Evan Schuman's StorefrontBacktalk

RFID has historically been seen as a technology to improve the supply chain, more efficiently managing products as they went from the point of manufacture through distributors and ultimately at the retailer’s backroom storage area.
But one of the world’s largest consumer goods players–$65 billion Procter & Gamble, which was one of the original and most vocal RFID cheerleaders?is finding that the technology can be financially valuable well beyond. It’s extending the supply chain beyond that backroom into the store aisles and shelves and potentially into shopping carts and all the way to the cashier point-of-sale.

For the RFID industry, P&G’s efforts are significant and influential, partly because of its long-standing highly-visible RFID efforts?only retail giant Wal-Mart is seen as more persuasive in RFID circles?but also because of its size. P&G’s 140,000 employees handle some of the best- known brands in the world, including Tide, Pampers, Gillette, Bounty, Dawn, Charmin, Crest and Head & Shoulders.

The most significant move from P&G has been its decision this year to use Gillette?which it acquired last October?as a chief RFID guinea pig. It made the RFID commitment to tag every case of Gillette’s Fusion razor blade product line starting with the product’s launch in January. It’s the first time that any major consumer product has been 100 percent tagged.

P&G refuses to say how many Gillette razors are being tagged as doing so would reveal the number of the products it is making, which is a closely-held industry secret.

Of the roughly 1.5 billion product cases that P&G makes and ships every year, the company is “actually only tagging somewhere between 5 million and 10 million cases,” said Jamshed H. Dubash, director of Electronic Product Code (EPC) technology for Procter & Gamble.

“This was a fairly big commitment from Gillette’s (and P&G’s) perspective,” Dubash said.

The Fusion tagging move “is a show of confidence. It’s an extraordinarily big deal,” said Sanjay Sarma, an associate professor of mechanical engineering at the Massachusetts Institute of Technology (MIT) and the former chairman of research and co-founder of MIT’s Auto-ID Center.

At a practical level, it shows a financial commitment to RFID from one of the world’s largest consumer goods manufacturers. “The lowest published cost for RFID is 5 cents a tag. At 100 million quantity, let’s say, at 5 cents, that’s $5 million. You have the cost of the tag and then the applied cost of the tag [which is the cost to adhere the tag to the container]. You’ve invested a lot of capital to provide that tag. If you are going to tag something, you’re really much better off doing it from the very beginning.”

Paula Rosenblum is a veteran industry analyst who has tracked RFID for both AME and the Aberdeen Group and who moved in May to become executive director at the Retail Systems Alert Group.

Rosenblum said she applauds P&G?s efforts, not necessarily for what they can do today as much as what this will enable down the road. ?Ever work for a retailer who decided to change their price tags? It used to take about a year to completely flush the old tickets out of the system. Maybe 2 years. It makes sense to start seeding their merchandise now ? especially since it?s their newest product line and the most likely to still be around when RFID at item level really happens,” she said. “It?s rather smart on their part to be seeding the product with tags. It?s built in: no production line changes late and no worries about product (changes) when someone decides it?s worthwhile to invest in a smart shelf.?

P&G is using Gen1 RFID chips (with 8-bits of encryption) from Alien Technology (Morgan Hill, CA) along with analytics software and EPC middleware in the Oat Foundation Suite 4.5 from OatSystems of Waltham, MA.

P&G is specifically using OATaxiom for analytics and reports and Oatxpress for event controls such as “making sure that the right case is within the right pallet,” said Sarma, who also serves as the Chief Technology Officer for OatSystems.

Typically, RFID tracking systems deploy a limited number of readers at strategic locations along the supply chain path, but P&G’s test is more robust and therefore uses far more readers than typical, said Paul Fox, a director of global external relations for P&G.

P&G has located an unspecified number of readers on the floor of their main distribution centers, along production lines, at the entrance and exit of 50-yard-long conveyor belt tunnels between the area where products are packaged and cased and more at distribution centers. There are more readers on the racks in the distribution center and more readers in the order assembly area and more readers on the pallets “to authenticate that you have the order accurately assembled,” Fox said.

There are also readers on the exit doors from the manufacturer’s distribution center, where products are then loaded onto trucks. When the trucks arrive at various retailers, they will be met with more readers on the retailer’s loading dock doors leading to the retailer’s distribution center “so they then record the arrival,” Fox said.

More readers watch as the pallet is disassembled?to record the cases coming in?and there are readers along the conveyor belts at that retailer and more readers on the retailer’s racking so they can know the exact product location within that distribution center. More readers are placed on the entry doors to the store-level backroom?establishing that it’s arrived in the store?and more readers on the backroom racking and more on the doors between the backroom and the selling floor. Finally, there are readers on the retailer’s cardboard compactors, to record the case being destroyed after it has presumably been fully unpacked.

One key lesson learned involved the positioning of decorative foil on packages to avoid interference to RFID signals. Foil reflects energy, which causes read problems.

