EIS Final Project
RFID Technology
A Comparative Study of E-ZPass and Wal-Mart
Jose Malpartida, Sebastian Martinez
Matias Moral, Avraj Sandhu, Phillip Wittwer
1. Technology overview
RFID, or radio frequency identification, is a technology that allows for communication between two
devices by means of radio waves. Thus neither a direct line of sight, nor a physical connection is needed.
The first device is a reader or antenna, the second is a so called tag. Readers are more complex and
expensive devices, whereas the tags are meant to be cheap and produced in high numbers.
Tags can be very simple, for example they could transmit a short id code, similar to a bar code, that is
powered by an electromagnetic field. Else, they can be more complex: they could be written to, perform
calculations for authentication like a pay-tv chipcard, and contain a power source to increase range.
Depending on the application, a major share of effort needs to also be put into an operations
infrastructure acting on the data received by the antennas, for example time tracking of employees or
billing for payment solutions.
History
The technology was first developed for military aircraft in the 1950s and 60s to allow identification of
friendly planes, as the pure radar signature did not answer this question. The first patents for a RFID tag
used to unlock a door touch less were awarded in 1973. In the 1980s first applications for toll collection,
as discussed in this article, were developed. With ongoing miniaturization ongoing and decaying prices,
in particular for tags, more and more potential applications were thought out. There was a major buzz
around RFID in the late 90s and early 2000s, as it was envisaged to have a RFID tag on every coke bottle
and a reader on every fridge, so the fridge would know how much is left and could order new goods
automatically.
Potential industries:
The versatile features of RFID tags lend the technology to use in a variety of different industries:
1. Toll booth payments: RFID tags are a naturally good fit for this industry. Traditional toll booths
require a person to be staffed at all times. In addition, the process can be inefficient since traffic
slows down to make payments. Finally, drivers have to deal with the hassle of cash and receipts.
Systems like E-ZPass install transponders with RFID tags in cars that are connected to pre-paid
accounts. The car can drive through toll booths with RFID scanners without stopping. The RFID
technology has been used very effectively here.
2. Retail: RFID tags can be used for retail environments like electronic stores or big box retailers in
multiple ways. Suppliers can ship products to retailers with RFID tags either at the individual unit
or collective (e.g. pallet) level to identify the contents of the package. This has several
advantages for the retailer. Firstly, retailers can detect the contents of multiple packages at a
time by simply passing them through a scanner (as compared to the manual process required
with bar codes). In addition, retailers can use RFID scanners on shelves to track stock-outs on
store shelves in real time to refine optimal inventory levels. Finally, RFID scanners can provide
touchless, seamless checkout at retailers.
3. Smartcards: Smartcards are cards with embedded RFID chips that have been used in a variety of
different applications ranging from ID cards for offices or colleges to passes for public
transportation (e.g. Oystercard for the London Underground). The touchless nature of RFIDs
makes them very useful for these purposes as people can simply wave their card near the
scanner instead of having to swipe it physically through a reader.
4. Healthcare: The healthcare industry has enthusiastically embraced both active and passive RFID
technology. Active technology is used to scan frequently moved or high impact items, while
passive technology is used for lower-cost items that don’t need to be tracked as well. The Mayo
Clinic reduced its error rate from 9% to 0.05% by deploying RFID technology.
5. Military: RFID tags have been widely used in the military, especially in the U.S. because of their
usage in tracking military equipment ranging from packs of ammunition to tanks. Given the high
cost of these items and the importance of being able to accurately track them to avoid losing
them to the enemy, RFID tags provide a more accurate way to track items. Nonetheless, there
are some security issues that have caused concerns about their implementation, e.g. enemies
being able to read RFIDs on the guns of soldiers in the field to detect their positions.
6. Manufacturing: RFIDs can be used very effectively in supply chain environments such as car
manufacturing. In a car manufacturing factory, several different models might be manufactured
at the same time. So, each car can be fitted with an RFID tag that uniquely identifies its model
and types of features that need to be installed. So when the car reaches the painting stations,
the painting machine reads the RFID tag to figure out that the car needs to be painted red.
7. Animal identification: RFID tags can be clipped on animals like cows for multiple uses ranging
from identification (to be able to identify healthy cows from the ones infected with mad-cow
disease) to feed tracking (being able to track how long a cow has spent at the feeding trough).
Challenges in implementation
The difficulty of implementing an RFID based system depends on a variety of factors: Price of the
infrastructure (readers and tags) compared to asset value, new processes and backend IT systems
needed, number of players involved in the ecosystem and employee inertia in accepting new processes.
In general, the more complex a system needs to be before any value can be created, the more
challenging implementation will be.
In this paper we will look at two industries: Toll collection with the example of E-ZPass, where RFID has
been successfully implemented and retail by the example of Wal-Mart, where implementation has been
attempted twice, and has not yet taken off.
2. E-ZPass
E-ZPass History
E-ZPass is an electronic toll collection system widely used in states along the east coast of the
U.S. First introduced in the late 90s, it is now very widely used along toll roads. The E-ZPass
system was introduced to make the process of collecting tolls more efficient from the highway’s
perspective, and more convenient from the driver’s perspective. The E-ZPass system makes very
effective use of the touch-less nature of RFIDs.
How it works: The driver pays a one-time fee of $20 to $30 (depending on the state) and EZPass delivers a transponder that is attached to the windshield of your car. The driver loads his
prepaid account with a certain amount of money. The transponder contains an RFID tag that
connects the driver’s individual pre-paid E-ZPass account. Now instead of driving through a
regular toll lane, the driver drives through a special E-ZPass lane that contains an RFID scanner.
