RFID Cuts Costs by 3 to 5 Percent

By Admin

An AMR Research says early RFID implementations have shown a 3 to 5 percent reduction in supply chain costs.


Nov. 4, 2002 – AMR Research has released a report on the benefits of using radio frequency identification. It says early implementations have shown a 3 to 5 percent reduction in supply chain costs and a 2 to 7 percent increase in revenue from improvements in inventory visibility.

The report, “ePC/RFID and its Imminent Effect on the Supply Chain,” was written by Peter Abell, director of research for AMR Research’s retail practice. It says that RFID will be economically viable by 2006 and that early adopters will begin deriving value from the technology in 2004.

“RFID is still too expensive for the majority of organizations even to contemplate implementing it on a total enterprise scale,” Abell writes. “However, specific businesses may find it is worthwhile to spend the money because they will see major returns for a particular business application within the supply chain.”

The report does not point to specific supply chain savings from using RFID, but rather talks generally about the benefits of tracking reusable assets, such as trailers, shipping containers, pallets, dollies, roll cages, and totes. The savings come from improvements in the accuracy of shipments, lower inventory carrying costs, and a reduction in shrinkage.

Abel says that early pilots by apparel makers indicate that they got a 3 to 7 percent increase in sales when RFID was used in stores because of the visibility of inventory at the store level. “A 1 percent increase in apparel sales has a sufficient return on investment, especially when coupled with decreasing costs from existing loss prevention, reduced store labor for physical inventories, and eliminating the return merchandise fraud [which can be as high as] 2 to 4 percent,” the report says.

Given these benefits, companies can justify paying 25 cents for tags and $500 for readers. But Abel says item-level tagging for low-margin, low-price goods will not be justified at current tag prices of 30 cents or more. He sees tagging of these items becoming viable in 2006. But, he writes, tag prices of 30 to 40 cents can be justified today for high-value, high-margin goods, like apparel, music and video, consumer durables, and consumer electronics.

“Some item-level tagging will occur in product categories even within fast-moving consumer goods retailers and suppliers, such as perishables, and sell-by date items, such as over-the-counter drugs,” he writes.

He points out that meat departments lose 4 to 6 percent of sales because of waste, theft, markdowns, and throwaways. That costs stores about $100,000 annually, which means they could see a return on investment in an RFID system at today’s prices within two years.

The report mentions many of the problems facing those who want to use RFID technology, including the lack of global standards, confusion over the five-cent tag, the need to develop IT infrastructure to handle data from readers and frequency issues.

Still, Abell is bullish. He recently told RFID Journal that several major European apparel and footwear retailers are planning to purchase upwards of 3 billion RFID tags each for implementations that will begin next year. The report doesn’t mention any of those retailers by name. But it’s clear from reading the report that Abell believes RFID is nearly ready for primetime.