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Radio frequency identification, or RFID, has been slow to reshape retailing, but it's finding unexpected uses in health care and beyond
Slide Show >>Pete Abell used to be bullish on radio frequency identification, a technology for tracking shipments known by its acronym RFID. Back in September, 2002, he penned a research report saying RFID would have an "imminent effect" on retailers and manufacturers, helping them better follow products from the factory all the way to store shelves. RFID would help manage inventory, reduce costs, and by 2006 it would be economically viable for its users, according to the report, published by consulting firm AMR Research.
Abell wasn't alone in rallying around RFID. Consulting firm IDTechEx predicted that by this year, more than one billion RFID tags would be used on cases and pallets in the so-called supply chain, the complex network of suppliers, storage facilities, transporters, distributors, and retailers that bring a product from the factory to the store.
Neither Abell nor IDTechEx is quite so bullish anymore. "It's a real whimper, rather than a shout," says IDTechEx chairman Peter Harrop, referring to use of RFID technology in the supply chain. IDTechEx has already slashed its forecast to 500 million tags and is about to ratchet the figure down again, this time to 350 million.
DIDN'T WORK ON METAL.
"What we have seen is that the business case has not materialized in line with what was expected," says Abell, now program director of radio frequency sensor network research at Manufacturing Insights, a subsidiary of consulting firm IDC.
What went wrong? For starters, the optimistic forecasts failed to account for technical glitches that made early RFID devices hard to read. The tags checked out fine when affixed to cardboard. But when they got wet or were affixed to metal or liquid products—not so much.
Another obstacle: the supply chain can be a complex Hydra of manufacturers, retailers, shippers, and others. To work well and be cost effective, the technology would have to be adopted by most if not all the companies in a given network. Many suppliers are waiting for the costs to drop and the technology to mature in order to build an RFID business case.
There are also concerns about privacy, tag security (see BusinessWeek.com, 3/16/06, "What's Lurking in That RFID Tag?"), and increasingly, vendor stability in a rapidly consolidating market. "A lot of companies are being acquired or looking at other markets," says Abell. RFID sales are not resulting in "sustainable income for the various participants." Alien Technology, a maker of RFID tags and readers, scrapped a planned initial share sale in early August citing "market conditions."
Then, on Sept. 19, Symbol Technologies (SBL), which makes RFID readers and tags, was snapped up by Motorola (MOT) for $3.9 billion (see BusinessWeek.com, 9/20/06, "Motorola Bellies Up to the Bar Code").
"It's a great revenue opportunity," Motorola Chief Executive Ed Zander said in an interview at the time. He plans to tap that opportunity by marrying RFID with Motorola's expertise in wireless technology.
STAR WARS APPLICATION.
And even though demand hasn't met expectations, other companies aren't giving up on RFID either. A handful of large retailers such as Wal-Mart (WMT), Target (TGT), Best Buy (BBY), and Albertsons (ABS-P) are asking more suppliers to start sending shipments with RFID tags. In response, suppliers are now affixing RFID tags to cases and pallets, though only for certain products.
RFID is finding a home in sometimes unexpected places, particularly outside retail and the supply chain. These areas include automated toll collection, car entry and security systems, and contactless payment such as ExxonMobil's (XOM) Speedpass. RFID is also being used to track pets, library books, hospital equipment—even prisoners.
In many instances, RFID acts as a sophisticated type of bar code, but some applications have surprised even Harrop. Hasbro (HAS) used RFID to make a Star Wars toy interactive. "We think 20% of RFID applications that are created are applications that come out of thin air," he says.
The total RFID market, including systems and services, will grow from $2.77 billion in 2006 to $26.2 billion in 2016 worldwide, according to IDTechEx.
HOW TO HELP NURSES.
In one unusual case, Dr. John Halamka knew something was awry when he discovered nurses squirreling away patient-controlled-anesthesia pumps in the ceiling tiles of Beth Israel Deaconess Medical Center in Boston. It wasn't that the hospital lacked equipment. The trick was finding the devices at just the right time. "Nurses were starting to be so worried about the availability of equipment that they would hide it," says Halamka, chief information officer of the medical center as well as Harvard Medical School.
