RFID is here-is it time for you to worry?

Radio Frequency Identification (RFID) systems are a buzzword in the packaging industry as major end users the world over-including Wal-Mart, Metro, and the U.S. Dept. of Defense-have all told suppliers to either start using the tags or, in Wal-Mart''s case to its top 100 suppliers, to start doing so by next month.

RFID is expected to help these end users better manage inventory, ensure shelves are always stocked, and respond rapidly to changing demand patterns. Legal liability issues and concerns about foodstuffs-for instance, "mad cow" disease in beef and worries in some countries about genetically modified foods-also seem likely to drive demand for RFID systems or other improved methods of tracking products for targeted recalls. Indeed, the New York Times reported on November 15 that the U.S. Food and Drug Administration and several major drugmakers announced initiatives that will put RFID tags in the labels of millions of medicine bottles-including those for Viagra, one of the most counterfeited drugs in the world, and OxyContin, a pain-control narcotic that has become one of the most abused medicines in the U.S.-to combat counterfeiting and fraud.

Leading edge

The reasons for a processor to invest time and finances developing RFID-capable products remain few, but, just as for the Wal-Mart suppliers, it may be a customer mandate. Wal-Mart is also seeing vendors volunteer to partake in its pilot program, which for the time being is restricted to one distribution center in Sanger, TX and seven stores in the Dallas-Fort Worth area, according to company spokesman Gus Whitcomb. In April, it began the pilot program, tagging pallets and cases of 21 products (out of approximately 100,000 in a typical store) from eight suppliers, including Gillette, Hewlett-Packard, Procter & Gamble, and Unilever. This January the top 100 suppliers and 37 other volunteers will be participating, and by June 2005 the company aims to be live in six distribution centers and 250 stores. In 2006, it will add its next 200 suppliers and plans to make RFID global.

To now the biggest effects of the coming RFID movement have been felt by processors of reusable plastics packaging (RPC), such as pallets and crates. Officials at Schoeller Wavin Systems NV (Hardenberg, Netherlands), one of the leaders in that market, say its customers are very interested in RFID.

For the molder, that means talking with customers to develop, and then mold, RPCs that are adapted for mounting the type of RFID system a customer intends to use. The molder must get into the minutiae of a customer''s operations, including what sort of RFID transponder, reader, and antennae will be used, not to mention how the customer operates its warehouse and loads its trucks.

Depending on the customer, the molder might also be asked to apply the tags itself before delivery. Application is still a post-process step as heat shock and shrinkage in injection molds has so far proven too great for an RFID system''s survival. "We''ve looked at it [inmold labeling with RFID], but [the available RFID systems] are not ready for it yet," says one Schoeller-Wavin technician. Joe Hiner, director of business development at RFID system supplier The Kennedy Group (Willoughby, OH), says that some customers have asked the firm about tags suitable for inmold labeling, but to now this remains impossible.

Beyond pallets and boxes

William LeMaire, managing director of PakIntell LLC (Westchester, PA), works as a consultant to packaging manufacturers, and he says the companies that spearhead item level advancements in RFID versus the current case and pallet programs will reap rewards. "It will be slow going," LeMaire says, "but I think that packaging companies as a rule are not paying enough attention to this, and I think it could be very critical. If flexible packaging were able to resolve how to get inexpensive RFID tags onto packages better than rigid folks, and quicker, I think they stand a chance to alter the packaging materials mix. Whoever resolves this problem the fastest and is most proactive has a real chance to gain some market share."

Some industry watchers are pushing the Wal-Marts of the world to put the brakes on RFID until the supply chain catches up. The ARC Advisory Group (Dedham, MA) recommends major retailers not force suppliers to tag every RPC, as there could emerge a supply crunch that would force costs of RFID tags higher. The group says its discussions with large Wal-Mart suppliers indicate that these suppliers have also raised this issue, and that Wal-Mart has acquiesced in many cases. At the same time, major RFID systems suppliers such as Zebra Technologies and Texas Instruments have announced plans to increase RFID capacity in anticipation of a demand surge. Hiner says that the RFID price point is still well above the $.05/unit threshold that Wal-Mart asked the industry to shoot for.

In an e-mail response, Hiner writes, "Customers are realizing that the $.05 tag is a myth today. The market is not at the level of production that it needs to be to reduce the cost down to $.05." Technology market consultancy Gartner Group (Stamford. CT) reckons RFID costs still are at $.40 to $10 for passive tags and much more for active (signal-emitting) tags. By 2009, the most competitive RFID tags will cost $.20, says Gartner. ARC Advisory Group figures a $.16 price tag will eventually be reached. ARC found that in 2003 the average unit price of a tag was $.91 for a passive HF tag and $.57 for a passive UHF tag.

Wal-Mart''s Whitcomb cites different figures, estimating that the tags'' cost has dropped 50% over the last year, falling $.40 to $.50 per tag to $.20. He sees the potential for driving costs down further, citing RFID initiatives from Best Buy, Target, Albertson''s, Ford, and General Motors. Others anticipate demand increases, with Allied Business Intelligence reporting 323 million tags shipped in 2002 and forecasting several billion in 2007.

Whatever the cost, there''s no argument with Wal-Mart about who will pay. "The cost is borne by suppliers," Whitcomb says. "It needs to get down, hopefully below a penny, but certainly below five cents before we start making the suppliers feel a little bit more comfortable about pricing."

PakIntell''s LeMaire says initial evidence supports a punitively higher price structure, citing one study based on a hypothetical scenario where the annual cost of implementing an RFID program to meet Wal-Mart''s initial request was $9 million, with $7.6 million devoted entirely to the tags.

"The consumer goods companies feel a little put out," LeMaire says, "but the way Wal-Mart feels is that in the long run, it''s doing you a favor. You''re going to be more efficient." LeMaire also admits that signing on for RFID has another overriding benefit that will drive its growth-you''ll remain on Wal-Mart''s vendor list.

Matthew Defosse [email protected]

Tony Deligio [email protected]

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