The foil on each package is important to P&G marketing because of the flashy appeal of its bright reflective colors. “A lot of our products are impulse buys and consumers can be intrigued by the color and the brightness,” Dubash said. After several package design experiments, the workaround turned out to be to simply leave the sides of packages foil-free and to then place the RFID chips on those package sides.

The Fusion tagging is not the only RFID major project with P&G. Indeed, a much more limited experiment within 19 stores of one unnamed retail chain delivered a much more tangible example of business ROI that has little to do with the traditional supply chain.

That experiment involved the Braun Cruzer, an electric shaver that sells from $55 to $90 and looked at how products moved during special promotions.

This kind of promotion accompanies a major advertising campaign and typically includes large cardboard cutouts in store aisles, with products. It is often used to promote new products.

By tracking Braun Cruzers, Gillette learned that 100 percent of the product made it from P&G’s distribution center to the retailer’s distribution center within three days. “That system is very efficient,” Dubash said.

What the company discerned next was a surprise: it found ?a bunch of variability? on the amount of time it took product to move from a retailer’s backroom to promotional displays on the sales floor, according to Dubash. Some product never left backrooms-even after 40 days, which is when the promotion ended.

Why was this significant? P&G and Gillette invested money on ad promotions around the Cruzer line. “So it’s extremely important for us that these displays get out to the store floor when the ads hit,? Dubash said.

For those products that did not get to the aisles, P&G concluded that the problem came down to a lack of inventory visibility. “It all boils down to the fact that the store manager doesn’t know that they’re there,” Dubash said. That’s because the boxes might be positioned facing a wall or somehow else be blocked from view. “Humans are fundamentally inefficient,” he said.

When P&G started matching the tracked products against sales data, it saw its a business case for continued deployment of RFID. “For the (razors) that did go to the store when they were supposed to, we saw a significant improvement in sales,” Dubash said, pointing to the 61 percent sales increase in the 19 test stores that complied with the promotional instructions.

During these trials, P&G opted to not act or intervene, but instead to watch on the sidelines. When they saw product not being unpacked, they resisted the urge to call the retailer. “We did not try and interact with the system. We wanted to get a good baseline to understand how things were moving,” Dubash said. “We wanted to see if the store manager would figure it out.”

Some have questioned whether consumer goods manufacturers are deploying RFID only because retailers are forcing them to. But P&G is finding a wide range of benefits that have little to do with keeping retailers happy.

Thanks to tracking, P&G found nicks when displays were erected earlier than planned—in addition to failing to get product to the sales floor. “Having the displays come out too early is also a big problem. You don’t want them there much sooner than 3 to 4 days before the actual promotion date,” Dubash said, “because what could happen is that you could sell it out before the promotion hits and now you’re going to have an out-of-stock condition.”

Dubash argues that for manufacturers such as Procter & Gamble-whose customers tend to have very strong brand loyalty-RFID supply-chain transparency can actually help the retailers even more than the manufacturer. If a customer is looking for a particular Gillette razor and sees none on the shelf, that customer will likely not buy any product and go to a different retailer to find it, Dubash said, preserving the sale for P&G but losing that sale for the retailer.

But for products that are seen as more generic-potato chips, for example-that same shelf-vacancy will likely be met with the consumer buying another potato chip brand, costing that manufacturer the sale and preserving the sale for the retailer.

P&G is also fond of RFID because the size and relatively high-cost of many Gillette products make them attractive targets for shoplifters.

During its recent RFID experiments, P&G has had to tackle the same kind of RFID implementation challenges as other manufacturers and retailers, including read accuracy.

The experiments involving the Fusion and Cruzer product lines were not aimed at addressing the read-rate accuracy issue because the nature of the displays and the cases involved sidestepped the typical accuracy problems.

The Fusion cases ?are these big airy boxes with one tag on it so they’re very easy to read. The issues have always been when you try to read small little cases hidden behind other cases,? Dubash said. As a result, the accuracy rate for the Fusion cases was 95percent and better.

The Cruzer display cases were also easy to read. ?That’s why there is a relatively high benefit (for experimenting) with displays. With the cost of the display relative to the cost of the tag, it’s very easy to achieve a positive ROI.?

Another critical concern for P&G-which is still being hashed out by standards makers-centers on establishing a uniform way to exchange data that’s collected by RFID readers.

While the P&G projects involve a limited amount of information – such as item or SKU number, as well as time and location when an item passed through the RFID reader – the challenge of uniform data collection and exchange becomes more complex as more information and partners are involved.

“The big issue is: How do you format the data? What will be the transport mechanism?” Dubash asks. “How are you going to share it? XML? Simply using Excel files?”

Other questions that companies like P&G must wrestle with: Should P&G share this information with Wal-Mart. Or other partners? And if so, how much?

“All this wonderful technology is for naught if we can’t exchange information between trading partners,” Dubash said.

The challenge here is going through the “lengthy and very painful” standards process, especially for companies smaller than the “tier one” retailers including Metro, Target and Wal-Mart.

