Identity crisis

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Radio frequency identification (RFID) is currently one of the hottest issues in the technology industry. Despite first appearing in tracking and access applications in the 1980s, the potential of RFID has only been recognised relatively recently, with Gartner predicting that 2004 would be the year of RFID ‘takeoff’. Using RFID tags, it is possible to identify and track objects without time delays, without human intervention and thus without variable costs. It is these benefits that have led Frost and Sullivan to estimate the worldwide RFID market at $1.6 billion in 2001 and forecast a yearly growth of 33 per cent with the market reaching $3.6 billion by 2006.

Much of this predicted growth has been allocated to the retail sector, where RFID tags could replace barcodes. RFID technology is based on a simple concept. RFID chips are radio devices that emit a unique ID when scanned at close range; these chips are inserted into tags that can be attached to almost anything. The appropriate scanner then simultaneously reads large numbers of these tags. Shopping becomes quicker and easier as entire trolleys can be scanned at once instead of individually scanning each product – bringing a reduction in costs for the retailer and increasing convenience for the consumer.

In the last six months there have been a number of RFID announcements in the retail sector including Target in the USA and Marks and Spencer in the UK. It is this move towards RFID by large global organisations that has driven the market expectation. In the next five years RFID is likely to have a major impact on any business or enterprise involved in the production, movement or sale of physical goods.

Amazing possibilities
With ever smaller, smarter and cheaper tags and readers, RFID is opening up amazing supply chain possibilities. Through RFID technology companies can improve efficiency and visibility, cut costs, better utilise their assets, produce higher quality goods, reduce shrinkage or counterfeiting and increase sales by reducing out-of-stocks.

LogicaCMG in March 2004 completed a study into RFID across Europe – covering 50 companies in six regions – to identify the potential for RFID adoption. The topics that were investigated include standards, US and European compatibility, reliability and legislation.

The research highlights that more than half the companies in the UK, Ireland, France, Germany, Belgium and the Netherlands rate RFID as a high priority for IT spend and have or are planning to deploy RFID pilot projects throughout 2004. It seems that the vast majority of these companies are planning to start implementing the technology within the next three years.

A number of major retailers, such as Tesco (UK) and Metro (Germany) are set to initiate large-scale rollout of RFID in 2004. Whilst these projects will be finalised by 2007, the research indicates that companies will not begin to tag consumer products until 2008 when prices of tags will have naturally lowered. The focus for the moment is on Returnable Transport Items (RTIs) in the supply chain, such as crates and pallets – the tagging of these RTIs will be standard as of 2005.

The main driver for the uptake of RFID in the supply chain, and specifically for RTIs, is the large variety of RTIs in retail supply chains, which makes the management, recording and administration both complex and labour intensive. RFID is set to eliminate these issues.

Be prepared
Since RFID will have a great impact on the processes and IT systems of companies, it is necessary that they thoroughly prepare themselves. The use of RFID with RTIs will only take place if the financial benefits are greater than the cost of implementation. The cost/benefit analysis part of LogicaCMG’s research showed that based on a tag price of 50 eurocents the handling cost per pallet could decrease by 8.5 per cent. This will provide a payback period of between two and three years.

Part of the problem to date has been the emphasis on the advantages for retailers, resulting in companies not realising the potential benefits of the technology. Educating these companies will therefore be important as well as ironing out worries such as standardisation.

With regards to standards, the problem for RFID is that it is a far more complicated technology than the barcode. Consistent standards are needed for deployment of RFID in each part of the world and for the coding system applied to tags to ensure that RFID is suitable for global users.

Standardisation is essential for the use of RFID in open supply chain applications, both with regard to the content of the tag and the radio frequency used to communicate between the tag and the reader (the so-called air interface).

The most likely outcome for the air interface is the acceptance of the Ultra High Frequency (UHF) Generation 2 standard proposed by 13 chip vendors including Philips Semiconductors and Texas Instruments in April 2004. Three other protocol proposals are also under consideration by the industry standards group, EPCglobal, a joint venture of the standards bodies EAN International and the Uniform Code Council. It is expected that the standard, probably in the 850-930 megahertz range, should be ratified by September 2004.

The use of low frequency and high frequency technology has become standardised and harmonised around the world. The situation is much more complex for UHF technology. In the USA, this technology is already widely used, but in Europe the use of UHF has been limited due to the existing legislation from the European Union. This legislation limits the reading range and speed, primarily because the power output of the reader is limited to 0.5 Watts.