When the driver drives through the toll booth the scanner detects the driver’s E-ZPass RFID and
automatically deducts the toll amount.
Advantages for the driver:
1. Speed: Drivers don’t have to stop at the toll lane and traffic moves much quicker through
the designated E-ZPass lanes.
2. Convenience: Drivers don’t have to deal with cash, coins, or receipts. All they need to do
is make sure their pre-paid account has enough money.
3. Discounts: The E-ZPass system at different times has offered different types of discounts,
ranging from carpooling discounts, green emission discounts, and resident discounts.
Advantages for highways
1. Less congestion: E-ZPass toll booths ensure that car traffic moves smoothly, thus
reducing the bottleneck effect of toll booths on highways.
2. Less manual labor: E-ZPass is an automated system that does not require the large
amount of manual labor that toll booths usually need.
3. Efficient detection: The E-ZPass booths have cameras for capturing number plates of toll
offenders.
All these advantages are made possible by the following attributes of RFIDs:
1. Cost: RFID tags are cheap enough to not be a major cost in the transponder unit.
2. Touch-less: RFID technology allows touch-less scanning of tags by a scanner a few feet
away.
Ecosystem map:
The E-ZPass ecosystem consists of 5 players: E-ZPass themselves, the highway authorities
sponsoring it, politicians influencing these, technology providers and drivers using the system.
Politicians
Drivers
Highway
authorities
E-Z Pass
Technolog
y provider
Value prism:
In the late 80s, when implementation of electronic toll collection systems was first discussed, the
political will was to phase-out toll collection completely, which would have cost the highway
authorities not just a revenue stream, but also a part of their ‘raison d’etre’. In an effort to make
toll collection more convenient for drivers and thus more acceptable, seven highway authorities
located in three states founded E-ZPass to create one system that could be used by all drivers in
that area and would allow for quicker adoption as compared to a solution just backed by one
authority. These circumstances led to the highway authorities driving the ecosystem and
supporting E-ZPass.
The authorities were also in a position to easily outfit existing toll collection booths with the
required technology, signs and lanes, as they are the operators of these.
All technology, including RFID tags and readers as well as the operational aspects were
coordinated by E-ZPass. Drivers either buy into the E-ZPass system or continue to use the
regular toll lines and thus interact directly with the highway authorities. As in the Wal-Mart
example, technology providers are not the driving force in this ecosystem. However, they
profited from the success and the fact that units had to be switched earlier than expected due to
battery lifetime issues.
Drivers were brought onboard by offering discounted fares, which offset the investment into the
RFID device. Furthermore, they benefited from the faster process. Usage did not decline later on,
as monthly fares were introduced. Today, drivers benefit even more as they do not have to slow
down in special express lanes.
E-ZPass itself was tightly run by the highway agencies, thus involved to get the system to life
with the backing of the highway authorities.
Politicians are interested in keeping drivers happy, as they represent a majority of the voters.
Participant
Drivers
Costs
 One-off
purchase of
device
Politicians

No removal of
toll collection
Highway
agencies

Massive
investments
into
infrastructure
Change from
employing toll
collectors to
technicians
Coordinate
across different
states and
agencies
Lower
revenues due to
decreased fares
Coordinate
among 7
agencies in 3
states
Full exposure
to political and
technical risks



E-ZPass


Benefits
 Faster drive
through toll
collect stations
 Lower toll fees
 Making
process easier
for drivers
 Secure ‘raison
d’etre’ with
investment
 Collect higher
fees from
violators
 Reduce
number of
employees
 Less clogging
of highways


Balance
Positive
Positive
Positive
Create business Neutral
model with
potential for
future growth
Information on
customer
accounts
Technology
providers


Exposure to
political risks
Investments
into
infrastructure

Usage statistics

Reference use
for RFID
technology
Big deal

Positive
Price vs. Convenience comparison:
Toll
booths
Price
E-ZPass
Convenience
E-ZPass is more convenient than traditional toll booths for drivers. Drivers don’t have to deal
with cash, coins or receipts. Also, they don’t have to stop for the toll booths, thus improving the
overall speed of their journey.
In addition, E-ZPass offers discounts to drivers for several reasons – from general discounts to
green emission discounts, to resident discounts. Although the cost of the system is a one-time fee
of $20 to $30, the fee can be easily recuperated if the driver uses E-ZPass enough.
So, overall, E-ZPass performs better than traditional toll booths for drivers in terms of both
convenience and price.
Use of RFID technology:
Overall, the use of RFID technology in E-ZPass transponders was very successful. Even though
RFID tags were more expensive in the late 90s when E-ZPass was first introduced, the tag itself
made up a very small part of the overall cost of the transponder. Because of this, a more
expensive tag only meant a difference of a few cents, and the cost could easily be passed down to
the user. The critical feature of the E-ZPass system design was that each car only needed a single
RFID tag. As we will see in future sections, this is a stark difference as compared to Wal-Mart
which wants to implement RFID tags on every individual product, in which case a difference of
a few cents in the cost of a tag has a major impact.
Summary of RFID tags for E-ZPass:
The main reason for E-ZPass succeeded was the will and power of the highway authorities, as
their buy-in was assured right from day 1. The technology, although a critical enabler, was not
the key driving force. Thus, the majority of the investments could be taken on by the authorities
who were also taking the risk and benefiting from the ecosystem. In addition, E-ZPass provided
benefits for all the players involved, thus making it a win-win proposition across the board.
