A new Forrester Research, Inc. (Nasdaq: FORR) report, “RFID At What Cost?,” places RFID implementation costs — startup and one year of maintenance annually — at approximately $9 million for a typical supplier attempting to comply with Wal-Mart.(1) The report also indicates that only 25 percent of suppliers will meet Wal-Mart’s January 1, 2005 deadline.(2)
“There is no business case for most suppliers in the short term,” says Forrester Research Senior Analyst Christine Spivey Overby. “The technology is not ready, and there is a lack of deep expertise in the industry to help suppliers implement RFID.”
The largest costs remain constant from supplier to supplier, highlighting major challenges that will impede RFID deployments.
- Tags currently make up more than 80 percent of a supplier’s cost. Based on today’s tag production processes and projected volumes, Forrester believes that suppliers should not build a near-term business case on any price lower than $0.40 per tag.
- Professional services spent on getting distribution centers operational are high and will only increase, due to a short supply of experienced RFID experts.
- Converse to what many believe, companies implementing RFID should expect to add supply chain labor to their budgets in the first year, because vendors have yet to perfect solutions for automating tagging and embedding RFID in packaging material.
To gain benefits such as product tracking, businesses need to begin RFID implementation at the manufacturer, rather than at the distribution center, which is one step closer to a retailer in the supply chain. Today, “source tagging” cases at the manufacturer is too disruptive for most companies to implement. Because source tagging requires significant process re-engineering and budgets that top $100 million in some cases, RFID early adopters like Gillette are the only companies that will attempt this approach in the next 12 months. In the short term, a “slap-and-ship” approach, in which suppliers tag cases and pallets in the distribution center, is the most realistic scenario for a majority of suppliers.
What Should Wal-Mart Do?
The report recommends that Wal-Mart redefine the scope of its RFID mandate by narrowing the scope of products to those with limited amounts of metal and liquid. With a narrower focus on high-priced products like prescription drugs, apparel, and DVDs, fewer suppliers would be affected by the 2005 mandate. It would also allow vendors and suppliers additional time to perfect tag reliability for all products. Forrester also recommends that Wal-Mart use its influence to help create a buying consortium, giving suppliers the collective power to cut tag costs.
What Should Suppliers Do?
Forrester suggests that suppliers use their initial learnings to shape mandates by Wal-Mart and other retailers. In addition to addressing the challenges they are facing in implementing RFID with Wal-Mart, suppliers should create an internal RFID lead position with direct access to the CEO.
(1) Total cost of compliance varies depending on a company’s distribution network and Wal-Mart volume. The model includes costs associated with infrastructure, software, consulting, and new warehouse labor.
(2) See Forrester’s May 25, 2004 update, “Wal-Mart Supports Its RFID Mandate.” The report finds that because Wal-Mart and its suppliers are focused on tagging only the most viable SKUs in the short term, most suppliers will comply with the January 2005 mandate.