Strategic Planning, SPA-19-0971
J. Woods, K. Peterson, C. Hirst
Research Note
30 January 2003
Maturing Open RFID Applications Will Reshape SCM
The first open, standards-based radio frequency
identification applications will mature by 2007. Coupled with
new business applications, RFID will radically change
supply chain management business strategies by 2012.
Core Topic
ERP II, Supply Chain & Manufacturing:
Supply Chain Management — Strategies,
Applications and
Key Issues
How will SCP and SCE technology and
architectures evolve?
How will SCP and SCE support current and
emerging business models, and key
enterprise business initiatives?
Strategic Planning Assumptions
During the period 2007 through 2012, the
most-strategic uses of RFID technology will
involve building radical new business
processes that leverage the technology's
data collection and distribution capabilities
(0.6 probability).
At least 50 percent of the RFID applications
in use in 2012 will not have been
contemplated in 2003 (0.7 probability).
Note 1
What Is RFID?
First conceived in 1948, RFID is an
automated data collection (ADC)
technology that enables equipment to read
tags without contact or line of sight. RFID
uses radio frequency (RF) waves to transfer
data between a reader and an item to
identify, track or locate that item. It has
several advantages over bar codes,
including noncontact readability (with no
direct line of sight required) and a longer
read range (100 feet or more with some
technologies). A typical RFID system
comprises three components: an antenna,
RFID tags (transponders) that are
electronically programmed with unique
information and an RF module with a
decoder (transceiver).
Radio frequency identification (RFID) holds great potential for
reshaping business strategies. The use of RFID to capitalize on
data flow in global supply chains could be one of the mostsignificant developments since enterprises first explicitly
recognized the importance of information flow in the supply
chain. Catalyzed by RFID, great change is ahead for productcentric enterprises worldwide (see "Supply Chain RFID Is
Tactical Now, but Will Be Strategic"). During the period 2007
through 2012, the most-strategic uses of RFID technology will
involve building radical new business processes that leverage
the technology's data collection and distribution capabilities (0.6
probability).
RFID is not a monolithic technology (see Note 1) or application: It
is a core technology that enables new processes and strategies.
Enterprises will never "install" RFID; rather, they will install
applications that enable the enterprise to exploit RFID or procure
the hardware to exploit it. This distinction may seem subtle, but it
is important to point that there are many ways that RFID will
affect applications, although it has little or no value in and of
itself.
RFID may not be generally applicable across many processes in
the enterprise until 2007, but specific applications with strategic
importance to some enterprises are likely to mature earlier.
Some RFID projects (such as livestock tracking) are already in
wide use. This is why Gartner encourages users to evaluate
individual RFID applications, rather than the overall technology
itself.
Given RFID's many applications, its resulting benefits and
beneficiaries will be largely unplanned. At least 50 percent of the
RFID applications in use in 2012 will not have been
contemplated in 2003 (0.7 probability). As a result, users must be
Gartner
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flexible and opportunistic when thinking about RFID. However,
there are architectural and standards issues that enterprises
should begin to address now to prepare for the 2007-to-2012
time frame, when interactions among multiple RFID deployments
will fundamentally change the way enterprises operate.
Four Phases of Deployment Involving Open, Interoperable,
Standards-Based RFID
RFID will achieve global granular visibility only by developing
unified standards and a low-cost tag (see "Standards Evolution
and Costs Will Drive RFID Deployments"). Assuming a global
granular visibility develops, enterprises will go through four
phases of RFID applications deployment (see Figure 1). Each
stage of development will increase the scope of the applications
being deployed and the strategic power of those applications to
create competitive differentiation for the enterprise.
Figure 1
Four Phases of Open RFID Deployment
Using RFID to Create New
Processes and Strategies
Open-Systems
RFID Applications
2007–2012
Closed-Loop Pilots
Strategic Based on Open
Power Standards
2004–2007
2002–2004
Closed-Loop
Applications
Pre-2002
Phase
1
2
3
4
Scope of Solution
Source: Gartner Research
Phase 1. Closed Applications: This is where most mature
applications (such as vehicle tagging and building access
controls) are today. Enterprises might attach RFID codes to a
limited number of items in a specific retail store or a warehouse.
Systems built on proprietary data standards will often be used to
manage the data associated with these transactions. There is
also limited technical and data interoperability of various RFID
systems.
© 2003 Gartner, Inc. and/or its Affiliates. All Rights Reserved.
