The University of Arkansas’ Information Technology Research Institute, a part of the Sam Walton College of Business, released a report a few weeks ago based on its preliminary study of the impact of RFID on reducing retail out-of-stocks (OOS).
The news out of Bentonville and most of the trade press was of course wildly positive. The official Wal-Mart press release on the study quotes CIO Linda Dillman as follows: “This is no longer a take-it-on-faith initiative. This study provides conclusive evidence that EPCs increase how often we put products in the hands of customers who want to buy them, making it a win for shoppers, suppliers and retailers.”
Does it?
First, let me repeat my consistent position that I’m very positive right now over many RFID-based applications, bullish long term over the retail/EPC variety, but just a little skeptical over the approach and economic sense of ECP in massive quantities right now.
For those who didn’t read the full report (available at http://itri.uark.edu ), here’s a quick summary. A team of University researchers, supported by a national merchandising firm, did visual inspections of out-of-stocks at shelf of 12 RFID-enabled stores and 12 “control” stores not yet using RFID. The research teams were tracking 4554 SKUs tagged with EPC codes at the RFID-enabled stores and obviously not tagged at the control stores.
The almost daily scanning lasted for approximately six months, from February to September, 2005, and included several Wal-Mart formats (Superstores, Neighborhood Markets, traditional).
The results: both sets of stores made progress in reducing out-of-stocks, but the RFID-enable stores did so much faster. In the end, the researchers concluded that RFID reduced OOS at store level by 16% over non-RFID based stores. The main driver of this improvement was a change from traditional methods of replenishing store shelves, which rely on workers noticing a shelf spot is empty, or scanning an item in the back store room and querying the system about room on the shelf to accept the product. With RFID, the store system uses data about store receipts and movement to the store shelf from RFID scans, combined with POS data, to drive “autopick” lists of what needs replenished. In short, this is a change from associate-driven replenishment to system-driven replenishment.
That last change in general certainly sounds good. But here are my questions, before we assume the benefits:
- First, as the researchers note, there may have been some “ Hawthorne effect” – the fact that the stores knew they were being monitored may in itself have had an impact on results.
- What the study scope does not include of course is whether there are other approaches to reducing out-of-stocks that are better/more economic than the massive EPC program. For example, as we reported a few weeks ago, Wal-Mart is in parallel rolling out it’s Remix program, which is designed to reduce OOS for fast moving SKUs through a streamlined distribution approach (see SCDigest Oct. 13, 2005). As we noted at the time, paradoxically the program will by definition reduce the return for RFID the more successful it is.
There are of course many other approaches that could have the same effect. For example, the report itself notes that one of the ways Wal-Mart replenishes the shelves now is that “Picklists [for shelf replenishment] can also be created by using a handheld device to scan barcodes on cases of product stored in the backroom. The system then identifies, via an indication of existing store level inventory, whether or not the case will fit on the shelf.” While this is currently an associate-driven process, it seems to imply the capability to create an autopick list without RFID, especially if a backroom stock locator such as Target employs was also used. Is EPC, at current costs/investment, clearly the best way to achieve the OOS goal?
- The economic return: The study cited previous research that says out-of-stocks cost retailers about 3.4% of sales, and manufacturers 2.6% (though we’ve had some debate here as well at SCDigest – see “RFID – It’s a Zero-Sum Game on the Revenue Side”). So here’s my math:
If 3.4% additional retail sales can be had by reducing OOS altogether, a 16% reduction in OOS should increases sales by .54% (3.4% * .16). Now, half a percent sales increase when you sell $300 billion dollars of goods is nothing to sneeze. Wal-Mart’s current net profit margin is about 3.5%, but that includes a lot of overhead, so I am going to grant it a 10% return from each lost OOS sales dollar recaptured. So, .54% (half a percent) increased sales times a 10% profit margin equals .054% increase in profit. This is five hundredths of a percent, by my admittedly very back of the envelope calculation.
My conclusion: interesting work, carry on with more, EPC should certainly have some effect on improving OOS, the economic case for EPC still unclear right now.
What is your take on the University of Arkansas EPC/Out-of-Stock research? Does it clearly show the benefits of EPC, or do you have questions? Do we need more analysis of alternatives and total economics? |