So, in July, 2005, Halamka began a trial in the hospital's emergency department, putting RFID tags on equipment and using an asset-tracking application that would tell care providers where to find intravenous pumps, ventilators, and other devices. Unlike the inexpensive passive tags used in retail, these $50 tags contain a battery and a transmitter, using the hospital's high-speed wireless network to broadcast the location of the equipment. After the trial, nurses and doctors said they spent an average 20 fewer minutes a day looking for equipment.
The method is doing more than making nurses more efficient. It's also helping reduce equipment losses that total $600,000 annually. Some of that is attributable to theft, but most often it's caused by accidents, such as when $1,000 portable cardiac monitors get rolled up in sheets and thrown down the laundry chute. It's a lot easier to find a piece of equipment that has an RFID tag slapped on the side. "When something shows up in a dirty utility room, within five minutes I can send a clerk to go get the thing, we can clean it and reuse it for another patient," Halamka says.
BIG HOSPITAL SAVINGS.
Another plus for the medical center: Equipment that's not being hidden away is more likely to get maximum use and doesn't need to be overstocked. Halamka estimates that the hospital will save $1 million to $2 million this year because it doesn't need to buy extra devices. "It's the kind of investment that pays for itself within a year," he says.
Health-care providers are finding a lot of other ways to harness RFID. By the end of 2006, for instance, the industry's largest application of RFID tagging will be tracking drugs, according to IDTechEx.
The World Health Organization estimates that 10% of global pharmaceutical sales are now counterfeit. In an effort to reduce counterfeiting, the Food & Drug Administration in December will start requiring wholesale distributors of prescription drugs to provide a statement of origin that identifies each prior sale, purchase, or trade of a drug, essentially documenting the drug's so-called pedigree. To this end, the FDA is urging drugmakers to make wider use of RFID, which creates an electronic pedigree for tracking the movement of drugs from the manufacturer to the pharmacy or hospital.
As an undercover drug enforcement agent, Aaron Graham saw firsthand the effects of illegal trafficking of narcotics. "We knew we needed a track-and-trace solution that would tell us where the original product was," says Graham, now vice-president of corporate security and chief security officer of Purdue Pharma, the company that makes OxyContin, a narcotic pain reliever.
Purdue Pharma is trying to battle theft of OxyContin as it travels from the manufacturer to the pharmacy. Criminals steal OxyContin and other drugs, store them at improper temperatures or perhaps adulterate them, and try to resell them later as legitimate goods, possibly risking patient safety.
By using RFID tags at the pill-bottle level, Purdue Pharma can flag shipments that have gone missing and alert relevant pharmacies, hospitals and other facilities. In 2004, Purdue Pharma began shipping its first bottles of OxyContin, equipped with RFID labels printed by George Schmitt & Co. In early trials, Purdue Pharma worked with Unisys (UIS) and SupplyScape, which provides e-pedigree software.
Other pharmaceutical companies are also adopting RFID to battle counterfeiting. In January, Pfizer (PFE) began tagging all packages, cases, and pallets of the erectile dysfunction drug Viagra. In March, GlaxoSmithKline (GSK) began a trial for tagging all bottles of HIV drug Trizivir that are distributed in the U.S.
RFID tags can also be used in health care for accuracy in dosages. Eight years ago, AstraZeneca (AZN) began tagging syringes for delivery to Europe and Japan of an anaesthesia called Diprivan, which is used during surgery. "They've tagged 40 million infuser syringes and they have totally eliminated errors," says IDTechEx's Harrop.
To prevent error, Beth Israel Deaconess Medical Center also uses RFID tags on the breast milk for infants. An RFID scanner reads the tag on the milk and the infant's wristband before the child is fed, and a software application creates an audit trail.