3. Wal-Mart
Background:
The Wal-Mart RFID Vision
Wal-Mart has always held innovation as a critical part of their competitive strategy. From the
push it made to the adoption of the barcode standard in the retail industry to the introduction of
the Retail Link system, the world’s largest retailer has always demonstrated a drive to invest in
the new technologies that would enable its growth and provide them with an operational
advantage in the market. As a part of that vision, Wal-Mart was the first big player in retail to
explore the benefits that RFID can create in their supply chain. In this paper, we will explore the
vision that Wal-Mart had for the application of the technology and why it failed to materialize.
Potential benefits of RFID Technology for the Retail Industry
An extensive list of benefits can be found, when you start thinking about the potential benefits
that RFID can bring to the retail industry. Although Wal-Mart clearly understands the full
potential of the technology (with state of the art functionalities), the following paragraphs try to
illustrate a realistic view of the benefits that Wal-Mart was pursuing with its first attempt to
implement RFID in 2003.
-
Prevention of stock outs. By having online information about inventory levels at shelf,
stock outs can be dramatically reduced. In this initial attempt, Wal-Mart was not thinking
about having individual tags for every SKU. Instead, they requested supplier to introduce
tags at a case level. With tags at this level, Wal-Mart was going to develop an in-store
process to monitor inventory on shelves by tracking cases that moves from the back store,
into the store, and by case boxes that were destroyed once SKUs were placed on shelves.
-
Optimize shelf space usage. With more detailed information in a shelf level, Wal-Mart
could reduce inventory levels (buffers) they need to have on shelf to prevent stock outs.
However, the most important benefit for Wal-Mart consists in the opportunity of having
more shelf space in stores to offer new products. Given the cost of shelf space, and its
direct relationship with sales, this benefit can have a huge impact in the store
performance
-
Improve customer shopping experience. Less stock outs in stores clearly impacts the
shopping experience by eliminating the need of buying alternative products when the one
you are looking for is not available. However, it is important to mention, that in this first
attempt Wal-Mart was not considering eliminating the need of scanning products at
checkouts (tags were not going to be placed at an SKU level), which could have had a
considerable impact in the customer experience.
-
Save handling time in receiving and stocking orders in stores. Tags at a case level
also impacts the time it takes to receive and process orders from the suppliers. Having the
possibility of automatically scan products and incorporate them on the systems when
being unloaded from the truck and moved into the store, can have an important impact in
productivity in the back room of stores.
-
Save handling time and labor in distribution centers. With the same reasoning showed
in the previous point, productivity can be also increased at distribution centers where
handling times and labor costs are key variables to measure the performance of this type
of facilities.
-
Reduce theft, both from employees and customers. This was another of the key
benefits Wal-Mart was trying to address in the first attempt. Although, items were not
going to be tagged at a SKU level, having better information in terms of location of
products (split vs back room and store) will make it easier to track unauthorized out flows
of products and identify the sources of the problem. At Distribution Centers, the impact
will be even bigger, since products are handled in cases, and cases are tracked with tags.
Total inventory levels will be online and adjusted constantly, and therefore it would be
easier to track differences on time to address the problem.
-
Gather better data on promotion and placement effectiveness of different locations
in the store. By having online information of shelf inventory levels and tracking the
speed products are selling, Wal-Mart can measure product performance in different
places within the store. This data is relevant both for the retailer and the consumer goods
company since it provides quantitative information of the results of specific promotions
and the impact that locations within the store has on sales. Whether Wal-Mart would like
to share or not this information is another issue, but it could clearly be used by Wal-Mart
to negotiate with its suppliers.
The last paragraphs tried to present the benefits Wal-Mart was envisioning in its first attempt
to implement RFID on its operations. Hopefully, many of the benefits mentioned would
contribute to boost sales, one of the biggest objectives of this initiative.
However a full implementation of the technology can bring additional benefits, i.e.,
RFID tags on every product, and it is relevant to understand them since they might explain
and justify the constant efforts Wal-Mart has made in the last years to implement this
technology.
-
Elimination of waiting times – With the full implementation, there will be no need to
wait in lines in stores any more. An implementation at a SKU level can let Wal-Mart
eliminate waiting times at checkouts. A cart full of tagged products can be automatically
scanned and consumers will just need to swipe credit cards to pay for the orders. A
further step, the inclusion of tags on the credit card could also eliminate the need of
swiping cards at checkouts reducing times even more.
-
Save labor at check outs – Given the last benefit mentioned, there is also an important
saving for Wal-Mart associated with the considerably reduction of labor at checkouts.
-
Considerable reduction of theft at all levels. Having information of all SKUs gives
Wal-Mart the change to monitor all product flows and notice when products are leaving
the facilities with no authorization. Moreover, if tags are embedded in the product
packaging, stealing products clearly becomes harder.
-
Implementation of cross selling - When imaging the full potential of the technology,
Wal-Mart was also thinking about spot advertising and targeted promotions to consumers
when they are shopping in the stores. Let imagine for a second that Wal-Mart can identify
what consumers have on their carts. With a very simple use of database marketing, WalMart can suggest to consumers products that they may be interested in given what it is on
their carts. In other words, Wal-Mart might be able to replicate what Amazon is currently
doing in its webpage when it suggests what other products consumer usually buys after
buying on particular product. This benefit can have an incredible impact in sales.