SPA-19-0971
30 January 2003
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Phase 2. Closed Pilots Based on Open Standards: This is
what leading adopter enterprises are currently investigating or
piloting. Many of the pilots of RFID applications, such as those of
Auto-ID Center participants, involve a limited number of
participants, but they are attempting to use open standards in
these pilots. These standards are still in their early or formative
stages, so they are typically not ready to be deployed in full-scale
production systems.
These initiatives are often proof-of-concept pilots that use
nascent standards, which enterprises conduct to learn about the
technology or to identify how it will change business strategy.
However, these pilots are often terminated without continuous
extension into full-scale production. At other times, these are
limited-scope pilots, using more mature, but not widely deployed,
standards that enterprises undertake with the expectation that
the standard will catch on — enabling broader sharing of data or
interoperable business processes — with the initial goal of
extending the pilot into full-scale production. Closed pilots based
on open standards will continue as the dominant form of RFID
deployment through 2004 (0.7 probability).
Phase 3. Open Systems RFID Applications: Open systems
refer to standards agreed on by a significant number of industry
players — fully documented, open to all parties that want to
adopt the standard and widely deployed enough to enable
interoperability in the context of industry business processes.
Truly open systems RFID applications will begin to appear in
2005 (0.7 probability). Open standards will appear around RFID,
as opposed to other areas where open standards have struggled,
because these standards are largely focused on transactional
information and do not depend on the development of loosely
coupled, semantically mediated interactions between systems.
However, open applications will largely be implemented in the
context of established business applications. For example, an
RFID tag in a retail application will be read in a traditional point of
sale (POS) application that has been retrofitted to read RFID
tags and convert data into Universal Product Codes (UPCs),
which can then be processed in a traditional fashion. By 2005,
entirely new types of POS applications, such as self-checkout or
instant-checkout that fully exploit the properties and technologies
of RFID will not have emerged.
Phase 4. Using RFID to Create New Processes and
Strategies: Beyond 2007, enterprises must create more-mature
RFID implementations, create new business processes and
reform business strategies to exploit these new processes. To
extend the previous example, potential changes in POS illustrate
the complex trade-offs enterprises will face in crafting new
© 2003 Gartner, Inc. and/or its Affiliates. All Rights Reserved.
SPA-19-0971
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strategies around RFID-enabled processes. A POS application
might be rewritten to enable self-checkout as the customer
leaves the store, as opposed to concentrating the transaction at
the front of the store. This new self-checkout application might
also dynamically try to upsell and cross-sell, based on an
understanding of what's in a customer's cart and what the
customer has decided not to put in the cart (in conjunction with
smart-shelf technology that can tell when products are removed
and replaced on the shelf).
However, expensive in-store merchandising like this has been
tried many times before, but it has never proved to be costjustifiable, because it's hard to get customers to make enough
incremental purchases. Nonetheless, by leveraging the RFID
architecture that is likely to be cost-justified (due to other supply
chain projects) and pervasive through 2007 in retail stores, this
type of individualized merchandising will finally be viable in
certain circumstances.
The Need for New Strategies
Phase 4 deployments will require interenterprise coordination
and new business strategies to support them. Four areas will
need to be addressed when enterprises and entire value
networks begin to engage in Phase 4 RFID deployments.
Information Sharing Strategies: To exploit the benefits of
interoperable RFID, business processes and the applications
supporting them will need to cross industry boundaries. To deal
with fluid collaboration and information sharing, enterprises will
implement business-to-business collaborative-commerce (B2B ccommerce) application architectures in conjunction with RFID
applications to create strategic advantage (see "Multienterprise
SCM Systems Will Come of Age by 2012"). Enterprises will also
have to deal with complex information sharing and hiding
strategies in RFID applications. Although not all RFID tags will be
able to record data throughout the life of a product, some tags
will have this capability. Enterprises need to understand how this
data is collected, shared, erased and secured before allowing
these types of tags into their operations. Enterprises will also
need trading partner buy-in before they will be able to use these
data pathways in their enterprises and value networks.
Business Application Upgrade/Replacement and New
Business Processes: Business applications will need to be
rethought, even within the four walls of the enterprise.
Enterprises will be forced to cope with mountains of new data
produced by RFID and to determine what data must be kept and
what can be discarded. They will then have to build business
© 2003 Gartner, Inc. and/or its Affiliates. All Rights Reserved.
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applications strategies that carry out these decisions about
information capture, storage, archiving and elimination.
