Radio-frequency identification (RFID) technology has been widely acknowledged to have the potential to significantly change the consumer packaged goods industry. The reality has yet to live up to the high expectations. Could 2008 be the year?
RFID is wireless technology that links "tags" (transponders) with "readers" (receivers). The tags contain information that can be read by a reader in range. For example, if you flip through a new book, a small, shiny square may fall out from between the pages; were someone to walk out of the store without paying, that little square--an RFID tag--could alert the staff.
In 2003, Wal-Mart (nyse: WMT - news - people ) mandated that its largest suppliers put RFID tags on cases and pallets. Pundits expected the consumer packaged goods industry to quickly adopt the technology, both to benefit from RFID use in supply chain management and to maintain standing with retailers.
However, results were not as expected. Wal-Mart installed RFID in distribution centers more slowly than anticipated, and some suppliers voiced concerns about the expense of RFID and the low returns associated with the investment. Five years after the mandate, Wal-Mart's RFID efforts have shifted focus. Widespread adoption of RFID in the consumer packaged goods industry isn't likely to occur until a sufficient value proposition emerges. This value proposition is likely to be found where the expectations are highest, using RFID to track each individual item in the supply chain by acting as a high-tech bar code.
Recall that bar codes themselves were a significant technological innovation. The bar code system took decades to be adopted, yet today it is pervasive. Retailers such as Wal-Mart have good reason to push for RFID use--they stand to benefit significantly from it. Whether for loss prevention or to enhance the consumer experience, retailers have clear jobs-to-be-done for which RFID is a solid solution, and therefore they have an incentive to adopt the technology.
As for consumer packaged goods, the lower margins and higher volume of most consumer packaged goods do not easily allow for the expense of RFID on an item-level basis. That is, the value proposition for the consumer packaged goods industry to use RFID for item-level supply chain management is not yet sufficient. Other challenges have included technological issues, high start-up costs, and issues associated with network effects. For example, the "good enough" bar for RFID applications was initially quite high. Getting the tag and reader advanced enough to perform at the necessary level has taken considerable time and resources.
However, the main challenge to widespread adoption of RFID technology is network effects. While RFID can be used without substantial networking infrastructure, its real benefits come from software functionality and applications in a network. This means software must be further developed and significant financial investments made to create the infrastructure needed to support the widespread use of RFID technology.
Another network-effects challenge is that RFID technology becomes more effective as networks grow, which will reduce costs and create more cohesive, comprehensive networks. However, because RFID has not been widely adopted and the networks are not robust, it does not make sense to some to adopt RFID yet.
It is hard to imagine that RFID will not one day be a global standard for supply-chain management. However, in the short term, different uses and more attractive value propositions continue to emerge. These include the kinds of low-end applications typical of early-stage technological innovations--such as using RFID to track promotional displays to ensure proper placement and display times--applications where "good enough" gets the job done. These lower-tech applications are also less sensitive to network effects and could even serve as a catalyst for RFID to move into the mainstream in the consumer packaged goods industry in the future.
Will the right conditions be in place in 2008 for RFID to take off in the consumer packaged goods industry? Most likely not. In 2008 we are more likely to see RFID continue to expand in lower-tech applications that may help move it into the consumer packaged goods mainstream in future years. The lesson: New technologies rarely achieve immediate industry-wide adoption, and in fact, many never achieve it at all. A more effective initial approach for new technologies can be finding niche applications that can serve as a beachhead for expansion into larger markets.
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