Timeline of Wal-Mart RFID Program
Wal-Mart has launched various efforts since early 2003 to mandate the adoption of RFID in its
supply chain. Attached is a timeline of the events that took place from the on-set of the initial
mandate, to a modified attempt in 2007 (Sourced from Supply Chain Digest). Among all of these
events, we highlighted what we thought were critical momentum shifters in the long term
viability of the plans:
June 2003: Wal-Mart’s then CIO Linda Dillman announces the start of the retailer’s EPC
compliance program at a meeting of the VICS organization, saying Wal-Mart would ask its
top 100 suppliers to begin tagging pallets and cases starting in January 2005.
August 2003: Wal-Mart says it will require all of its suppliers to put RFID tags carrying
Electronic Product Codes on pallets and cases by the end of 2006. "We have asked our 100 top
suppliers to have product on pallets employing RFID chips and in cases with RFID chips. By
2006, we will roll it out with all suppliers," Wal-Mart spokesman Tom Williams says.
November 2003: Wal-Mart brings the “top 100 suppliers” into Bentonville to learn more details
of its RFID program, qualifying its previous announcement by saying the initial requirement will
be for the first 100 to tag pallets and cases being shipped to three Texas distribution centers
(DCs) in January 2005.
April 2004: Wal-Mart begins its RFID trial by receiving cases and pallets of product with EPC
tags at a single distribution center in Sanger, TX as part of a test being conducted with eight
suppliers. The tagged goods are to track goods to the back of seven Wal-Mart stores in Texas
served by the DC. The first eight suppliers, which each tagged just a small number of SKUs,
were Gillette, Hewlett-Packard, Johnson & Johnson, Kimberly-Clark, Kraft Foods, Nestlé Purina
PetCare, Procter & Gamble, and Unilever.
June 2004: Wal-Mart meets with its top 100 and "next 200" suppliers in Bentonville to lay
out its RFID tagging requirements and timeline. Suppliers are told that by June 2005,
RFID systems will be operating in up to six of its distribution centers and 250 stores. WalMart further says that it expects to be using EPC technology in up to 13 distribution
centers and 600 Wal-Mart and Sam's Club stores by the end of 2005. Deadline for the
“next 200 suppliers” to start tagging cases and pallets is set for January 2006, though what
shipments to what DCs is not clear.
October 2004: Wal-Mart says it plans to start shipping RFID-tagged cases and pallets to a Sam's
Club store in Plano, Texas very soon, starting the division’s RFID program.
January 2005: Many, but not all, of the “top 100” start shipping some tagged products to
three Wal-Mart DCs in Texas.
March 2005: CIO Linda Dillman says Wal-Mart is on track to support RFID capability in 600
stores and 12 distribution centers by the end of the year.
October 2005: Wal-Mart says that by the end of this month, it will have installed radio frequency
identification systems in more than 500 stores and five distribution centers.
October 2005: Wal-Mart says it expects the next wave of 300 suppliers (making 600 total) to
start shipping tagged cases and pallets by January 2007.
October 2005: A Wal-Mart sponsored report from the University of Arkansas’
Information Technology Research Institute, a part of the Sam Walton College of Business,
releases a report based on its preliminary study of the impact of RFID on reducing retail
out-of-stocks (OOS). The researchers conclude that RFID reduced OOS at store level by
16% over non-RFID based stores.
January 2006: Wal-Mart says it is piloting a program with a few suppliers and EPCGlobal
to generate advance ship notices for supplier shipments based on RFID reads.
January 2006: Supposed deadline for the “next 200 suppliers” to begin sending some
tagged product to some DCs, though relatively few do in any meaningful way.
March 2006: Wal-Mart says it is working on two “proof of concept” pilots for using sensors
along with RFID tags to track produce and environmental temperatures as the products move
along the supply chain.
April 2006: Wal-Mart says it will phase out the use of Gen 1 tags by in favor of Gen 2 by
mid-year, saying it will no longer accept the use of Gen 1 tags on the cases and pallets it
receives from its suppliers after June 30.
April 2006: Linda Dillman leaves as CIO to take an executive role in Human Resources.
Rollin Ford, previously head of supply chain and logistics, becomes CIO. Ford
subsequently takes a much lower profile approach to RFID.
September, 2006: Wal-Mart announces that by January 31, 2007, another 500 of Wal-Mart's
3,900 stores will have RFID readers installed. If it happened, that would bring the total of RFIDenabled Wal-Mart stores up to 1,000.
February 2007: The Wall Street Journal runs an article entitled "Wal-Mart's RadioTracked Inventory Hits Static." The article says, "Wal-Mart Stores Inc.'s next leap
forward in ultra-efficient distribution is showing signs of fizzling," given a lack of internal
progress in rolling out the technology and a lack of value for suppliers. Rollin Ford writes
rebuttal letter to the WSJ, and Wal-Mart finds the CIO of Campbell’s Soup and the
chairman of Smucker’s to support RFID value prop. Meanwhile, CIO of Sara Lee says at
the same time that RFID isn’t making sense at the current level of cost and performance.
October 2007: Wal-Mart announces a major change in its RFID strategy, largely
abandoning the initial pallet/case focus on shipments going to Wal-Mart stores in favor of
three focus areas: (1) shipments going to Sam’s Club; (2) promotional displays and
products going to Wal-Mart stores; (3) tests to see RFID’s impact in improving category
management in select areas. "We're coming at RFID from a different angle," Wal-Mart's
VP of Information Technology, Carolyn Walton, says at the EPC Global conference.