In addition, enterprises and vendors will have to rethink how their
applications operate in the context of RFID. For example, in a
warehouse management system (WMS), RFID may introduce
data latency to achieve maximum benefit from the technology.
Data latency is not inherently negative (enterprises should
choose a certain amount of latency in circumstances where the
cost of zero data latency is too high), but it's a problem if
applications cannot account for this latency, and processes are
not engineered around it. Currently, a WMS operates on the
assumption that it has the most up-to-date data about the status
of a specific product in the warehouse.
For example, a best practice in many warehouse environments is
to scan a product with a wireless bar code reader whenever it is
removed from the shelf. This scan verifies that the right product
is being picked and tells the WMS to decrement that inventory
from the slot. However, because of the way RFID enables new
processes by enabling users to read many tags at once, an
operator may decide that the scan verification is best done at the
end of the aisle, when all of the RFID tags can be read
simultaneously. This choice will introduce data latency into the
warehouse environment, because the WMS will not know that
the item has been removed from the shelf until, potentially, a few
minutes after the item has been picked. This can wreak havoc on
warehouse operations if the WMS is not equipped to deal with
this situation. Because of the significant retooling of logic and
careful considerations about costs and productivity in this WMS
example, enterprises will need to rethink fundamental
assumptions about enterprise applications and business
processes in the face of Phase 4 RFID deployments.
Cost-Sharing Strategies: Not all RFID applications can costjustify themselves solely within the four walls of an enterprise.
Often, the costs and benefits will be borne asymmetrically
throughout the supply chain. For example, a manufacturer in the
consumer packaged goods (CPG) supply chain bears all of the
costs of applying RFID tags to individual products, but it receives
little, if any, direct benefit from this application. The retailer is
likely to be the primary beneficiary of item-level tagging in CPG,
whereas the manufacturer and distributor will be the primary
beneficiaries of case and pallet-level tagging. The obvious
answer is that manufacturers will pass on the costs of tags to
retailers, but this is not always easy to work out.
For example, manufacturers might benefit from the tags in recall
processes, complicating the split of costs between manufacturer
and retailer. In another example, some retailers might not use the
© 2003 Gartner, Inc. and/or its Affiliates. All Rights Reserved.
SPA-19-0971
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tags as much as other retailers, making the manufacturer's
goods less competitively priced to that retailer. Sophisticated
payment structures that enable those who bear the costs of the
technology to recover those costs from the actual users of the
technology could emerge in the 2007-to-2012 time frame to solve
these problems. This could be an application in which the
micropayment structures developed in the late 1990s could be
useful. Enterprises should consider the future costs and benefits
of RFID tagging in negotiating and pricing contracts.
RFID Architecture: Profoundly strategic architectural choices
about RFID are masquerading as mundane technical issues in
the development of RFID. However, the flow of information and
the distribution of power in supply chains will be largely
influenced by these architectural issues, and, ultimately, by those
enterprises and individuals crafting architectures for RFID system
deployments. An example of the effects that architecture can
have on the strategic composition of an industry is the way that
Auto-ID Center standards could affect diverting operations or the
way retail POS data is collected and sold (see "Auto-ID Center
Addresses Privacy, but There's Work to Do"). Even enterprises
not yet interested in deploying RFID should be involved in the
creation of standards and architectures for RFID. Involvement
will ensure that the standards reflect the strategic interests of the
enterprise.
Acronym Key
ADC
B2B CCommerce
CPG
POS
RF
RFID
SCE
SCM
SCP
UPC
WMS
Automated data collection
Business-to-business
collaborative commerce
Consumer packaged
goods
Point of sale
Radio frequency
Radio frequency
identification
Supply chain execution
Supply chain
management
Supply chain planning
Universal Product Code
Warehouse management
system
Bottom Line: Radio frequency identification (RFID) will
fundamentally shape the supply chain landscape for years to
come. RFID will develop through 2007 in the context of
augmenting established business processes and applications.
Assuming this maturation happens by 2007, enterprises will have
to struggle to reform their businesses between 2007 and 2012,
as fundamental assumptions about process and strategy
evaporate, because maturing RFID applications change the way
that enterprises collect, use and distribute data about goods in
the supply chain. Enterprises should begin to understand how
they will form and re-form information-sharing strategies,
business processes and applications, and cost-sharing strategies
as RFID applications begin to mature in 2007.
© 2003 Gartner, Inc. and/or its Affiliates. All Rights Reserved.
SPA-19-0971
30 January 2003
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