In Europe, the desire to place the use of UHF on an equal footing to the USA is generally recognised. This is why the European Telecommunication Standards Institute (ETSI) has developed a proposal suggesting the increase of the permitted power output to two Watts. At the moment, this proposal has been submitted to the various member states for approval. On the basis of discussions with the various parties involved, we anticipate that the ETSI proposal will be approved by the end of this year. This is very important for the large-scale use of RFID in the European retail supply chain.

Some industry observers remain concerned that there will be different standards in the USA and Europe and analyst house Butler recently commented that RFID could face a VHS versus Betamax situation – with conflicting standards in the different regions. Meanwhile, according to Meta Group, the fear of choosing what could be the ‘wrong’ standard is preventing companies from launching pilot projects. Meta Group also stated that the standards debate is being used as an excuse for delaying development by enterprise software vendors.

Different frequencies
In the mean time, companies will need to request a site license if they wish to use UHF technology based on the American standards. Apart from this, the USA and Europe will continue to use different frequencies in the UHF range in the future. This issue has to be resolved if RFID is to become a truly global tool.

EPCglobal has also expressed concern that some retailers want the emerging standard to use ‘active’ tags, which are more expensive than the more common ‘passive’ tags currently in use. The advantage of active tags is that data can be amended or deleted during the product life cycle – but they are much more expensive, which will hinder their take-up.

The interest in RFID for supply chain applications is relatively new and no large-scale implementations have yet been carried out. Products are often not completely faultless, particularly for UHF technology in Europe.

As a consequence, it often takes considerable time to install and perfect the RFID hardware in each location. However, this problem is likely to become less relevant thanks to large-scale implementations by companies such as Wal-Mart, which should iron out many of the current problems.

In view of the anticipated progress in standardisation and European legislation, we anticipate that reliable UHF technology for the European market will be available in 2005. In 2004, companies will have to work with UHF products that meet American standards (for which a site license can be requested), or with early versions of new products designed for the European market.

Relative immaturity
However, another problem is reliability. In testing, 20 per cent of tags fail and while this should be overcome by the end of 2004, it is another illustration of the problems facing RFID due to its relative immaturity as a technology.

RFID is still a complex technology in which little experience has been gained in most organisations. Most of the RFID installation expertise in the supply chain currently lies with small organisations that have been involved in the first pilot projects.

To be successful, large-scale implementation on a European level will demand the support of larger international technology companies.

Currently the USA is ahead of Europe in terms of knowledge. Wal-Mart, Albertsons and Target – three of the four largest retailers in the United States – will require their major suppliers to deliver all pallets and cases with RFID tags as of 2005. Improved supply chain visibility, more efficient processes and higher turnover are the benefits these companies anticipate.

Many retailers, manufacturers and logistics service providers wonder when Europe will reach this stage and anticipate that eventually Europe will overtake the US.

The US approach is largely mandatory. Wal-Mart, for example, is making supplier adoption compulsory for key suppliers by 2005. While this pushes early adoption, it will not encourage widespread take-up – the European collaborative approach should reap longer-term benefits.

The only way to jump the RFID adoption barrier is through IT developer and manufacturer collaboration and education. Just as the wider IT industry is beginning to appreciate the value of co-competition, the proponents of RFID must work together to propel its uptake.

LogicaCMG’s study supports this viewpoint. The starting point for this study is the retail supply chain, consisting of suppliers, manufacturers and retailers where the level of collaboration was shown to promote the understanding of RFID and its advantages.

Far reaching consequences
The implementation of RFID has far reaching consequences for organisations and demands fundamental preparation. The preparation time is relatively long at the moment, due to the immature technology and the limited experience with RFID. A proven step-by-step implementation is effective: from study or proof of concept, pilots and small-scale projects to large-scale rollout.

Once the problems outlined earlier have been overcome there is no reason why RFID should not take-off. For example, many other industries are discussing using RFID technology in areas such as security and access control – this has relevance to associated service sectors, such as insurance, through RFID tagging’s anti-theft capability. 

However, there is a risk of misconception about RFID technology among consumers. Privacy issues are clouding the picture and if RFID is to become widespread public support is needed, meaning these issues need to be met head-on.

As part of their RFID strategy, retailers and manufacturers need to develop a privacy policy and communicate this to their customers. As well as this, there needs to be a level of education worldwide to promote RFID outside its traditional stronghold of consumer retail products.

In Europe this process of education is naturally occurring as a collaborative approach is allowing companies from all sectors to get involved. As standards are not being imposed from above a more receptive attitude prevails. It follows, therefore, that although the US will be the early adopter of RFID, Europe will derive greater use from the technology.

Paul Stam de Jonge is RFID solutions director at LogicaCMG – a major international IT services and wireless telecoms company providing management and IT consultancy, systems integration and outsourcing services. paul.stam.de.jonge@logicacmg.com

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