January 1, 2005, was supposed to be the day when radio frequency identification (RFID) technology began to take off. That was when Wal-Mart Stores Inc. began requiring suppliers to attach RFID tags to the pallets and cases that they shipped to the retail giant.
The initiative was intended to help Wal-Mart manage inventory and reduce out-of-stock errors by providing the company with visibility into the location of inventory. The Wal-Mart mandate -- along with a similar one from the U.S. Department of Defense -- was also widely expected to jump-start the use of RFID technology among retailers, consumer packaged goods manufacturers, and others.
While there are signs that the RFID initiative is beginning to pay off for Wal-Mart, recent studies suggest that manufacturers in a number of industries -- including pharmaceuticals, automotive, and even consumer goods -- are still struggling to justify investing in broad production rollouts of RFID. As a result, experts say, many manufacturers are still only evaluating the technology and engaging in small pilot projects.
"The market got over-hyped," says Sara Shah, an industry analyst at ABI Research (Oyster Bay, NY) who recently backed away from a prediction she made last year that RFID transponder usage among life-sciences manufacturers would increase 3.5-fold between 2005 and 2006. Shah now says she expects no more than 10 drugs to be shipped with RFID tags in 2006.
"It now looks like RFID is going to progress pretty gradually in the pharmaceuticals industry," Shah says. "There are still several major concerns."
The slower-than-expected RFID rollout among pharmaceuticals manufacturers recently caught the attention of officials from the U.S. Food and Drug Administration. At a February meeting of the FDA's Counterfeit Drug Task Force, acting FDA Commissioner Andrew von Eschenbach asked for staff recommendations on a possible FDA mandate on RFID implementation.
"The longer we delay, the more opportunity is lost," von Eschenbach said.
A similar go-slow approach to RFID is evident among automotive and even consumer goods manufacturers. Automotive manufacturers had been expected to jump on RFID to help track non-disposable containers in which parts are handled and shipped. Mismanagement of these containers reportedly costs automotive manufacturers as much as $1.4 billion annually. A recent report by AMR Research (Boston), however, said 41% of automotive manufacturers have no plans to deploy RFID to track containers.
Even consumer products (CP) makers -- many of whom are directly impacted by the Wal-Mart mandate -- appear to be limiting RFID spending to the minimum required for compliance. A recent AMR survey of 20 CP manufacturers found that on average they are spending $628,000 on RFID initiatives annually. By AMR's estimates, widespread RFID deployment by a large CP manufacturer should cost between $13 million and $23 million.
A number of factors are causing manufacturers to resist full-scale RFID rollouts. High costs and uncertain ROI are near the top of the list of barriers, experts say. At the FDA Counterfeit Drug Task Force meeting, Tom McPhillips, a vice president at Pfizer Inc. -- one of the few pharmaceutical makers with a commercial RFID implementation -- said tagging five-dose package combinations of drugs cost the company $5 million.
With those high costs to absorb, many manufacturing companies are having difficulty establishing an ROI case for RFID. According to the AMR report, 51% of automotive manufacturers say poor ROI is the biggest hurdle they face in justifying RFID rollouts.
And many manufacturers say they are finding it difficult to execute business process changes that could make RFID investments pay off. Many consumer goods manufacturers, for example, told AMR that they could easily justify investments in RFID if they could use the technology to automate the proof-of-delivery process, a step that would speed cash flow and reduce paperwork. Unfortunately, the report says, retailers so far have refused to accept RFID-generated electronic notices as proof of delivery.
Immature RFID standards have also delayed deployments, experts say. While standards bodies such as EPCglobal have made progress defining standards for Gen 2 RFID technologies using ultra high frequency (UHF) bands -- favored by retailers like Wal-Mart -- many pharmaceutical manufacturers say chips using high frequency (HF) tags work better on drug packaging. EPCglobal has yet to finalize a standard for life sciences manufacturers using the HF frequencies.
Despite these hurdles, however, manufacturers are still expected to continue to invest in RFID -- albeit at a slower-than-expected pace. In the past few months, in fact, consumer packaged goods makers have begun to identify RFID applications that have a potentially strong ROI case, such as item-level tagging for promotions tracking.
"We're starting to see the market take a turn in the right direction," says Kara Romanow, research director at AMR Research. "In the past, everything had been focused on retailer mandates, but for a lot of suppliers compliance brought no value. Now they're starting to identify applications that will bring value."
As that happens, experts say, RFID will begin to live up to expectations.
"Right now a lot of the expectations were based on hype that everything would take off in a year or two, which hasn't happened," says Marc Osofsky, vice president of marketing and product management at RFID supplier Oat Systems (Waltham, MA). "But if you compare RFID to prior innovations such as bar codes or even the Internet, it is really right on track."
-- Freelancer Stephen Barlas, a former MA Washington editor, contributed to this report.
This article originally appeared in the April 2006 issue of Managing Automation magazine.