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RFID Isn't Clicking With Internet Retailers

Dot-coms led the Internet revolution. So why are these tech-savvy companies sitting on the sidelines while brick-and-mortar retailers lead the RFID revolution?
By Elizabeth Wasserman
Dec 01, 2005—To the customer, buying goods at online discount retailer Overstock.com is a seamless experience. One click: Place a book or a watch or a poker set into an electronic shopping cart. Next click: Proceed to checkout. A few more clicks: Pay for the item with a credit card, and get an estimated delivery date. On the back end, however, the supply chain at Overstock.com—as at many other Internet retailers—is not quite as seamless.

Overstock.com, based in Salt Lake City, buys closeouts of brand-name merchandise from assorted suppliers, and then offers those goods to online customers at a discount. Some items don't even have bar codes when they arrive at Overstock.com's warehouses in Salt Lake City and Indianapolis; bar code labels have to be applied manually to that merchandise. Complicating matters is that customer orders are usually for one or more distinct items. Overstock.com workers must locate the goods in the warehouse, hand-pick the individual items out of a case or pallet, hand-pack the items and turn over the package to a parcel service, which is ultimately responsible for delivery.

E-tailers could use RFID to reduce supply chain theft, achieve better retail count accuracy and inventory control, and verify the authenticity of returned goods.
RFID has the potential to help Internet retailers automate the back end so the order fulfillment process is as efficient as the ordering process is on the front end. "This is an opportunity for Internet retailers to leverage RFID to more effectively pick, pack and ship faster," says Joseph Gagnon, global and Americas retail industry leader at IBM Business Consulting Services.

While Overstock.com and other technology-savvy e-tailers are excited about the potential of RFID, they say that right now the high cost of implementing the technology doesn't make economic sense. In addition to the cost of hardware, Overstock.com has to weigh the cost of reengineering business processes, data management and software integration against what the company stands to gain, says Ted Martin, the company's senior vice president of merchandising and operations.

And e-tailers say they stand to gain less from RFID than brick-and-mortar retailers—those with physical stores—that have given their larger suppliers mandates to tag pallets and cases of goods. The e-tail business model is based on finding and shipping individual items directly to consumers, whereas the brick-and-mortar world involves keeping pallets and cases of goods stocked in distribution centers, warehouses and individual retail stores. Analysts say e-tailers are more likely to realize benefits from RFID once manufacturers are tagging at the item level because it will allow them to stock items more efficiently in warehouses and locate items more quickly.

"The role of RFID in an Internet retailer is not item-level tagging for the purpose of checkout," says Gagnon. "It's more of finding items and redesigning for maximum efficiency of the layout of warehouses and regional distribution centers."

The online order-fulfillment process is unique to Internet retailers, and one of their most difficult and costly problems. In other areas, even though e-tailers often have different processes than brick-and-mortar retail chains, they could see some of the same benefits from RFID, analysts say. Internet retailers could use RFID to help the bottom line by reducing theft and other product losses in the supply chain, achieving better retail count accuracy and inventory control, and verifying the authenticity of goods being returned. RFID could also solve another problem that stores don't have: Online retailers have to hand off shipments to parcel services, and sometimes items get lost, misidentified or delivered to the wrong address. RFID would provide more accountability in terms of delivery for online retailers.
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