It's Good for Retailers, But Manufacturers Take the Hit With RFID

Report Forecast's Manufacturers Will Bear Brunt of RFID Implementation Costs

 

Retailers can expect extensive inventory and labor cost savings from the adoption of radio frequency identification (RFID) technology, but some consumer product manufacturers will face higher costs and delayed benefits from adopting the technology. That's the gist of a new report on RFID and the Electronic Product Code (EPC) from global management consulting firm A.T. Kearney (www.atkearney.com.

Many industry segments were shaken by the June 2003 announcement by Wal-Mart that its top 100 suppliers would be required to use RFID tags on their cases and pallets by January 2005. The Kearney analysis says other retailers and buying groups such as the U.S. Department of Defense followed suit and announced their own plans.

The report estimates retailers will see benefits in three primary areas: reduced inventory through a one-time cash savings estimated at 5% of total inventory, an annual reduction in store and warehouse labor expenses of 7.5%, a reduction in out-of-stock items that should result in up to $1 billion of additional annual sales for retailers who reengineer their current shelf-fulfillment processes.

The cost of EPC and RFID adoption to the retailer community is estimated at $400,000 per distribution center and $100,000 per store, with an additional $35-40 million needed for systems integration across an entire organization.

"While these are very significant amounts, the upside is that most of the costs to retailers are fixed," said Dave Donnan, the A.T. Kearney vice president who conducted the analysis. "The story for manufacturers, on the other hand, is quite different depending on the type of product they make."

Manufacturers will incur the same one-time charges for RFID readers and systems integration as retailers. But they also get hit with the recurring charge of placing RFID tags on their pallets and cases, as mandated by Wal-Mart.

The cost of tagging varies significantly. The Kearney report compares two manufacturers with $5 billion in sales - a low-impact (high volume, less-expensive products) grocery manufacturer and a high-impact (low volume, higher-value goods) OTC drug manufacturer - and concludes the low-impact manufacturer is $155 million worse off from a capital spending perspective (assuming the current $0.15 cost per RFID tag, a 10-yr. horizon, and a 12% weighted average cost of capital).

"The hit on manufacturers' cash flow is not something that can be made up by volume, as the saying goes," Donnan said. "In fact, the high- volume manufacturers will see the greatest cash-flow impact."

Manufacturers will see benefits in two areas--those they can control and those linked to their trading partners. Among the benefits manufacturers control are increased tracking and inventory visibility, enhanced labor efficiency, and improved fulfillment. However, the study notes most manufacturers are "well beyond the basics when it comes to supply chain efficiency," and there might not be much left to gain from these benefits.

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