Much of the RFID tagging currently taking place is on cases or pallets of goods. But tracking of individual items—from pill bottles to airplane parts—is on the rise. In fact, item-level tagging is growing faster than previously thought, from $200 million in 2006 to $13.2 billion in 2016, according to IDTechEx. In 2006, 200 million items will be tagged, but that number is set to increase to 550 billion items that may be tagged by 2016.
REDUCING BOEING'S COSTS.
Boeing (BA) will use item-level RFID tags to identify airplane parts on its new 787 Dreamliner, which is expected to go into service in 2008. The company chose Intelleflex to provide what it calls "smart labels" for parts that require maintenance. These labels contain identification information as well as maintenance and inspection data. Boeing expects RFID to help reduce maintenance and inventory costs.
Currently, British retailer Marks & Spencer is the world's largest adopter of item-level tags, according to IDTechEx. The store began using RFID tags in 2002, when it started tagging returnable food-produce delivery trays, so it could better track delays in produce delivery that might mean wilting lettuce and overripe tomatoes.
By fixing delivery problems, Marks & Spencer got fresher fruits and vegetables in the produce aisle and helped boost sales, says Manufacturing Insight's Abell. Now the company is tagging individual clothing items such as men's suits in a trial at 52 stores.
Marks & Spencer only sells its own branded products, unlike Wal-Mart, which sells many different brands. Because Marks & Spencer does not need to deal with hundreds of different suppliers, it operates in what experts call a closed loop. Analysts say it's a lot easier to deploy RFID in a closed loop, when one party doesn't have to coordinate efforts with many other companies.
However complicated its task, Wal-Mart is still considered one of RFID's trailblazers (see BusinessWeek.com, 2/04/04, "RFID: On Track for a Rapid Rise"). By January, 2007, Wal-Mart expects that 600 suppliers will use RFID tags to label cases and pallets to the retailer. Wal-Mart is also expanding the number of
participating stores, bringing another 500 online by the end of January, for a total of 1,000 retail locations.
For Wal-Mart, the benefits are many. RFID is helping the world's largest retailer reduce the number of out-of-stock items, a problem that plagues all retailers. Across the industry, about 8% of products will be out of stock on store shelves at any given time.
HOW TO KEEP SHELVES FULL.
"One out of every 12 items on your list won't be there for the average consumer," says Bill Hardgrave, executive director of the RFID Research Center at the University of Arkansas. Out-of-stock items are the result of a number of factors, including inaccurate forecasting and ordering by the store.
When Hardgrave conducted a study over a six-month period at 24 Wal-Mart stores in 2005, he discovered that 22% of all out-of-stock products were in the store, but not on the shelf. Further studies by the center revealed that for a majority of items, RFID was able to help reduce out-of-stock items by about 30% and for faster-moving items—those that sold 7 to15 products per day—it could reduce out-of-stocks by 62%. That in turn can "mean a potential uplift in sales of 1% for both retailers and suppliers," says Hardgrave.
Electronic product codes, when used with RFID, can also help manufacturers and retailers make the most of in-store promotional displays. Too often, individual stores don't properly coordinate display timing and availability of an advertised product. "Manufacturers invest quite a lot of money running weekly promotions," says Greg Aimi, director of supply-chain research at AMR Research. "There wasn't any visibility by the manufacturer as to how that was transpiring."
So Procter & Gamble's (PG) Gillette used Wal-Mart-supplied software to monitor the movement of promotional displays from the distribution center to the Wal-Mart store backroom and ultimately to the store floor.
Until now, many manufacturers have implemented RFID, sometimes grudgingly, at the behest of Wal-Mart, Target, and other retailers. "Most consumer goods manufacturers that have been mandated to fit these cases with RFID tags don't see a payback at all," says Harrop.
But the Gillette study, conducted with the Massachusetts Institute of Technology and IESE Business School at the University of Navarra in Spain, found that using electronic product-code alerts to monitor and assist in moving displays to the floor yielded a 19% sales increase. That's just the kind of evidence that IT and finance departments may need before joining RFID's delayed revolution.
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