January 2008: Wal-Mart announces its first real compliances “penalties” for failure to tag
products, specifically for shipments to its Sam’s Club chain. Wal-Mart says in letter to
suppliers that a failure to tag pallets sent to its distribution center in DeSoto, Texas, or
directly to one of its stores served by that DC after January 31 will be charged a service fee,
starting at $2 per untagged pallet on Feb. 1, and capping at $3 per pallet on Jan. 1, 2009.
Wal-Mart also announced its plans for the Sam’s Club rollout (which was later changed).
January 2009: Sam’s Club dramatically lowers penalties for failure to tag pallets from $2-3
dollars per pallet to just 12 cents – what Wal-Mart estimates it will cost Sam’s to do the tagging
itself. It also pushes back the rollout schedule announced the previous January, saying the
tagging requirement will apply only to pallets sent to the DeSoto DC or stores served by that DC
in 2009. DC. Pallet-level tagging is expected to be rolled out chain-wide in 2010, while the
deadline for tagging sellable units is "under review."
February 2009: Procter & Gamble says that after “validating” the benefits of RFID in
merchandising and promotional displays, it is ending its pilot program with Wal-Mart for
those displays, implying Wal-Mart is not acting on the information to improve store
execution.
The retail store RFID Ecosystem
CPG’s
RFID Tags
RFID Readers
RFID and ERP
connection
RFID
Integrators
Logistics, distribution
Other
Retailers
RFID Tags manufacturers: They can be integrated or not, in the sense they produce only the
chip, or they produce the whole tag. They expertise lies in mass production of semiconductor
technology. Tags can be passive, active, only reading or write and read.
RFID readers manufacturers: They can be integrated with the antenna manufacturers or not.
They expertise lies in designing circuits and electronics. They readers vary by range, precision,
resistance to interference, wavelength at type of frequency (UHF, RHF)
RFID and ERP connection: They designed the software and middle ware that handles the
RFID readers, and also the connection between that system and the ERP system most companies
use.
RIFD integrators: Some are vertically integrated and manufacture tags, readers and software or
a combination of some of them. But there are also some that only offer the integration and
consulting services to join all these different pieces into an application the different participants
in the retail industry can use.
CPG: Consumer product companies are the first link in the retail value chain, and are the most
likely candidate to attach the RFID tags. They sell to Wal-Mart, other big retailers and also to big
distributors that then reach smaller retailers.
Distributors and logistics: This category could include big distributors, logistics operators,
trucking companies, warehouse companies, and distribution center companies.
Other retailers: This category includes big retailers that compete with Wal-Mart, like target,
supermarket chains, wholesale chains like Costco and BJ’s, pharmacy chains like Walgreen’s
and CVS, and all other smaller retailers.
Wal-Mart: For the ecosystem we consider Wal-Mart to depending of the level of RFID
implementation, the Wal-Mart stores, their Sam’s Club stores, and their distribution centers.
Wal-Mart RFID Initiative Ecosystem Analysis
In this section we are going to analyze the ecosystem that Wal-Mart was facing at the time of the
first RFID deployment. To that purpose, we are going to frame our analysis utilizing the
ecosystem diagrams we learned in class and define what went wrong under each of the
components that resulted in a failed
a) Innovation Strategy
Back in 2003, Wal-Mart communicated under the leadership of its then CIO, Linda Dillman, a
mandate for its top 137 suppliers to start shipping RFID-tagged pallets and cases to three
selected distribution centers beginning in January 2005. When Wal-Mart communicated this
mandate, it had already defined an innovation strategy and the steps it needed to make to get it
started.
Wal-Mart dreamt of achieving a fool proof, error free, transparent supply chain utilizing RFID
technology as the key enabler. Long before the mandate was announced, Wal-Mart had
established their own RFID Lab in Rogers, AR and funded research conducted by the University
of Arkansas’s RFID Research Center in order to understand the benefits the company could
realize by implementing the technology in their operations.
From our perspective, Wal-Mart’s RFID innovation strategy was rooted on:


Establishing a competitive advantage by discovering the benefits of using RFID in the
retail industry earlier than its competitors.
Influence the nascent global standards for RFID data exchange
However, what they really lacked was an understanding on how this technology adoption in the
ecosystem was going to benefit is trading partners.
b) Co-Innovation Risk
The ecosystem at the time of Wal-Mart’s announcement had many risks related to innovations
that technology providers need to make in order to make the viability of the initiative a success.
Here is a list of some of the innovations that were required:
-
Develop a tag / reader configuration that could guarantee 100% read accuracy (HIGH):
The performance of the tags before the initiative was to go live varied depending on the
business process to be performed. For example, a key read point for the business case
was the move from the back room of the store to the front. At this location, reads were
taken at conveyors and box crushers that were only achieving between 50-90% accuracy.
