News

Report analyzes benefits, costs of RFID for both retailers, manufacturers

January 14, 2004

CHICAGO - Retailers can expect inventory and labor cost savings from the adoption of radio frequency identification (RFID) and electronic product code (EPC) technologies, but some consumer-product manufacturers will face higher costs and delayed benefits, according to a new report on the technologies from A.T. Kearney.

A.T. Kearney believes retailers will see benefits in three primary areas:

• Reduced inventory through a one-time cash savings estimated at 5 percent of total inventory
• An annual reduction of 7.5 percent in store and warehouse labor expenses
• A reduction in out-of-stock items, resulting in a recurring annual benefit of $700,000 per $1 billion in annual sales

A.T. Kearney estimates the cost of EPC and RFID adoption at $400,000 per distribution center and $100,000 per store, with an additional $35 million to $40 million needed for systems integration across entire retail organizations.

"While these are very significant amounts, the upside is that most of the costs to retailers are fixed," said Dave Donnan, an A.T. Kearney vice president who conducted the analysis. "The story for manufacturers, on the other hand, is quite different depending on the type of product they make."

Manufacturers will incur the same one-time charges for RFID readers and systems integration as retailers, but they also get hit with the recurring charge of placing RFID tags on their pallets and cases, according to the report.

The report breaks manufacturers into two categories: high-impact manufacturers who sell lower volumes of expensive products and experience significant out-of-stocks and shrinkage (generally drug and general-merchandise manufacturers); and low-impact manufacturers who sell high volumes of less expensive goods and experience limited shrinkage (food and grocery manufacturers).

The cost of tagging varies significantly across the two types. The A.T. Kearney report compares two manufacturers with $5 billion in sales -- a low-impact grocery manufacturer and a high-impact over-the-counter drug manufacturer -- and concludes the low-impact manufacturer loses $155 million from a capital budgeting perspective (assuming the current 15-cent cost per RFID tag, a 10-year horizon and a weighted average cost of capital of 12 percent).

"The hit on manufacturers' cash flow is not something that can be made up by volume, as the saying goes," Donnan said. "In fact, the high-volume manufacturers will see the greatest cash-flow impact."

Manufacturers will see benefits from EPC and RFID fall into two areas -- benefits they can control and those linked to their trading partners. Among the benefits manufacturers control are increased tracking and inventory visibility, enhanced labor efficiency and improved fulfillment. However, the consulting firm notes that most manufacturers are "well beyond the basics when it comes to supply-chain efficiency" -- thus there might be little to gain from these benefits.

Most of the trading-partner benefits depend on retailers taking advantage of improved product information to give manufacturers greater visibility into out-of-stock items, inventory and items that can't be sold. This will require retailers to change some of their processes and become more comfortable sharing information currently considered confidential, according to the report.