RFID

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RFID From technology economics to business
policy

• Yale Braunstein
• School of Information
• Updated April 2010

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Motivation

• Opportunity to have policy informed by economics
  technology
• Opportunity for policy and technology to develop
  in logical, coordinated manner

Todays approach From technology
economics to business policy
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Economic Background

• Costs features
• One approach is to look at prior technology for
  analogs (e.g., barcodes)
• Technical hierarchy
• Where does RFID fit in with other technologies in
  terms of use, complexity, etc.
• The next three slides portray these relationships
  in different ways

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Costs features
Characteristics Barcode
RFID
Y Y
Low (Line of Sight) Med-High
Y (Discount Card) Y (CalTrans)
12 digits (bytes) for UPC 64 or 96 bits
.001 .05
Persistence Accessible to remote
monitoring Link to user/consumer database
(example) Bits/bytes of information Cost per
code/tag
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But, it is not an either-or case

• Since it is likely that technologies old
  (barcodes) and new (RFID) can and will co-exist,
  it is important to look at the rationales and
  drivers for each technology
• Economics
• Regulatory and policy issues
• Each informs the other. The old approach was to
  focus on optimal regulation. We now realize
  this is impossible to define so we look at
  optimizing strategic business decisions given the
  regulatory environment. (a la Michael Porter)

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 Myth The EPC is an RFID Replacement of the
Current Bar Codes (GTIN/UPC) Truth EPC used in
RFID tags and bar coding are considered
complementary data-capture technologies. Even
with large-scale adoption of RFID, there will be
a continued need for bar coding to coexist with
RFID in the future. While current bar coding
offers the same number for every case of a given
stock-keeping unit (SKU), EPC is a standard way
to serialize all inventory. The unique attributes
of RFID enable improved visibility into supply
chain movements and history. With RFID
technology, the level of information is deeper,
allowing inventory to be tracked and data to be
more freely shared between suppliers and
retailers. While RFID has the potential to offer
a closer technical fit as well as operational
benefits in certain applications, it will not
serve as a replacement for bar codes. Both types
of technology have a place in todays
fast-developing business environment.
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Underlying economics

• Potential to reduce transactions costs
• Fixed cost to adopt/convert to RFIDs
• Per-unit costs
• Other costs for adopters
• Benefits for adopters
• Increase capabilities to
• Discriminate in prices
• Do versioning

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Standard Value Chain

• - a linked set of value creating activities
• from raw material to end use product

Customer
Procurement
RD
Manufacturing
Marketing
Distribution
Service
Value chain
Customer Basis
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Redesign of the Value Chain

• Redesign can create dramatic gains in
• cost structure
• asset investment
• speed of responsiveness to external changes
• What has to be redesigned?
• set of activities
• the interfaces across the chain

We shall return to this later...
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Operating Frequencies and Uses of RFIDs
Advantages Liabilities
Applications
Widely deployed broad global freq. deployment minimum metal interferences Read range limited to less than 1.5 meters Animal tracking Container tracking Antitheft systems
Low Freq. 125 kHz to 134
Widely deployed broad global freq. deployment minimum moisture interferences Read range limited to less than 1.5 meters Metal serious problem Library asset tracking Baggage tracking Retail product tracking
High Freq. 13.56 MHz
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Operating Freq and Uses of RFIDs
Advantages Liabilities
Applications
Widely deployed read range MUCH greater than other standards Cant be used in Japan, affected by moisture and adjacent tags Pallet Container tracking Vehicle tracking
Ultra-high 868 MHz to 928
Read range is MUCH greater than even UH. Not widely deployed, complex implementation, cant be used in parts of EU Vehicle access control
Microwave 2.45 GHz
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Supply Chain Economics

• Overall ROI? Probably negative if one
• Just looks at costs
• Does not restructure to take advantage of the
  technology
• Competitive advantage (those with tags worth
  more than same quality w/o)
• The haves and the have-nots
• High fixed costs

