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  - August 17, 2010 -  

RFID News: Is WalMart Item-Level Tagging Program Leading to an EPC Inlay Capacity Crunch?


Lead Times Stretching Out for Months, Sources Say; How Will WalMart Handle Tag Supply Issues after its RFP Process Concludes? A Step-Change in Tag Costs in 12-24 Months?



SCDigest Editorial Staff

SCDigest Says:
With its inlay RFP, it is possible that WalMart might procure the tags and then have suppliers order them as needed off the master contract.

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After years in which demand for EPC RFID “inlays” and smart labels remained well-under the market’s production capacity, supplies now are said to be very tight, with increasingly long lead times in the face of expected demand from the new WalMart appareling tagging program. (See Will WalMart get RFID Right This Time?).


Sources contacted by SCDigest all said capacity right now is very tight across the board and that lead times are extended for EPC Gen 2 inlays, which consist of a chip and an antenna that can be used within a label or paper tag medium, or embedded or applied to packaging materials directly.


“We’re hearing about lead times extending out as much as six months,” Michael Liard, Practice Director, RFID, at ABI Research told Supply Chain Digest this week.


Dean Frew, CEO at RFID solution provider Xterprise agreed.


“Yes the supply crunch is happening …. and yes WalMart is the reason,” Frew said. “I am not sure how much of the issue is inlay supply and how much is converted price ticket supply.”


In other words, there are reports of supply constraints at inlay suppliers such as Alien Technology and UPM Raflatac as well as downstream suppliers which may attach or embed those inlays on to or into labels and tags that go on the sold merchandise with the UPC code, pricing, and other information.


What is WalMart’s Plan for EPC Inlay/Tag Supply?


To date, it is still not clear how WalMart is going to handle the costs and supply of tags to its men’s jeans and basics suppliers, which will be first group of its vendors that need to begin tagging their goods at the item-level.


“These vendors have existing contracts with both WalMart on the price of the goods being sold and with traditional UPC tag and label vendors which currently supply them,” Liard noted. “The extra cost of adding RFID has to be accounted for somewhere.”


To that end, a WalMart executive recently acknowledge that WalMart might “subsidize” in some way the costs of the tags for its suppliers, but did not provide any real details on how this might work.

Myron Burke, WalMart's director of store innovation who is heading up the apparel tagging initiative, estimated recently that the first categories of men’s jeans and basics might involve the need for as many as 250,000 million EPC tags annually. That number would go into the billions as other apparel categories are added to the program.

This RFID-Auto ID Story is Continued Below





What is known is that WalMart just weeks ago issued a large request for proposal (RFP) to a number of inlay and tag providers in support of its item-level tagging initiative.


With the RFP, it is possible that WalMart might procure the tags and then have suppliers order them as needed off the master contract.


“It makes sense to consolidate the order and drive the price as low as possible,” Liard observed. “WalMart is probably interested in seeing just how low the prices can go.”


Right now, inlays are priced about 7 cents each for large orders.


The potential for the WalMart business may have some inlay and label/tag suppliers reserving some of their capacity for this potentially huge new amount of business.


That’s important, because it isn’t clear whether WalMart suppliers needing to tag their apparel shipments have to secure their own inlay or tag/label supplies, or rely on WalMart. Obviously, the program could be delayed if supply is constrained with very long lead times.


Liard notes that when EPC did not take off after the first WalMart tagging initiative in 2003-05, some RFID tag capacity was shuttered, or dedicated to other types of tags beside EPC. For example, Alien Technology closed a tag factory in Fargo, ND in 2009 – before WalMart’s new apparel initiative was known. In addition to WalMart, retailer American Apparel is in the midst of an item-level roll out across its chain, and others such as JC Penney are also expected to take action soon, adding to the market volumes.


However, a spokesperson for Alien says that while capacity is tight, the company hopes to get back to normal lead times soon.


“Gen 2 IC, inlay and label supply is running very tight right now. This is due to healthy demand increases in many segments, certainly not just apparel, and not just Walmart,” said Alien’s Victor Vega. “Although some of our lead times are extending, we do not see any reason to believe that our lead times will not remain under 6 weeks, long term.”


ABI’s Liard noted in may have been a smart move for UPM Raflatac to have invested in capacity with a factory in China to go with existing facilities in Europe and North America.


“They decided to invest while many others were pulling back,” Liard observed.


As things play out, Xterprise’s Frew says apparel suppliers need to look at a number of options to maximize flexibility and potentially best manage supply constraints.


Suppliers should “look into alternative approaches to the common method of using converted price tickets with attached EPC tags,” Frew said. “Some suppliers are interested in “wet inlay” approaches with bulk encoding as the means to get EPC codes into cases of products.”


With this approach, inlays with an adhesive backing are applied say to the plastic packaging of an item during the production process. After the items are placed into the shipping carton, a bar code (or RFID tag) on the carton is read, and all the inlays inside the carton are encoded with their own unique EPC numbers.


That approach may not only be lower cost than converted hang tags with an EPC chip, but also take the converting processes out of the loop as a potential supply bottleneck, Frew said.


Toby Rush, president of RFID solution provider Rush Tracking Systems, says that while supplies are tight now, in the end the higher volumes and capacity being added may finally move the price of EPC tags down after being stuck in basically the same place for a couple of years.


“Assuming the demand from apparel tagging holds, the price point and volume curves we have been hoping for may be realized over the next 12-24 months,” Rush said.



What are you seeing out there in terms of EPC inlay/tag supply and demand? How do you see this playing out? Let us know your thoughts at the Feedback button below.

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