Compiled by Theresa Gilmore

A few weeks ago, Supply Chain Digest Editor Dan Gilmore sat down to discuss RFID with Procter & Gamble’s Dick Cantwell. Cantwell has been very active in the Electronic Product Code (EPC) community, and also been a vocal proponent of the potential of RFID/EPC in the consumer goods-to-retail supply chain. Also contributing to the interview is Cantwell's colleague, Paul Fox. Gilmore has questions, Cantwell has answers, in part 2 of this two-part Unplugged interview. Part 1 can be found here: Procter and Gamble "Unplugged" on RFID. Gilmore’s summary and comment on part 2 can be found here: https://www.scdigest.com/assets/FirstThoughts/07-06-21.php

Cantwell Says:

What is the cost of the tag?  We are at the 15-cent range now and it’s dropping like a rock.  If you came to one of our packing facilities now, you would notice that we have automated that application of our tags on our high-speed packaging lines so that we can apply tags at a dramatically lower cost.  What do you say? Send us your comments here

Gilmore: I got the idea from the initial work on promotional displays that a lot of this was that Gillette and P & G would follow up with the store manager and say “We’ve been monitoring the data and here’s what you need to do.” If we now take this across dozens of vendors - there are hundreds that do this type of promotional displays - are we going to have 300 different CPG manufacturers all calling 1500 or 3000 different Wal-Mart store managers? How is that going to work?

Cantwell:  Yes, you put your finger right on the nub of the problem.  P&G Gillette has a huge advantage right now because we have a merchandising force that routinely calls on stores each day over a 3-4 week cycle.  We are in the stores and we can take that information and make it actionable with store personnel and make sure these displays get out. That’s a huge competitive advantage for us, and we’re taking advantage of RFID to drive that competitive advantage. 

But longer term, what is going to happen and what we see beginning to happen now is the store itself – store personnel – are going to on-board the process that we are doing for them.  They are going to start generating automated data and directing their staff to do what we’re doing for them in these pilots.

That’s the process I referred to earlier that we’re going through and that will go through at Wal-Mart. There is socializing and educating and motivating the store managers to begin changing their processes.  That’s going to be a longer term process.  But with RFID visibility, actionable visibility as we call it, they now have the tools to do it.  The store manager goes to a Wal-mart meeting and gets the playbook on how you can better execute display results using real-time reports that say he needs to do this, this and this, and he or she’s getting feedback on whether it happens or not.  That process is going to eventually drive greater executional excellence. 

Gilmore: Aren’t those benefits more for the chief marketing or merchandising officer than the Chief Supply Chain Officer?

Cantwell: That’s a very good point.  I’ve always intended that this is a cross functional shared opportunity and that needs to involve IT and operations and marketing people on the same team in the same room.  All of them have a stake both from a standpoint of enabling the technology, but also from benefiting from the technology. 

From a marketing standpoint, marketers have a limited number of marketing dollars to spend on advertising and in store activities like promotions. If they can use RFID to better measure the effectiveness of their promotions, they are going to be able to establish a set of best practices that tells you what promotions work best, what part of the store they work best in, how they should best execute it, etc. This becomes a huge marketing tool and this is something that retailer’s marketing staffs and supplier’s marketing staffs are going to want to use to mine the rich data and the new metrics to really redefine in-store marketing execution.

Gilmore: This seems to me to have several impacts. The way the supply chain and marketing may think about value and ROI may be quite a bit different, for one. And do we need “RFID for merchandisers” training? It seems that this is flipping around a little bit in the short term.  In the long term it’s going to get back in the supply chain, but in the short term it has flipped a little bit on this and it’s more about in-store execution and in-store merchandising. If you go back to the original Auto ID center materials I don’t believe you would see much about that in the original concepts.

Paul Fox: Let me give you a perspective on this. I share a lot of your concern about the balance of responsibility and engagement between supply chain and marketing on this.  But one dynamic you will see beginning to increase in terms of its importance to the marketing function is that if you accept the principle that marketing is very much focused on  trying to connect with the customer, and trying to develop the promotions, the displays, etc. with the hope of engaging in-store with that customer. 