-
Lack of widely adopted Electronic Product Code (EPC) standards (MEDIUM): The
standards for RFID tag serialization and labeling had not yet been defined by the time of
the announcement. GS1, the entity that controlled the supply chain management
standards for barcodes would not define a final standard (EPCGlobal) for at least a few
more months after the Wal-Mart announcement and even then it took many years to gain
mass adoption
-
Need for RFID Middleware and Application to process read data (HIGH): Companies
like Microsoft, IBM and SAP all jumped to the opportunity of developing the
infrastructure necessary to enable the conversion of RFID data into actionable
information. However, no application gained wide acceptance in the market. As a
consequence, system integrators were bringing various software platforms, readers and
tags that created confusion in the market
-
5 cent RFID tags (HIGH): Finally, the biggest risk of all. For the implementation to be
sustainable over the long term, RFID tags needed to reach a cost of $0.05 / case. This was
not the case in 2003 and has not happened yet
c) Adoption Chain Risk
The key players in Wal-Mart’s RFID deployment ecosystem are:
-
Tag manufacturers
Reader and hardware providers
Software analytic companies
System Integrators
Wal-Mart’s Suppliers
The first four players were very eager to jump into the business opportunities that the RFID
mandate was creating. This was exemplified in the various startups that occurred from 20032005 while Wal-Mart was defining the details of the mandate. Therefore, adoption by these
players was not a risk
The real risk in the adoption chain was Wal-Mart’s suppliers. In a way, Wal-Mart unilaterally
established the mandate to its top 100 suppliers by using its purchasing power as leverage.
Suppliers did not have a clear picture on what benefits they were going to realize on the RFID
rollout and as such were very cautious and slow in implementing the technology. As we could
see from the RFID timeline, the number of tagged pallets and cases shipped to Wal-Mart’s DCs
did not keep with the initial rollout timeline and many delays took place. “Compliance” became
a new word that was frequently used among suppliers to gauge the level of engagement with the
initiative and some suppliers opted for a tag “slap and ship approach” without any real RFID
infrastructure investment in their operations.
What we can learn from this is that Wal-Mart underestimated the adoption risks of this initiative.
In retrospect, what Wal-Mart could have done to mitigate this risk is to include its key suppliers
on the quantification of supply chain savings and its corresponding division. Moreover,
education seminars on how to reap the benefits of the technology could have mitigated the
confusion in the space. In reality, system integrators were the ones educating suppliers on the
potential benefits of RFID in their operations.
d) Execution Risk
The execution risk of the mandate was greatly underestimated by Wal-Mart. The original
timeline established for compliance with the mandate (January 2005) was very aggressive and
did not take into account the co-innovation risks that needed to take place in regards to tags and
systems to make it a reality. It also underestimated the knowledge curve that needed to take place
for its suppliers to understand the value to be realized upon a RFID implementation. This was
critical considering the large capital outlays associated with the initiative.
Even within its own facilities, Wal-Mart was unable to meet the original timeline proposed
internally for deploying RFID infrastructure in its distribution centers and stores.
Is RFID an incremental or destructive innovation?
Let’s consider the two key dimensions of process and user knowledge.
Process
In general RFID is not destructive to the participant’s processes and is basically and incremental
innovation, by making it easier to identify and follow products, boxes and pallets during logistic,
handling, shelving, and checkout.
Let’s see it from the perspective of each participant.
-
CPG manufacturers: RFID could add features (ie. more data) but does not change the
fundamental process of distribution of their products, they still have to put a tag on boxes
and they still have to keep track of pallets. RFID would only change that they won’t have
to directly scan any bar code in their processes.
-
Distributors, logistics operators: RFID does not change fundamentally how they run
their process; it would mostly make it easier in an incremental way.
Retailers: In terms of process RFID at least the first implementation are not destructive
to the process of retailers. They still receive the merchandize in almost the same way,
restock in the same way, the only process that could eventually change with RFID
implemented at SKU level would be checkout, and even then it won’t be such a big
change since self-checkout has been around for a while now.
Knowledge
Here is where the issue is more complicated. RFID technology does not imply a destruction of
user’s knowledge per se. It is not like the ability of knowing how to scan a bar code will become
useless, or had any value in the first place. But the deployment of RFID changes considerably the
IT support and infrastructure companies need to have in place. To really reap the benefits of
RFID supply chains participants will have to share information at level never seen before.
Deciding what to share and what to keep will imply the development of new knowledge. System
compatibility issues, and standardization of information will also force companies to develop
new expertize. Today many databases of these companies have several issues in terms of
reliability of information, which will need to be solved first. At the end it will force companies to
hire new employees, and force some current ones to develop new skills. The advantage of
having full, real-time visibility on the supply chain for a product from manufacturing to shelve
will not yield the expected fruits unless accompanied by new data analysis, fast decision making,
instant promotions, and new database marketing tools and skills.
For each participant the degree of new knowledge to be developed will vary, but the main
conclusion remains the same: On paper RFID sound great, but to make it work companies need
knowledge that they do not possess today.
Table : RFID disruption matrix for CPG, logistics, and retailers
Knowledge
Destructive
RFID
Incremental
Incremental
Destructive
Process
The Leadership Prism on Wal-Mart’s RFID Mandate
To evaluate the leadership prism on Wal-Mart’s RFID mandate and identify who was better
positioned to drive the initiative we put a side by side comparison on the benefits, costs and
surpluses of the various players in the ecosystem.
It was not a surprise that Wal-Mart emerged as the player that was to benefit the most from this
engagement. However, Wal-Mart failed in its approach to have its suppliers, the biggest losers in
this initiative, benefit from the introduction of the technology and mitigate their adoption risk in
the rollout.
