Cost reduction in retailing & products using RFID
Jul 13, 2005
Consumers usually welcome price reduction. For that to be enduring, the supplier and retailer must reduce costs. RFID on trucks, pallets and cases is achieving this in many ways but the tagging of individual items is revealing yet richer rewards, even though it is at a much earlier stage. Automation is the key, but it comes alongside crime reduction, reducing excess stocks and work in progress and reducing the time taken from raw materials to finished item on the retailer's shelf ("time to market") and other benefits that directly impact costs. Most retailers involved in RFID see reducing stockouts on high-stockouts items such as DVDs and fashion apparel as the "quick win".
Studies cited by DET show that out-of-stocks are worth between 3 and 4 per cent of total store sales, climbing to 11 per cent of the top 2,000 items. A study of over 600 store locations conducted by IRI and Procter & Gamble found that over 2 per cent of high-volume stock keeping units (SKUs) are out-of-stock on the shelf at any given time, contributing to revenue losses of 25 per cent and more in some promoted categories. Furthermore, the study concluded that 15 per cent of the time, when consumers encounter an out-of-stock in their chosen item, the sale is lost altogether, and 50 per cent of the time consumers purchase a competing brand.
Retailers already reaping benefits for consumers
Customer service is increased when store associates have better knowledge of product whereabouts. With item level RFID, staff know instantly if a particular item is in the store, and can track it down immediately. When an item becomes out of stock, the staff member can simply scan the EPC tag on the shelf, access the planogram, and calculate the next best item to place in that open spot. With "smart shelves" where the electronics in the shelf scans the RFID tags on the items it supports, even that can be automated.
Security, environmental monitoring, traffic pattern monitoring, consumer behaviour, even ingredient-level tracking are all potential in-store uses for RFID. Most players agree it is not the ability to do these things that is revolutionary but rather the efficiency with which these tasks can be performed that makes RFID technology pay back rapidly.
Wal-Mart is one of the leaders
Wal-Mart's president and CEO Lee Scott said: "We expect we will reduce mark downs, drive down inventory and improve stock turn as it helps to track product through the supply chain."
Indeed, by improving supply chain traceability, it would take $1bn out of Wal-Mart's inventory," he predicted.
The analysts go further, suggesting that RFID could slash 15% or $6.7bn from Wal-Mart's labour costs because the need for employees to scan barcodes on pallets and cases in the supply chain would be eliminated. Indeed, Erwin De Spielgelere of EAN estimates this as $8.35 billion yearly, broken down as shown
The estimated savings of Wal-Mart
Simon Langford, manager of RFID Strategy at Wal-Mart says," Given that it costs the company five cents every time a member of staff scans a barcode on a pallet in one of our warehouses, automating that process will save millions before we even begin counting benefits."
Marks and Spencer
In 2003, retailer Marks and Spencer in the UK showed the way by replacing barcodes on food trays, that were manually scanned one at a time, with RFID tags that are automatically read thirty at a time by a doorway interrogator. That obtained a payback of only one year, after which the substantial cost savings could be shared with the consumer.
Many ways of giving the consumer better value
Those in the various parts of the value chain prioritise the benefits differently. In a survey carried out by IBM and Executive Technology, 38% of retailers ranked article surveillance as an important potential benefit of RFID, presumably as a means of reducing theft in their supply chains and outlets. A T Kearney and Kurt Salmon Associates found that retailers particularly valued the capability of RFID to reduce out-of-stock. By contrast, Consumer Packaged Goods CPG manufacturers RFID as key to inventory management and greater supply chain visibility.
RFID tackles many inefficiencies
The US Food and Drug administration has assessed that "Up to 20% of foods are discarded due to spoilage in the supply chain." RFID helps to address this too, by providing reliable recording of the factors leading to spoilage and where and when they occur. Shrinkage is a term that refers to loss of product through damage, misplacement or theft from manufacture to retail and during the retailing process itself. In competitive markets, all the above potential cost improvements get largely passed to the consumer. For example, it is rare for those in the value chain to increase their percentage return on gross sales for long for fear of inviting in competition.
Below are some examples of costs and lost sales in the Consumer Packaged Goods CPG supply chain that item level RFID can tackle, though not eliminate entirely. The consensus view is that item level tagging has the potential to impact far more of this than the current work tagging vehicles, cases and pallets in the supply chain can achieve.
Some costs and lost sales in the CPG supply chain that item level RFID can impact
Payback factors for item level RFID identified in various rollouts, trials and studies are shown below.
Hear from Tesco, Kaufhof, GlaxoSmithKline, IKEA, Marks & Spencer and many more at Smart Labels Europe, Cambridge UK September 20-21 www.smartlabelsEUROPE.com .