Now the assumption is that you’d get a reasonable level of execution to allow that to happen at the store level.  What is now happening across the retail sector in the U.S. and now extending into Europe by the end of the year is a global standard on movement and availability at the store tracked by what we call a “measured media.” 

Marketing at manufacturers today will buy other marketing channels based on measurement data.  They get data to decide how they will spend money on TV from Nielsen, for example, or other data sources for print.  It establishes consumer reach. 

Now, an “industry scanner” is being developed to measure the store in terms of consumer reach.  I hate to use this word, in a sense, but stores will be “elevated” on the same level as all the other marketing channels.  But a critical factor in establishing the store’s ability to reach a consumer is really a pretty simple equation – it’s the traffic, how many people were in the store, the aisle, the zone of the store, and what did they have the opportunity to see. 

And that’s where the question of compliance comes in.  It will suddenly get this huge amount of focus. Dick’s put the foundation stones in there, showing that the studies we’ve done indicate the compliance is around 45%.  That’s a huge area of opportunity to drive sales and reach shoppers. But on the other side of the coin is that this in-store metric will get traction. It will become a syndicated service by Nielsen in early 2008. 

Another side of it is, retailers need to drive compliance too or else their score is not going to look good.  That’s another dynamic that’s happening within the retail sector, where it’s focusing marketing’s attention on the question of compliance, which before really didn’t have that level of focus.

Gilmore: Why do you think, other than Wal-Mart, the other retailers seem to be moving very slow in this whole area?

Cantwell:  I think there are a couple reasons.  One is the other retailers are scared to death of Wal-Mart.  So, the work they are doing is being done pretty much behind closed doors.  I can tell you that there is work going on that half a dozen retailers that I know that never gets the press, never makes the light of day.

They’re keeping themselves in a readiness mode, so that when this thing hits, they’re prepared but they don’t want to give away their strategies.  Second, there are retailers out there that manage certain aspects of their supply chain very well, and today don’t see the low hanging fruit that Wal-Mart sees. 

I think there are retailers out there that are staying abreast of the technology without hopping in, but feel when it starts to accelerate they’ll have time to find one of the big consultants  and get a turnkey solution to plug in.  I’m a little more skeptical of that because I think you’ve got to have on-boarded RFID and have it in the DNA of your company to make it successful.  

Paul Fox: I know it all kicks off in the retail sector, so there was a lot of focus there in those earlier years. P&G and Gillette were among the principal drivers.  The traction of technology has received across different sectors is significant though.  I think that is something that is sometimes overlooked because Wal-Mart. You have areas like footwear and apparel, areas like movies and entertainment, areas like pharmaceuticals.  Then you’ve got other applications of RFID technology in things like aerospace, and defense, and the US Department of Defense, which is a major user of the technology. But it’s not surprising that time and time again the focus comes back to the Wal-Mart roll out.

Cantwell: Well that’s one big change since the days of the Auto ID Center.  At that time, the Auto ID Center was centered around CPG leading the way.  I chair the board of EPC Global and I’m very vocal at letting the GS1 know that although it is a CPG-to-retail centric organization, it cannot ignore aerospace and chemicals and pharmaceuticals, etc., because they very well may adopt this technology faster and deeper than CPG. 

The great thing about it is because of the standardized platform that GS1 EPC global is architecting and deploying, what’s good for chemicals will be good for CPG because we all use the same tags, we all use the same EPCIS system, we’ll all benefit from the same economies of scale. 

So, I think it is great that the apparel, for example, is finding so many applications and realizing the benefits.  I think it is great that Avery Dennison, one of the largest label manufacturers in the world, if not the largest, is also a tag producer, and they’re putting tags they produce into labels they produce for apparel, so that apparel can have a low cost applied tag solution for inventory management and in-store consumer shopper satisfaction.  You’ll see the dominoes start to fall.  It can become a gold rush very quickly for any given industry.

Gilmore: Last question: with cost to distribute in CPG sometimes as low as 20 cents per case, how can you possibly cost justify RFID tagging that in the end also costs that much or more? Which would you rather have: a whole distribution center, or tags on cases?

Fox: Well to answer your first question or one of the questions that was imbedded in that, tag costs are at about 15 cents right now.  We’re pretty confident that it is going to be below 10 in the immediate future – not 5 years from now but right around the corner. 