Thus, we can conclude that Wal-Mart should have being more strategic in its approach to driving
development activity for the initiative. As we studied in the Pixtech case, sometimes the player
that will benefit the most from the implementation of an innovative strategy needs to postpone
the realization of its own business benefits in lieu of securing development and adoption by the
members of its ecosystem. In retrospective, Wal-Mart should have focused its first efforts on:
-
Building an environment for suppliers to learn about the benefits of RFID
Developing alliances with relevant system integrators and hardware providers to seek
standardization of technology
Create a clear benefit delivery roadmap for Wal-Mart and its suppliers
Find below a table that shows the estimated benefits and cost for each of the players in the
ecosystem: (These figures were estimated on just the volumes of the initial 2003 mandate only)
Benefits
Wal-Mart
1. Prevent stock-outs
2. Optimize shelf space usage
3. Improve customer shopping experience
4. Save handling time in receiving and stocking orders in stores
5. Save handling time and labor in distribution centers
6. Reduce theft, both from employees and customers
7. Gather better data on promotion and placement effectiveness of
different locations in the store
8. Boost sales
It was estimated that Wal-Mart can see increased sales of $300 million per
year, by having the inventory visibility and not incur on stock outs (Figures
based on a full scale rollout with 100% compliance by all global suppliers)
For the purposes of the 3 DC's originally targetted, we could reduce the
benefit to 5% of the total opportunity size, which give an opportunity of
$15 million
1. Better visibility on the raw materials needed to carry out their
production, effectively reducing working capital
Suppliers
2. Monitor products with low fill rates at Wal-mart to prevent lost sales
However, the exact delivery process for the benefits were unclear and hard
to quantify
Potential of large tag sales based on the mandate adoption
Tag
Manufacturers
The estimated sales per year on tags in average for each of the top 100
suppliers was approximated to be: $7.6 million (19 million shipments X
$0.40 per tag)
Estimated Cost
Surplus
Benefit of reduced sales on
The cost for rolling out RFID
the 3 DC's
infrastructure and systems across
their selected distribution centers can
$15 million increased sales be estimated to be $3 million for the
$3 million investment = $12
three initial DC's
million gain for Walmart
Forrester estimated that the
approximated cost, each of the top
100 Wal-Mart suppliers will incur on
the initiative will reach the $10
million
No surplus, in reality the
initiative was mostly a cost
of doing business with WalMart
No surplus, losses of $10
million
We estimated the cost of sales
(inclusive of delivery of the tags) to
be 80% of the sell price, Thus costs
were $608M
Margin opportunity of $152
Million
We estimated the cost of sales
(inclusive of delivery of the
hardware) to be 70% of the sell price.
Thus overall costs are $23 million
Margin opportunity of $10
million
We estimate the costs of sales for
hardware (just licensing right for
simplification) to be 50%. Thus overall
software production costs are $9
million
Margin opportunity of $9
million
Thus, market opportunity for this mandate alone of $760 million in tag sales
Reader and
Hardware
Providers
Software
analytic
companies
System
Intregators
New business based on Wal-Mart and suppliers buying RFID readers and
other associated hardware
Approximated hardware and infrastructure investment by supplier of
$330,000
Market opportunity for new hardware sales over $33 million
Opportunity to sell systems across the supply chain partners to enable the
RFID data capture and create meaningful analytics. Opportunity per
supplier of $180,000
Thus, market opportunity of $18 million
Opportunity to service players in this ecosystem by selling solutions from
We estimate the costs of sales for
the hardware, software and tags integration perspective, as well as to
hardware (just licensing right for
provide consulting services for a nascent industry. Opportunity per supplier
Margin opportunity of $7.2
simplification) to be 40%. Thus overall
$127,500
million
software production costs are $5.2
million
Thus, market opportunity approx $13 million
Premium for Performance
Bar Codes vs RFID
Although bar codes have become the standard for identifying and tracking objects in the
supply chain, RFID seems to have appeared to substitute this technology, by offering some
key benefits that increase transparency across the product handling lifecycle.
One of the benefits of RFID, is that there is no need for line of sight back to a reader whereas
bar codes require a scanner to pass over each product. RFID enables pallets of products to
pass through a stationary portal reader and the information is automatically captured. RFID
can also read multiple tags simultaneously and they often have a longer life span than bar
codes.
Data capabilities of RFID are also superior. Product maintenance instructions, shipping
histories, manufacturing and expiry dates are just a few examples of the types of information
that can be programmed onto an RFID tag. This information can help track specific products
as they move through the supply chain giving a detailed snapshot of how a product was
handled from the moment it enters the warehouse to when it is purchased by a consumer.
However, although RFID is offering interesting benefits compared to Bar Codes, it seems
that the new technology doesn’t provide yet an appropriate performance/price balance,
in terms of the price consumers are willing to pay for the expected performance of the new
technology. The chart below is useful to represent the current status of both technologies
given the current demand curve.
Bar Code (point A) is right on the demand curve, providing a certain level of performance for
a price that consumers are willing to pay. However, given the current performance that RFID
(point B) is delivering, consumers find the respective price too high to think about a possible
conversion.
At this moment, we think that RFID technology must be following one of the possible paths
represented in the chart, in order to find a good position over the demand curve. One option
would be to decrease the total cost of the technology, considering not only hardware costs but
also all other costs associated with the implementation of the technology (training, systems
and risks; product vs. total costs framework).
Another option would be to find improvements for the technology. In this sense, we believe
RFID still has some room to prove that it can considerably impact one of the most important
indicators in the retail industry, product sales. Preventing stock-out, one of the main benefits,
doesn’t seem to be enough.
To exemplify this situation, it is interesting to present a simple model we developed to
simulate and compare the relative benefits and costs of RFID from the perspective of a
supplier (Consumer Goods Company - CPG).
