in using 13.56 MHz RFID in closed-loop systems, such as tracking reusable assets and uniforms in industrial laundries. Most European retailers and manufacturers had little enthusiasm for the concept of tracking goods in the open supply chain with UHF tags, because European regulations limited the use of the technology in their countries. UHF interrogators were restricted to half a watt of effective radiated power (ERP), which meant UHF tags could be read from no more than about a meter away (3 feet). That wasn't good enough to read tags on cases moving through a 3-meter-wide dock door. In the United States, interrogators could use 4 watts of effective isotropic radiated power (a slightly different measure), and tags could be read at 10 to 12 feet (3 to 4 meters).

Another issue for European companies has been the lack of an EPC protocol that works well in Europe. The first-generation EPC tags were developed in the United States and were optimized to perform well in the 902 MHz to 928 MHz band used in the United States. The tags didn't work as well at 869.4 MHz to 869.65 MHz, the UHF band used in Europe.

In September 2004, the European Telecommunications Standards Institute (ETSI), which oversees radio spectrum standards in the European Union, raised the power limit of UHF systems to 2 watts ERP and increased the bandwidth these systems could use to 865 MHz to 868 MHz, which should greatly improve performance. And systems based on the second-generation EPC standard, which was designed to work from 860 MHz to 960 MHz, are expected to perform well in Europe.

The Metro Group in Germany and Tesco in the United Kingdom are adopting EPC technology and promoting it as a way to track goods in the European supply chain. Tesco plans to begin receiving tagged pallets and cases from one supplier by the end of this year. Metro has already deployed EPC portal interrogators in several distribution centers and stores and is accepting tagged pallets from more than 10 of its largest suppliers. Kimberly-Clark, for example, is tagging about 200 pallets a week for shipment to a selection of Metro stores.

But it's too early to say whether they and other European retailers, as well as manufacturers, will benefit from using EPC Gen 2 technology to tag pallets and cases moving through the supply chain. "Our drive for anything we do using RFID is finding out the business case for us," says Geoff Mortley, process development manager at Kimberly-Clark Europe. "The only way we can do that is by working with retailers to try and identify it, but we told Metro we reserve the right to delay moving to case-level tagging until we find the business case."

Kraft Foods has also been tagging pallets and cases shipped to Metro. "So far it's been difficult to judge the potential ROI [from UHF EPC] because we have been using relatively unsophisticated tags of variable quality and very labor-intensive processes to apply them," says Peter Jordan, director for international B2B strategy for Kraft Foods. "We have regarded this as an R&D exercise to find out how the technology works."

Not all retailers in Europe are embracing UHF EPC systems. Marks & Spencer considered using it for its apparel item-tagging trials, and instead opted for its own RFID system. But M&S is in a unique position: It has almost complete control over its garment supply chain because the company sells only its own brand products delivered exclusively by its suppliers. "We chose not to use EPC in our item-level trials because we wanted to use technology that would not only fit our business case but was also proved, simple and cost-effective," says James Stafford, head of clothing RFID for Marks & Spencer.
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