RFID Heats Up

With the compliance deadline for Wal-Mart’s radio frequency identification (RFID) initiative now just eight months away, there is no doubt that interest in the technology is heating up.

Some of the latest evidence came at the RFID Journal Live! conference, March 29-31, in Chicago, where organizers said they were forced to turn away about 200 would-be attendees. In all, between 800 and 1,000 individuals packed into the event, which featured nearly 60 conference sessions held at the Chicago Hilton hotel, said show personnel. The conference, which also included exhibits by more than 40 vendors, was co-produced by RFID Journal and Phocas Partners (www.phocaspartners.com), Oakland, Calif.

Wal-Mart Stores Inc., Bentonville, Ark., mandated in June last year that its top 100 suppliers begin applying RFID tags to pallets and cases by January 2005. Other major retailers, including Albertsons and Target, have since launched their own RFID initiatives, and the U.S. Department of Defense has joined the RFID bandwagon as well.

RFID costs

While Wal-Mart and others hope to gain supply chain efficiencies through the use of RFID, a major concern of suppliers has been the cost of implementation. And at RFID Journal Live!, results of a recent study released by Forrester Research Inc. (www.forrester.com), Cambridge, Mass., helped shed some light on that topic.

According to Christine Spivey Overby, a Forrester senior analyst, a typical supplier who attempts to meet the Wal-Mart January 2005 deadline can expect to spend $9.1 million on RFID, including up-front investment and operating costs, in the first year. Initially, the January deadline applies to all pallets and cases shipped to three Wal-Mart distribution centers in Northeast Texas, with additional centers ramping up throughout the year. Forrester based its cost estimates on a hypothetical food manufacturer with $12 billion in annual North American sales that has three distribution centers shipping 15.6 billion RFID-tagged cases and pallets annually to the three Wal-Mart Texas distribution centers.

Of the $9.1 million, more than 80 percent, or $7.6 million, would go for the RFID tags, which Overby pegged at 40 cents each. Additional costs would include hardware, such as servers and RFID readers, $329,000; software, $183,000; consulting and integration, $128,000; internal project team costs, $315,000; tag and reader testing, $80,000; training, $39,000; and additional warehouse labor, $469,000.

The added labor costs arise from the need for workers to manually place tags on Wal-Mart-bound product in distribution facilities as close to the shipping zone as possible, said Overby, an approach known as “slap-and-ship.” That method will pay few benefits to suppliers, who will reap more benefits long term by integrating tag application into their production processes, Overby noted. But given the high capital cost of setting up tagging operations and equipment in each of many production plants, Forrester is recommending that suppliers take a slap-and-ship approach initially, while they learn more about RFID technology, Overby said.

Market Projections

As RFID activity picks up, market researchers see strong growth opportunity for vendors. Venture Development Corp. (VDC, www.vdc-corp.com), Natick, Mass., recently increased its estimates for the size and growth of the RFID market, since its last report on the subject in 2002. VDC now believes that global RFID shipments will grow at a 37 percent compound annual rate between 2003 and 2005, compared to its earlier 21 percent estimate.

VDC pegs the worldwide RFID market, including transponders (or tags), readers and software, at $1.1 billion in 2003, and sees that rising to $2.1 billion by yearend 2005. Transponders make up the largest segment, rising from $554 million in 2003 to $853 million in 2005, the research firm said. But the fastest growth will come in readers, which will grow at a 59 percent compound clip, rising from $272 million in 2003 to $683 million next year. RFID software sales, meanwhile, will grow from $301 million in 2003 to $594 million in 2005, VDC said.

Wes Iversen

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