Premium for Performance - Supplier’s Perspective – Minimum tag cost needed
The relationship presented below shows a very straightforward set up to compare benefits
and costs of implementing RFID in a CGP company. It only addresses the cost of
incorporating tags in products, and it does not consider all the costs commented previously.
However the exercise is valid, since if the technology doesn’t prove to be profitable
considering just one cost category, it won’t work when other costs are included.
Total profit = (quantity) . (profit margin – tag cost) + (incremental quantity sold) .
(profit margin – tag cost)
Since bar codes have proven to be a good solution for handling materials in an efficient way,
we believe that RFID will be considered when it can have a considerable impact in sales (by
the reducing stock outs, improving targeted promotions or the customer experience).
Therefore, we are using the variable incremental quantity sold to measure the main benefit of
the implementation of RFID.
Let assume that we have an average CPG company with annual revenues of 12 billion
dollars. Let’s say that given expensive and cheap products, the average price of each unit
sold is 6 dollars. This implies that the company is selling 2 billion products annually. Based
on industry standards, we can assume that on average, product profits are 20%, which
implies in this case that the company is getting 1.2 dollars every time a product is sold.
Let’s now start playing with costs and benefits. The benefits are represented by the
incremental sales for a CPG. The costs are represented by the decrease of margins given the
cost of tags.
Supplier - CPG
Basic Set Up
Revenues
Avg Price
Units
Margins
Unit Margin
Cost per tag in dollars
Estimated incresed in sales
12,000,000,000
6
2,000,000,000
20%
1.2
0.15
5%
No Tags
Total Profit
2,400,000,000
Tags
Profit with tags
Extra sales
Total Profit
2,100,000,000
105,000,000
2,205,000,000
Profit Increase
-195,000,000
For a 5% increase of sales, and a 15 cents cost of tags, the situation doesn’t seem to be
profitable (loss of 195M). Let see other scenarios (table below) by doing a sensitivity
analysis using tag cost and sales increase as variables.
Sales Increase
5%
10%
15%
20%
0.05
15
130
245
360
Tag Cost
0.1
0.15
-90
-195
20
-90
130
15
240
120
0.2
-300
-200
-100
0
A 20% increase in sales would be great scenario, however, it is difficult to justify that RFID
can achieve a sales increase of 20%. Usually, stock-outs do not represent 20% of sales, and it
is difficult to think that targeted promotions or customer satisfaction will have a contribution
to achieve a 20% increase. Let say that it is reasonable to think that a sales increase between
5 and 10% can be achieved with today’s technology. With this base, the cost of tags needs to
go down to 5 cents per tag to make the implementation feasible. However, it is important to
remember that we are just considering the cost of tags, and therefore the situation can be
even worse if we consider all the other associated with the implementation of RFID1.
It is important to mention, that these numbers are aligned with many researchers and
literatures that have also stated numbers below 5 cents as a minimum cost to enable CPGS to
start thinking about RFID.
1.
Total Implementation Costs - Infrastructure costs ( Readers at DC and Stores - Shelves, Doors, Forklifts, Registers), Software
systems (Middleware, Applications), Processes (Organization change management, Training, Store layout adaption), Installation
(System set-up, Labeling and encoding of items), Supplier goodwill, Public Relations risk
In summary, although Wal-Mart is pushing hard to implement the technology, the analysis of
relative benefit vs total cost analysis from a supplier perspective introduces some insights
that may explain why the technology has not been approved by Consumer Goods Companies.
3. Conclusion
Why did EZ pass succeed and Wal-Mart failed?
Ecosystem issues:
EZ pass was the correct leader of the ecosystem; they were bearers of most of initial costs of starting the
ecosystem, but also most of the later benefits.
Wal-Mart completely disregarded ecosystem issues in their successive attempts to use RFID technology.


Failed to recognize that CPG’s where the key adopter and RFID did not necessarily made sense
to them, they forced them to do it. Wal-Mart also forgot that CPg serve a number of other
retailers and that a partial implementation of RFID only for Wal-Mart might never be
economically viable for them.
Failed to compensate important ecosystem players for their initial loses. Wal-Mart only saw
their benefits never cared about other cost benefit equation for the RFID implementation.
Technology and Knowledge issues:
In both EZ pass and Wal-Mart case the technology implicated some kind of destruction either to
knowledge, processes of both. But the difference is EZ seemed have been aware of this and at instead of
running pilots to improve the technology and educate the participants, they started with a just a couple
of highways. In a way they started with a minimum commercially viable option and grew from there, this
proved the right choice since the first years where difficult and many issues had to be solved before
being able to fully expand. Wal-Mart disregarded this effect and tried to by only market share power
impose a standardization of the technology and failed to facilitate the training of ecosystem players so
they could see the benefits of the technology in their processes. They did not actively engaged and
associate with technology providers to figure and reach a standardization of RFID that was suited for all
the players in the ecosystem.
Price benefits issues:
RFID tag prices are just too expensive for a SKU or box level implementation yet. The
fundamental difference between EZ pass and Wal-Mart or in general retail implementations is
that EZ pass needed only one tag per customer and many readers to work, rendering the price of
the tags insignificant compared to other costs. The retail supply chain instead needs a huge
number of tags and also a big number of readers to make it work, so adoption is very sensitive to
the price of tags, and therefore to the current number of users. Prices won’t drop until mass
production process are developed, something that will not happen until producers can envision
mass adoption.