While much is made about the costs to manufacture and market products, the difference between success and failure in many enterprises can be found in the supply chain.

Even the best products supported by top-notch marketing can be undermined by inefficiencies in the warehousing and shipping phases of the cycle. Getting products on store shelves in a timely, streamlined manner that ensures balanced inventory for both the supplier and retailer is the foundation of a profitable bottom line.

That explains the current excitement about radio frequency identification [RFID] technologies. Already mandated by monster enterprises such as Wal-Mart and the U.S. Department of Defense, RFID promises to eventually replace bar codes while automating crucial tasks and providing real-time insight into the nuances of the supply chain.

Bar codes have been effective for years, but they remain labor intensive — each item must be manipulated so it can be scanned within inches of a reader that must have an unobstructed view of the bar code. In contrast, an RFID tag emits a radio signal that tells a mechanical reader a few yards away of its existence and its unique Electronic Product Code (EPC) — even if the tag is not visible from the reader's location.

“It takes line of sight out the equation — it's based on proximity, not visibility,” ABI Research senior analyst Erik Michielsen said. “The value is that it takes the person out of it.”

At a distribution center, this means the bottleneck of items sitting on a loading dock waiting for written confirmation can be largely avoided. Instead, forklifts carrying palettes or cases drive interrupted past a reader before putting the product on a boat or truck, just as a car with an RFID tag is able to quickly pass through a tollbooth.

An effective RFID system allows loading to be executed automatically and accurately. In addition to enhancing efficiency, it also removes the need to have an extra employee at the loading dock to coordinate shipping and receiving.

“The way we look at RFID is that it means more automation, less [manual] counting and greater accuracy,” said Jeannie Tharrington, spokesperson for Procter & Gamble, one of the world's largest suppliers of retail goods.

Given that labor represents about 30% of supply-chain costs, such efficiencies are important. A recent University of Florida study revealing that businesses lost $5.8 billion in sales in 2001 because of administrative shipping errors provides significant evidence of the need to improve accuracy in that arena.

“It [sales lost because of shipping problems] may only represent a few percentage points, but when you're talking about these kind of volumes, it's substantial … it can lead to millions upon millions of dollars in savings,” said Bob Robertson, product manager for Manhattan Associates, a supply chain software developer.

Still, even these realities probably were not enough to turn RFID into one of the world's fastest-growing technologies (see chart). Indeed, the initial buzz and projected rapid adoption rate of the technology is being driven by suppliers' zeal to stay in the good graces of the proverbial 900-pound gorilla.

Table 1: Projected growth of RFID market

2003: $1.9 billion
2004: $2.4 billion
2005: $3.6 billion
2006: $4.6 billion
2007: $5.6 billion
2008: $7.1 billion

Source: ABI Research

Table 2: Cost components for RFID tags

Today Future
Integrated circuit: 12 cents Integrated circuit: < 1 cent
Antenna: 4 cents Antenna: < 1 cent
Assembly: 3 cents Assembly: < 1 cent
Label creation: 3 cents Label creation: < 1 cent
Total: 22 cents Total: < 5 cents
Source: Alien Technology

“It's very easy to summarize why the hype is so great: Wal-Mart,” said Josh Walker, vice president and research director for Forrester Research.

When the world's largest retailer announced last year that all of its suppliers must affix products with RFID tags by the beginning of 2005, everyone took notice. Since then, other large retailers such as Target and Albertson's have issued similar decrees. And the U.S. Department of Defense — one of the largest single sources of supplier contracts in the world — also has an aggressive RFID strategy in an effort to ensure that its materials and supplies reach their proper destinations.

One common theme in all of these RFID initiatives is that none of the mandating enterprises expect to see an increase in the price of goods shipped to them, meaning suppliers must bear the costs involved with affixing RFID tags to products.

Walker said most suppliers are expected to adopt crude “slap and ship” methods at distribution centers to put RFID tags on products to comply with mandates. While such a strategy will keep large enterprise customers happy, it is inefficient and an unequivocal financial burden for suppliers.

