DoD Mandates Supplier Adoption of RFID

October, 2003

This Research Byte is based on research by Frank Scavo, President of Computer Economics, as part of his work at our sister consulting firm, Strativa.

As part its management consulting services, Strativa provides independent software selection consulting services for organizations looking to assess legacy systems or to replace ERP, CRM, HCM, or other enterprise systems.

The U.S. Department of Defense (DoD) has ordered its entire supply base to implement the use of radio frequency identification tags (RFID), effective January 2005. DoD’s mandate follows a similar mandate by Wal-Mart on its largest 100 suppliers. Since these two mandates are going to drive rapid adoption of RFID technology over the next few years, let’s take a quick look at RFID and what it means for manufacturers and distributors.

What is RFID?
RFID technology allows products to be identified at a distance, by means of a tag that, when energized by radio waves, responds with identification information. You may have already seen RFID in another application. It is the same basic technology used in employee access control cards. The cards are designed to unlock a door when waved in the general area of a card reader (so-called “proximity cards”).

RFID tags in supply chain applications are similar except that the RF signal is stronger, allowing goods to be identified at a greater distance. The RFID standard being adopted by DoD is the same as that being adopted by Wal-Mart, so there will be only one standard for suppliers to comply with. The new standard is called the Electronic Product Code (EPC), which is under development by the Uniform Code Council (UCC) and EPCglobal, a new organization under UCC.

Benefits of RFID
Once the RFID tag is affixed to the product, case, or pallet, all participants in the supply chain can use RFID readers to automatically identify and track any item, untouched by human hands. The productivity savings are expected to be very substantial, including increases in:

  • Data accuracy
  • Timeliness
  • Visibility

At the risk of over-simplification, shipments into a warehouse could essentially announce their arrival and trigger matching against advance ship notices or purchase orders. Likewise, shipments out of a warehouse could automatically identify and trigger pick confirmation and advanced ship notice to the consignee. Manual effort in taking physical inventory would be greatly reduced. Think of it as bar-code data collection on steroids.

Costs of RFID
RFID isn’t cheap. The DoD and Wal-Mart mandates will require large investments in RFID infrastructure by suppliers. Since the infrastructure must be in place before applications can be developed to take advantage of it, participating suppliers will see little immediate return on this investment, other than being able to continue to do business with DoD and Wal-Mart. According to one estimate, fitting out a single warehouse for RFID could run $100,000, not counting the cost of integrating RFID readers into existing warehouse management systems to complement bar-code readers or manual transaction entry.

Furthermore, early adopters–those who are under DoD and Wal-Mart mandates–are going to pay the most. Suppliers who can wait will save, as the cost of the technology drops with economies of scale. Wal-Mart is shooting for a price of $0.05 per tag, but even that price will probably drop as volume increases. Tags today reportedly have a failure rate of 20%, which tells me that chip manufacturing processes are not yet mature. Still, as with any electronic component, yields will improve dramatically as volume increases, and tag costs eventually will fall. The cost of readers should fall as well.

What Is the Impact?
DoD’s mandate covers nearly everything purchased by the military, from munitions to commissary items, estimated at a whopping 45 million items supplied by over 20,000 suppliers. DoD’s deadline is less than 16 months away, in January 2005. (Coincidentally, Wal-Mart’s first deadline is the same date). Most observers doubt that DoD’s deadline can be met, so there may be some extensions granted. However, the mandate will not go away because the benefits are simply too great.

Despite the high implementation costs, the mandate by DoD and Wal-Mart is a huge endorsement, and is likely to trigger widespread adoption of this technology over the next several years. So, even if your firm is not a supplier to DoD or Wal-Mart, you should still begin to research RFID technology. At some point in the not-to-distant future, it is likely that someone downstream in your supply chain is going to start asking for RFID. If your competition is ready to deliver and you are not, you could be at a serious disadvantage.