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Part 2: Prospects for Adoption

Will companies invest millions to deploy the Auto-ID Center's RFID system? Those who have examined the business case say yes.
Sep 16, 2002—Sept. 16, 2002 - The mission of the Auto-ID Center is to create a global system for tracking goods as they move from one country to another and one company to another. The potential benefits of such a system are unprecedented. Imagine Dell selling a computer and being able to know precisely which computer it was, when it was made and every component in it. The company would be able to let suppliers around the world know virtually instantly that one of their components had been sold, giving them real-time data on demand and enabling them to match the manufacturer's needs more precisely, reducing inventories throughout the entire supply chain.

RFID can reduce theft
But the retailers and CPG manufacturers who are sponsoring the Auto-ID Center and participating in its field test say they are looking – at least initially – to deploy the technology where they can get a return on investment from improving their own internal operations. The ROI will come from three primary areas: reducing out of stocks (which increases sales), cutting labor costs, and slashing inventories.

We believe retailers will drive adoption because they have the most to gain from using RFID. Items are not on the shelves at grocery and general merchandise stores about 5 to 10 percent of the time. So-called out of stocks average upwards of 15 percent on fast-moving items. Studies show that retailers lose 3 to 4 percent of sales because items aren't on the shelves when people want them. If Wal-Mart can recapture even 1 percent of lost sales using RFID, it would bring in an extra $2 billion a year.

Theft -- both by employees and shoplifters -- is another major issue for retailers. In 2001, retailers lost 1.80 percent of their total annual sales to shrink, up from 1.69 percent the prior year, according to the latest national Retail Security Survey. That translates into $33.2 billion in lost sales. That's a very big deal in an industry with razor-thin margins. Woolworths says theft by customers and employees at its 788 U.K. stores last year reduced gross margins from 7 percent to 1.7 percent.

RFID not only has the potential to dramatically reduce shoplifting and supply chain theft, but it can also virtually eliminate administrative errors, which make up 17.5 percent of retail shrinkage, and vendor fraud, which accounts for 5.9 percent. (In a later installment of this Special Report, we'll explain how retailers plan to use RFID to reduce inventory shrinkage.)

The potential benefits of RFID have long been known. The real question is, Can companies deploy a system that is affordable and provides a big enough return on investment to justify the risk? The answer depends heavily on the cost of the system – and on the way it is deployed.

We don't agree with the conventional wisdom that says companies will use RFID first to track pallets, then cases and eventually individual products. If tracking pallets offered huge benefits, more companies would be doing it today using proprietary systems. Companies will deploy the technology in ways that deliver the most return on investment. For retailers, that might mean tracking pallets, cases and even individual units of certain products, before they track pallets of other products.
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