July 2005         return to newsletter contents page

RFID - A Distribution Perspective

RFID is the latest technology step in Automatic Data Collection (ADC). Radio Frequency IDentification is the natural successor to bar codes as a means of collecting information about products and packages.

In the beginning, there were bar codes which provided the ability to identify a product with an 11 digit code. The first 5 digits represented the producer and were assigned by the Uniform Code Council (UCC) to anyone who applied.

The next 5 digits represented an individual product and package combination. For example, if I purchase one “pen” it would have a code on the package for that pen. If I bought a box of the same pens where there were 12 individual packages in the box, it would have a different bar code number. Even though there is an ability to use additional digits to represent packing, they are not used in most distribution markets.

It is up to the supplier / manufacturer / importer to make sure that all product codes are unique. Mergers and acquisitions have made some of the processes more complex. Changing bar codes is expensive for most manufacturers, so many of them have multiple “producer” numbers. This can cause confusion.

There is an eleventh digit that is used to check the first 10. This check digit is supposed to catch most keying or reading errors. It is possible to have offsetting errors in 2 digits, but this is very rare and the check digit has made sure that there are few errors when reading bar codes.

This year (2005) a new bar code standard has been implemented. Everyone is now supposed to be using a 13 digit code. As with any technology, not everyone is ready to make the change, but it is a world wide standard.

Now we have a new technology with immature standards. There is no agreement on international standards. What we do know is that RFID allows us to capture information about a package without needing “line of sight” or physical contact.

RFID only requires us to be close to the product to identify it. At the low end, an RFID tag can only be read within a foot of the product. At the higher end, RFID information can be read from over 20 feet away and on a car moving at 50 miles per hour. At the highest levels, RFID or transponders can be read from jet aircraft miles away and moving at supersonic speeds.

RFID tags can be static, which means they only carry the information originally embedded on them or they can be updateable. Tags can be passive (no independent power source) or active (with a dedicated power source) to gain range and features. They can even record and report data.

Small, passive tags will hold from 64 bits of information (8 “hex” characters) up to a thousand bits. Active tags can contain up to 128 thousand bits – today.

The current situation

When bar codes first came out, they were concentrated in the grocery and then the high volume consumer goods industry. As “pro-sumer” products started to sell through retail outlets, the giants started to demand that bar codes be affixed to all products. As a higher percentage of product was bar coded, more distributors decided to start using the bar codes themselves.

There were many procedures created to work around the lack of codes on many products. The early adopters got the early advantage. It was slow, but eventually the majority of products arrived at our warehouses with barcodes printed on them. Bar codes were inexpensive. The cost of adding them was almost zero.

Now, there is a new method of identifying a product. It is RFID. But we are still in the early stages. The costs are much higher than barcodes. A supplier has to attach a special tag with embedded electronics rather than just print a set of bars on the outside of a package.

RFID tags can be as easy as attaching a printed barcode label to unmarked packages, and over time it will become less expensive and less necessary. Right now there are other hurdles that need to be cleared.

The largest is the need for standards. With barcodes, we had standards for “symbology” (how the bars were positioned to represent data) and exactly what data was to be encoded and how. With RFID, we have a number of different (and incompatible) technical standards. These include the frequencies used to transmit the information and how it is stored.

Then there are the content standards. How many characters, what order and what they mean. Barcodes started in the grocery industry and they formed the UCC to assign codes. In RFID, there are competing groups wanting to control the assignment of codes (and the money it can generate).

Even with the problems that seem so large today, there are many benefits that we can see for the future. It will be a balancing act. It will be different from industry to industry and from manufacturer to manufacturer. For most distributors, it will be necessary to have both barcode and RFID capabilities for the foreseeable future.

Right now we should focus on understanding the upside, the downside and business considerations.

Upside

RFID can add significantly to the benefits of barcodes. Consider for a moment the simple act of cycle or inventory counting. An advanced RFID system could distinguish multiple sources in a bin. This means that an inventory can be accurately taken by holding a reader in proximity to a bin or shelf location. Then the reader would count the number of items that are present. No manual intervention and the system will reconcile the inventory.

Products that require third party processing can have RFID tags that are updated as the product is sent out and then changed again as it is received back into inventory. All processing would stay with the product and the need for lot control could be a thing of the past.

Inspection results could be added to tags. In this way, a formal tracking of what inspection was done, by whom and when would become part of the permanent record traveling with a product. Where there is limited shelf life, the expiration dates could be loaded on the tags and used to pull outdated product before it is accidentally shipped to a customer.

Embedded tags could carry serial numbers and warranty history. Animal tags already can carry medical histories that can be updated by scales (weight) and doctors (procedures and diagnostics).

Of course, there is the basic confirmation of the identity of a given part or product. The ability to receive, put away, pick – pack – and ship are all available to help in the management of a sophisticated warehouse. Even lost inventory could be found by taking a reader to the car trunks of every salesperson.

Downside

The two biggest drawbacks today are lack of standards and cost. Anyone who went through the early days of EDI understands the problems associated with incompatible codes. How many different interpretations were there? When Europe decided to establish a different standard than the US, it created more confusion and delays in obtaining the potential benefits.

Today, the same problem is happening with RFID. The International Organization for Standardization (ISO), The Auto-ID Center and Global Tag (GTAG created by EAN International and the Uniform Code Council which have merged their interest into EPCglobal) are all creating standards for usage. Industry groups must get in the discussions to make sure their interests are served.

Cost is another big issue. Again, using the comparison to EDI, the early programs and VANs (Value Added Networks) added to the cost of using the protocols. That created a supply channel battle as to who was going to get stuck with the cost. Many members of the channel decided to absorb costs when they believed the savings would warrant whatever was necessary to get a critical mass of trading partners to use the technology.

We see similar positioning going on with Wal-Mart taking the publicity lead in pushing for RFID to reduce their costs of operation. The whole world is watching to see what happens. Right now, they are hoping to get the costs of an individual tag to 5 cents.

Actual tag costs for smaller companies that do not have the economies of scale can be 50 cents or higher. It does not take much to imagine this is a deal killer especially with lower cost products. Our own view is that at this price, RFID will initially be justified at the packing (pallet) level rather then the individual products.

Use of RFID will be limited to those trading partners that can agree on strategic reasons and capabilities to improve their bottom lines together. The investment in readers and programming will not be insignificant.

We are also still learning how to take greatest advantage of the new capabilities. It is like the early days of computing. When we went from the 80 column punched card (with or without hanging chads) to disc drives, it took years to learn to use the disc as more than just a fast card or tape reader.

RFID will be more than just a substitute for barcodes or it will not succeed. Barcodes are inexpensive, ubiquitous, accepted by business and standard. It is not clear how long it will take RFID to reach the same level.

Business Issues

Finally, it will come down to what makes fiscal and strategic sense to a group of trading partners. There is no way that an RFID tag will be able to replace the barcode on an individual dog chew toy. However, it might be useful to replace the packing sheets associated with a multiple pallet order of a variety of pet supplies.

(Of course, trading partners can use the “856 Advance Ship Notice” EDI transaction set to provide the same basic capability. Therefore, making RFID viable will mean finding new capabilities or new uses. These may be processes that we are not even thinking about. It most probably will include a paradigm shift and force everyone to adopt new business methods.)

In the fast changing world of technology, the best advice is to keep your eyes on what is happening. For smaller operations, it is too early. But, you do not want to be the last to jump on the bandwagon. So watch your competitors and watch what other industries are doing. Find that point when you can gain a significant advantage by being a leader in you industry and market.