Cantwell: Here’s how I look at it Dan.  First of all, what is the cost of the tag?  We are at the 15 cent range now and it’s dropping like a rock.  If you came to one of our packing facilities now you would notice that we have automated that application of our tags on our high-speed packaging lines so that we can apply tags at a dramatically lower cost.  I encourage you to go to New England Wooden Ware up in Gardner, Massachusetts, where they have now installed the first corrugate producing machine, corrugate assembly machine, where the tags are being applied as the corrugate is being built. 

So, they have come up with a way to apply the tag as part of the corrugate process, so application cost is maybe a cent, or less.  So, you take a 10-15 cent application cost, and you drive it down to under a penny. That’s a pretty dramatic paradigm shift.

Right now we are betting that prices will go lower, and it’s all about the promise of future opportunities, but prices are going to drop.  Secondly, I think as these tags are used within the four walls by the DC operator, they are going to find advantages in terms of locating, assembling, checking inventory in and out. We found in our own DC about a 20% improvement of productivity as a result of using the technology. 

Third, we are amortizing that the cost of the tag, whether is 20, 10, or 5 cents, on the downstream applications.  All the things that happen in checking the inventory into the customer’s DC, reconciling orders to shipments, getting the product into the back room, knowing when it is out on the shelf, knowing when it needs to be replenished by associating RFID data with  POS data.  Every time we send one of our merchandising reps into a Wal -Mart with the data that is generated by EPC reads, even at case level, we are able to see $300-500 dollars of incremental sales.  And you multiply that against the whole Wal-Mart chain, you’re talking about millions of dollars in increased sales opportunity.

Fox: And just to give you a perspective on that, if you take the many locations where we have a packaging operating next to a plant.  Basically you’ve got a tunnel that connects the two buildings.  All this is has historically been a non-EPC enabled process. If you imagine a pallet moving from the pack center, through a tunnel into the DC, that inventory would have to be counted, for a number of reasons.  One, because we want to know what’s moving, but also to reconcile the payment for third party packagers. That process, on average, the process of manually counting the cases on the pallet would take about 20 seconds.  It doesn’t seem like that much, but with the EPC-based process we were below five seconds per pallet. 

You start adding that up, and you add to that fact that you have an incremental improvement accuracy, at the end of the day you know that manual process is costing you a lot.  There are all these things sort of floating out there that you need to draw in when you do those ROI calculations.  Today, you add 10 cents on the applied tag cost, but you take it away somewhere else in the process, because you don’t need to do something you used to do.  You’ve got people now building this stuff into the corrugate, and we’re going to get an applied cost of less than a cent.

Cantwell:  OK Dan, just to close our conversation, I think it’s important to keep in perspective, and I think you touched down when you talked about the marketing opportunities, this is a supply chain play right now – there are huge efficiencies and productivity gains and in-store compliance gains and execution gains which serve a huge purpose in providing an ROI to install the infrastructure. 

But if you were talking to the CEO or the chairman of the board right now, the thing that motivates them, the thing that he or she wants to be talking to the board about, is building top line sales.  The fact that right now, by making the supply chain work more effectively for us, we can reduce out-of-stocks , drive display execution, generate incremental sales as a result of that. This is huge for the CEO. 

You then build on that with that infrastructure in place, and you think about all the consumer marketing, consumer interaction opportunities you have to drive shopper satisfaction.  That’s where P&G plays.  That’s where P & G has no equal.  I think what you’re going to see is more and more opportunities building off the infrastructure to drive those things.  It might be starting with having better marketing metrics as Paul alluded to.  So now we have a better idea of what is in store worth to us verses spending our dollars on advertising verses spending our dollars on internet marketing.  But then beyond that, you’re talking about maybe having a consumer who can interact directly with your products and create a tighter brand relationship, which is going to build brand equity.  And P&G wants to provide its consumers the opportunity to bond even more closely with its products.

So, I’ve always been somebody who looked at my cell phone as the ultimate consumer device for interacting with products – getting information, identifying yourself to the product, finding out that because you are a loyal user, you can get a 2 for 1 deal or you can get a free item with your purchase or whatever.  So, those are the things that are going as the supply chain infrastructure is filled, those are the things that are going to get a lot of CEO’s attention down the road.