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Myth Replacing Bar Code-Based Processes with
RFID Processes Will Achieve ROI Truth Feeling
the pressure to incorporate RFID into their
manufacturing and logistics operations, some
companies will tend to implement technology for
technologys sake. Buyer beware Implementing
RFID does not instantly guarantee a fast path to
return on investment (ROI). To impact the bottom
line, the decision to implement RFID must be
linked to a definitive business goal. For most
companies, it is cost-prohibitive to convert to
RFID on a broad scale. And, in some cases, it
doesnt make sense. For example, if your
warehouse is reliably scanning bar-coded cartons
on a conveyor as they are loaded onto a truck,
switching this process to RFID doesnt really buy
you anything. Why? Because the labor savings
resulting from replacing an automated bar code
scan with RFID simply dont amount to
much. However, if every carton is currently
scanned manually, changing the process to
automate the data capture could reduce labor
requirements and increase facility throughput. In
addition, if there are areas in which data is
lacking, adding RFID can increase visibility and
accuracy. The reality RFID technology isnt
new. It has been around for the past decade,
whereas bar code technology has surpassed three
decades. The promise of achieving greater ROI
with RFID is not time-sensitive as many may
believe it is application-dependent.
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Myth RFID Benefits Only Retailers, Not
Suppliers Truth While the RFID spotlight has
clearly illuminated major retailers (Wal-Mart,
Tesco, Metro, Target and Albertsons), several
major Fortune 500 suppliers including Procter
Gamble, Gillette, and others are driving toward
RFID implementation across the supply
chain. Suppliers might not achieve incremental
ROI, but there are benefits to be gained. As the
Wal-Marts and Metros of the world implement new
RFID requirements, suppliersin their efforts to
complymust be prepared to execute the right
technology strategy to serve their own
business. Suppliers should view RFID compliance
as a means to capture more detailed inventory
information, increase visibility throughout the
supply chain and reduce the number of claims. For
the first time, suppliers can use shared data to
gain new insights, better source products to meet
demand patterns, take preemptive corrective
actions to avoid claims and better satisfy their
customers needs. More satisfied customers and
increased stocks in-store lead to more business.
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Myth RFID is the Only Way to Automate Manual
Warehouse Receiving Processes Truth In certain
cases, RFID may be appropriate for warehouse
automation, but it is not the only solution. In
fact, one of the biggest paybacks of evaluating
potential RFID uses in the warehouse is that this
investigation actually helps uncover big savings
opportunities that dont require RFID
technology. Savings can be significant for
manufacturing companies that are looking to
eliminate their labor-intensive, paper-based
processes by automating the receiving function.
Tagging of cases can be done with bar code
(versus RFID) technology and still yield tangible
ROI because the company has eliminated the
potential for manual intervention and thus human
error. Another example is a manufacturer that
bar codes pallets and scans them onto containers.
If the company discovers that it never sends the
advanced shipping notice (ASN) to the receiving
warehouse, theyve identified a gap that can be
rectified and this can therefore lead to improved
customer service. This scenario does not require
RFID rather, it involves the addition of a
simple step to close the warehouse receiving
process loopan especially important link for
capable-to-promise (CTP) manufacturers.
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Transactions costs

• Savings throughout entire supply and retail chain
  (shipping, inventory, pricing, etc)
• RFIDs have potential to lower transactions costs,
  but benefits probably will be unequally spread
  across the supply chain
• This raises contractual supplier vs. retailer
  issues

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Fixed costs to adopt

• Readers costs appx. 1,000 4,000
• Tag Printers 2,000 5,000
• Middleware 25,000 200,000
• More easily afforded by larger players
• Large players more likely to have more difficult
  logistics, with costly errors.
• According to Forrester, companies must spend as
  much as 100 million to see real benefits from
  deployment

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Unit costs

• At least fifty times that of barcodes(remember
  the comparisons chart)
• But this will change (learning curve)

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Other costs for adopters

• RFID strategy and technology 50,000 - 300,000
• Training and maintenance
• Specialized, network-connected tagging equipment
  (ex factor floor equipment)
• Reoccurring fees to EPCglobal and/or UCCnet
  (15-20 of cost of system)

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Benefits for adopters

• (Varies for every adopter)
• Avoided shipping errors
• Reduced labor costs
• Accurate inventory counts and improved
  forecasting demand
• Avoided incidents of counterfeiting (which can
  also damage brand value and public confidence)
• EPC/RFID adoption saves between 500 million and
  1 billion/yr for pharmaceutical manufacturers,
  and between 200 million and 400 million/yr for
  healthcare distributors

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Price discrimination, etc.

• To successfully discriminate, the seller needs
  to
• Identify two or more market segments
• With different elasticities of demand
• Prevent arbitrage
• For versioning to work
• New versions need to add functionality, at least
  in the minds of some users
• Old versions need to expire
• RFIDs can facilitate either of these

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RFID in casinos price discrimination?