“As you move into the Tier2s and Tier 3s, this is a huge infrastructure cost,” he said. “It’s all about enabling volume interactions, scaling.”

This is especially troublesome as retailers and manufacturers move beyond the experimental initial one-to-one RFID approach and into the one-to-many world, he said.

“The big issues is: How do you format the data? What will be the transport mechanism?” Dubash asked. “How are you going to share it? XML? Simply using Excel files?”

Like almost all standardization projects, the debate is less about doing it the ideal way or even the best way and more about doing it a consistent way. Dubash points to RFID data-exchange security as an especially thorny issue.

To maximize the potential benefit gains from RFID data-sharing, executives want to ultimately interact with as many of their distributors, suppliers and major customers as possible. But bringing potential competitors into a trusted network can be frightening.

The standardization approach must not only find a common format to report the data, but it must also agree on what data will be reported, he said.

“Security’s a huge concern for us. It would be a disaster if a competitor was able to see our data,” Dubash said. The most obvious remedies, however, bring their own problems.

P&G has explored building additional security into each tag, but has had to determine whether to share encryption codes with retail partners, who also work with direct rivals. “In this realm of data exchange, what is the most effective way of doing this? Do you make the tags bigger and more expensive?” he asks.

Dubash said the single biggest roadblock to RFID has been the applied tag cost versus tag cost dilemma.

That speaks to the difference between the cost of the chip itself and the cost of everything that is needed to make it work, including an antennae and some kind of sticky surface that can be physically placed directly on the product.

Initially, tag makers addressed such issues by shrinking the chip to reduce costs, but that had the unintended consequence of making it much more difficult for companies like P&G to apply the chip. It didn’t take that much extra effort to adhere each chip before the labor and related costs wiped out any savings from the lower chip costs.

“By making the chips smaller and smaller, it was driving up the handling costs,” Dubash said. “The handling costs of the chip became much more expensive.”

The next challenge before P&G will be figuring out the best ways to integrate the tags directly into product corrugate. Adding it to a finished product manually or semi-automatically can be very expensive, Dubash said, so they are trying out ways to incorporate it into the product manufacturing process.

Printed antennas is another option being explored, he said.

The next generations of RFID chips in general?referring to Gen1 moving to Gen2 as well as HF moving to UHF?is a critical move forward, Jamshed said.

Some in the industry?most often RFID chip makers?have argued that Gen1 still has key advantages and the two chip generations work best for different applications. Jamshed has heard those arguments and finds them bogus. “In my mind, there is no truth” to the advantages of Gen1, he said. “Gen2 far outperforms Gen1.”

Chief among those advantages is the ability to pick and choose what reads will be accepted. “Let’s say you’re trying to look at a pallet of cases of Fusion blades. Next to it is a pallet of Fusion razors. You’re trying to read just the blades and avoid what we call stray reads,” he said.

The Gen2 capabilities are especially critical as more and more items are tagged and “forktrucks are going through a densely populated area of tags,” he said, adding that P&G is not there yet, but will be eventually. “Right now, the scale just isn’t there. Do we have rows upon rows of fully-tagged products in our warehouses? No.”

The Ultra-High Frequency (UHF) versus High Frequency (HF) issue is very similar to the Gen1 and Gen 2 issue, in that both speak to different strengths depending on the application. It’s also similar in that Jamshed has a clear favorite and isn’t fully buying the “both have their strengths” position.

HF has been around the longest and therefore has the better marketshare. “In the pharma space specifically, HF vendors have established a strong foothold with some information that may or may not be factual,” he said.

UHF, for example, has a much stronger range and, the argument goes, is better for warehouse and other farfield applications and is not as effective for item-level or other nearfield applications. But P&G has recently seen some UHF applications that demonstrate strong nearfield potential, Jamshed said, “which demonstrates that it can do all of the things that HF can do.”

“Coming to closure that one standard is the way to go, that’s one of the key challenges,” Jamshed said, specifically that it’s both a political as well as technological challenge. Many vendors have staked out key positions and that can shape perceptions.

Given that P&G is not focusing a lot of effort on item-level, Jamshed said that he expects it will be the major pharmaceutical players who will have to take the lead on that one. “The Pfizers of the world are going to have to decide,” he said. “That’s their challenge in dealing with the Wal-Marts of the world.”

This is not the last of the P&G RFID experimentation. How long the Fusion line will continue to be chipped will depend on how the experiment continues to do and whether P&G sees value in continuing the effort.

But either way, the consumer giant will be conducting a “largescale” RFID experiment with Wal-Mart this summer, Dubash said, adding that it will be large enough to try and get statistically valid data for what works and doesn’t with RFID.

As long as $65 billion consumer giants like P&G keep working on RFID with retail giants like $312 billion Wal-Mart, the rest of their industry will have to fall in line. That’s especially true if results continue to show that RFID can boost profits well beyond what would be considered razor-thin.