But suppliers can turn this burden into a boon by affixing tags to products as early in the supply chain as possible, so they can be used to automate warehouse inventory and maintain real-time visibility of the supply chain until it is time to ship, according to Tom Laffey, vice president of TIBCO Software.

“The key is integrating RFID into your supply-chain management strategy, which means you have to do more than just slap a tag on palettes so you can do business with Wal-Mart, Target and the Department of Defense,” Laffey said.

Perhaps no supplier group has as much to gain from RFID technology as pharmaceutical manufacturers, because the ability to track and trace products promises to help combat counterfeit drugs, which represent at least 5% of all drugs sold, according to Attilio Bellman, manager of global RFID solutions for BearingPoint Inc.

Although there are no mandates currently, the Healthcare Distribution Management Association has recommended that all suppliers use RFID tags on products by 2005 and the U.S. Food and Drug Administration has extended a similar recommendation that would include hospitals and pharmacies by 2007.

In addition to helping combat counterfeit drugs, RFID technology also can help the pharmaceutical industry by limiting losses related to recalls, Bellman said. Rather than taking entire lot numbers out of circulation — the current process, which tends to undermine consumer faith in products — recalls can be limited strictly to the individual bottles of medicine that were not manufactured or packaged properly.

“The implications are huge,” Bellman said. “We're not just talking about tagging cases and pallets, which is what most suppliers are doing with RFID. We're talking about tagging individual products.”

Tagging individual products is the Holy Grail for companies involved in the retail supply chain, as demonstrated at the Metro Group's “future store” in Rheinberg, Germany.

With RFID tags replacing bar codes on individual products, customers at this store simply push their shopping cart past a reader at checkout and all products are scanned automatically, eliminating the need to manually scan each product. And employees can take store inventories — traditionally a labor-intensive process for all retailers — quickly and more accurately by holding an RFID reader while walking through aisles.

Such technology also holds great promise for suppliers, who constantly struggle to make sure their products are never out of stock in a given store, according to Procter & Gamble's Tharrington.

“A lot of times, we learn after the fact that a product is selling particularly well in a certain part of the country for some reason — for instance, when the flu hits an area, Nyquil and Vicks just fly off the shelves,” she said. “With RFID, we could see that happening in real time and make sure we restock those areas as necessary.”

Because RFID tags can be remarkably small — considering that they incorporate a transmitter with an antenna — using the technology to track products on a per-item basis is physically possible. However, the technology currently is too expensive to try this on a widespread basis, especially for inexpensive items — for instance, attaching an RFID tag to a wood pencil makes little economic sense.

Currently, an RFID tag can be affixed to an item for about 22 cents. But the price of RFID tags is decreasing rapidly, according to Keith Scott, senior vice president of sales and marketing for Alien Technology. Breakthroughs that automate the manufacturing process and advanced techniques such as printed ink antennas should reduce the cost to less than 5 cents per tag in the not-too-distant future, Scott said.

Like most new technologies, RFID faces a number of challenges and growing pains. Many of the efficiencies sought in shipping and receiving are not being realized in pilot trials, because pallets are being called back to be reread, Walker said. In particular, there are problems reading tags for products containing metal and liquids, which can disrupt the radio communication between tags and readers.

That's why the trials are so important, Walker said.

“They're learning things like, ‘Where should I put the tag? Do I need one tag, or do I need two?’” he said. “It's better to figure that out now.”

Everyone in the supply chain is anxiously awaiting the establishment of a global standard. Currently, all the major U.S. initiatives have been based on the EPC architecture, but having a worldwide standard is a critical precursor to international suppliers making large investments in RFID.

In the short term, the technical issues regarding tags and readers will be the focal point of the RFID story. After they are resolved, the hardware likely will become commoditized, but growth opportunities will remain for software-oriented integration companies that help each member of the supply chain derive benefits from all of the new data assembled via RFID, according to Walker.

“Four years from now, we think companies like Accenture and IBM Global Services are going to be making most of the money,” he said.