Has there been anything much stranger in the supply chain than the tale of RFID in the consumer packaged goods to retail supply chain?
The journey has been from visions of supply chain transformation to now, literally, at a near dead standstill - though there is clearly a connection to today's very lively efforts with RFID for "item-level" apparel. It's worth exploring what happened, and why.
In 1999, a trio of academics founded the Auto ID Center at MIT, which focused on a new path for RFID technology. Though RFID had been around for decades and was increasingly popular in certain manufacturing/asset tracking applications throughout the 1990s (though still at a small scale), the tags were very expensive, and generally were designed to carry lots of data. MIT recognized the need to change that model if wide-scale RFID adoption was to occur.
"CPG companies and WalMart did not do enough "hard math" to really understand the returns before making substantial investments in RFID. Other retailers sat back and let WalMart do the "dirty work."
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The Auto ID center emerged with a different paradigm - much lower cost tags that were primarily "license plate" identifiers, carrying relatively little data that would be tied to databases, Those tags evolved to what we now know as the electronic product code (EPC). The concept of the "five-cent tag" that would unlock numerous commercial applications was also born at MIT.
Though the total vision was certainly broader, clearly the locus of thinking and activity was the consumer packaged goods to retail value chain. Companies like Gillette, Procter & Gamble, Kimberly Clark, Unilever and WalMart were the most prominent and active members of the Center. CPG companies represented by far the largest part of company membership in the Center (there were also many RFID technology companies, but few end user companies outside of CPG and retail). All the early trials were in the CPG to retail supply chain, and most of the documents had this chain as their focal point as well.
In 2003, MIT handed the effort off to EPCglobal, an arm of GS1, and soon thereafter WalMart launched its famous "sort of" mandate. Around the same time, eight companies began trials of RFID shipments to WalMart; all but one (HP) was a consumer packaged goods company.
There was "magic in the air," followed by substantial investment by many large CPG manufacturers, venture capitalists (more on that in a moment) and technology companies building to this vision, where RFID tagged cases would provide end-to-end, real-time visibility to inventory from manufacturer to store shelf.
But things certainly did not work out as planned. While RFID progresses and even thrives in other segments, in the CPG to retail value chain EPC tagging is simply stopped in its tracks. WalMart is doing nothing there, now focused on apparel programs. A P&G spokesperson told me this week that as far as he knows, Procter & Gamble has no active RFID projects or pilots currently underway - this from a company that was leading the charge not that many years ago, and had at one point I believe at least 20 people working on RFID. For example, P&G developed what became the industry standard requirements document for RFID-capable fork trucks. Even the UK's Tesco stores and Germany's Metro chain, which continued ahead after WalMart has clearly started to bail, have done nothing new for about three years.
Is this not just bizarre? Was this vision in the end just full of mush? Could so many smart people have been so wrong? Or is the value still there, and got waylaid for various reasons, waiting to be reignited?
I have thought about this a lot for the past couple of weeks. I have also talked to a number of people heavily involved at the time - and been turned down by others who didn't want to share their thoughts for whatever reason, largely fear of WalMart wrath, I believe (really?).
The conversations have been interesting - and in total, remind me of the old "different pieces of the elephant" metaphor. There is connective tissue across all of them, for sure, but each offers a different part of the full story.
Simon Ellis, now a leading industry analyst at IDC Manufacturing Insights, for several years was a "Supply Chain Futurist" at Unilever North America, and spent a number of those years primarily focused on RFID.
"There was sort of a collective euphoria back then that probably didn't look hard enough at the real business case for consumer packaged goods," he told me. He noted that even at 5-7 cents per tag, a level we are just getting to now, that would equal the cost of the secondary packaging itself, "which would be very difficult to justify" in low margin CPG products.
As the reality started to hit relative to the cost impact of the WalMart program versus the benefits, CPG companies started to push back despite such strong earlier enthusiasm. Ellis shared a story I had not previously heard, which was that around 2005, Tig Gilliam, an EPC thought leader at the time with IBM, delivered a report to Linda Dillman, then CIO at WalMart and the main public face of WalMart's program. It was called "RFID: A Balanced Perspective," and described the financial and operational challenges CPG companies faced with WalMart's program, calling for more analysis and a slowdown of the rollout.
The work has been sponsored by some 20 CPG companies. Most were supposed to show up at the Bentonville meeting. Instead only four made it there (surprise, surprise) and one company rep (I know who but won't say here) changed gears and wound up taking WalMart's side. The companies had not prepped Dillman well before hand about what was coming, and Ellis (who was there) says she was not a happy camper.
Patrick Javick, VP of Industry Engagement at GS1 US, echoes somewhat similar themes. He also says that then and maybe even today, it turned out that lower margin CPG products cannot well support the cost of RFID tagging in a general sense, versus higher margin apparel and some other non-CPG consumer products. He also says that some of the retailer mandates may have had a core problem in that they were broad based and did not focus on having all items in a given shelf category being tagged.
"It turned out to be too problematic trying to manage RFID processes and regular bar-code based processes in the same category," Javick told me. "Today you see successful deployments such as that at WalMart taking a category-based approach, for example with denims, in its current apparel initiative."
Javick referenced a University of Arkansas RFID Center study circa 2007 that came to the same conclusion - that much greater benefits accrued to the retailer and supplier when the full-category was RFID enabled. I had missed that one.
Just for the record, I did a quick check on margins, picking two examples. In 2010, Kimberly Clark's gross margins were about 37%, while VF's (an apparel company) were about 48%.
Dean Frew of Xterprise, an RFID-focused solution provider who was very involved with WalMart CPG suppliers at the time, thinks "WalMart had the resources to try something and see if it would work. They took those learnings, and found that the better path to value was to focus on apparel products and item-level tagging."
He and Javick both note that we wouldn't be where we are today in apparel and RFID technology generally if not for WalMart's CPG-focused program. Frew says more than $1 billion in venture capital, private equity and corporate money was invested in RFID companies based on the expected WalMart gold mine. That is what led to rapid progress in RFID technology and performance.
As usual, I am out of space. I heard so much more from my sources than I can share here - we will have more detail in next week's On-Target newsletter. I will summarize here, without necessarily well supporting my conclusions due to lack of space.
1. CPG companies and WalMart did not do enough "hard math" to really understand the returns before making substantial investments in RFID. Other retailers sat back and let WalMart do the "dirty work."
2. There was a "heard" mentality that contributed strongly to this, supported by the self-interested RFID hype machine in some parts of the media and consulting community.
3. Many CPG companies did and continue to believe there is great ROI in some product categories, the most prominent being in promotional execution but also others. But WalMart basically gave up on those (not clear why) and no other retailers have stepped up. Manufacturers cannot do it without retailers.
4. WalMart did not design or execute its program well, especially in having a mass mandate across hundreds of suppliers, when P&G and others were arguing for a segmented approach based on value. I believe the value for these "advantaged" products (P&G's term) is still there. This is more the approach WalMart is smartly taking now with apparel.
5. The really big losers were the venture capitalists who took a billion dollar bath funding dozens of RFID companies who later went under or sold for pennies on the dollar, as the WalMart bonanza never occurred. But their contributions pushed the technology along dramatically faster than would have happened without WalMart's unsuccessful program., the benefits of which others are enjoying today.
Those are my thoughts - would love yours.
What do you think happened in RFID from consumer packaged goods to retail? How did the leaders of the vision and excitement get it so wrong? Or is the value still there? Let us know your thoughts at the Feedback button below.
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