• In the past, casinos have relied on pit bosses
  and dealers to continually estimate how much
  gamblers were wagering, which in turn enabled the
  casinos to figure out about how much a customer
  spent overall, and what level of discounts and
  freebies he or she was entitled to. With RFID,
  the chips are automatically scanned at each
  bettor's position, and the data are displayed in
  real time on a personal computer behind the table
  visible to the dealer and pit bosses -- thus
  eliminating the human guesswork.

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Potential winners losers - I

• Who wins? Who loses?
• The quick answer is that RFIDs will produce some
  big winners and a lot of losers. Even for the
  winners, RFIDs requires so much capital and
  change that the risk is very great. Successful
  transition management requires insight, finesse,
  and careful planning.
• Smaller firms may be particularly at risk

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Potential winners losers - II

• Participation will be costly for the
  manufacturers. Nevertheless, they will have to
  adopt Auto-ID. Large manufacturers may see a
  decrease in profitability, but many smaller
  manufacturers will not have the resources to
  remain involved at all. At the same time, many
  smaller retailers will not have the incentive or
  resources to adopt Auto-ID. This may well
  accelerate the split in the retail sector between
  "haves" and "have-nots."

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Issues I - Standards

• Myth There Are no Set Standards for RFID Today
• Truth GTAG? ISO 18006.A? ISO 18006.B? Gen 2 EPC?
  The acronym soup has thickened into a murky layer
  of complexity, further complicated by some
  vendors claims of owning the standards. The fact
  is that there are several RFID standards today.
• The major reason that the prior standards were
  never adopted on a broad scale was that the
  technology companies were the main drivers of
  these standards. They had a solution and were
  seeking a problem to address. EPC standards,
  however, were developed by end user companies to
  ensure that the technology developed addressed a
  specific business need.
• Recent rumors regarding the Global Proposal
  verses the Freedom Proposal within the EPC
  community, along with company lawsuits, have
  added to the uncertainty. EPCglobal is helping to
  define the standards for next-generation
  technology, but the big playersWal-Mart, Metro,
  the U.S. department of Defense, and select
  Fortune 500 companiesare aggressively moving
  forward on the RFID adoption curve, and many have
  already implemented current-generation EPC
  technology.
• Smaller businesses will likely take their cue
  from the industry leaders as RFID standards
  continue to evolve, emerge and ultimately become
  more entrenched.

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Issues II - Regulation

• Reasons to regulate
• It may be more efficient to treat RFID as a
  special case
• Reasons not-to-regulate
• Avoid the problem of building a regulatory model
  based on defunct technology
• General approaches to privacy, price
  discrimination, etc., may be sufficient

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Recently in California

• California Bill Seeks to Ban Tags in IDs
• California's Identity Information Protection Act
  would prohibit the use of contactless integrated
  circuits in government-issued identification
  documents.
• (The Identity Information Protection Act of 2005,
  SB 682, authored by State Senator Joe Simitian)
• See http//www.rfidjournal.com/article/articlevie
  w/1565/1/1/
• and http//www.aclunc.org/pressrel/050517-rfidbill
  .html

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Consumer applications - 1

• Could RFIDs be valuable once the consumer has
  purchased products with them?
• Clothes, DVDs, passports, car parts, etc.
• Another Pharmaceuticals
• Supply chain, especially with third-party payers
• Smart Medicine Cabinets
• Are there consumer analogs to high reliability
  systems such as nuclear power plants, airplanes,
  etc.?

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Consumer applications - 2

• Eventually, do items w/o RFID become less
  valuable?
• May not be able to return items w/o active RFID
• Could not find item in home
• Could not generate list of items
• Could be difficult to sell per second hand if
  they also have adopted RFID (ex textbooks)

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Consumer applications - 3

• Potential for complementary effects
• Imagine if your mobile phone had a reader
  (Phillips Electronics is trying to do this.)
• The PDA may have a revival
• Innovative software that works with RFIDs
• RFID jammers and protectors

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Government applications - 1

• May be useful to distinguish between
• Cases driven by economics (these can be analyzed
  with similar approaches to business applications)
• Cases driven by non-economic concerns
• National security
• National identity
• Government can also direct technology adoption by
  its (very large) purchasing decisions
• Historical example microfiche in the U.S.

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Government Applications - 2

• The Federal Highway Administration awarded a
  contract to develop a 5.9 GHz RFID system to cut
  road fatalities in the U.S. by 50.
• New U.S. Civilian and Soldier Passports with RFID
• DoDs supply chain
• Satellite tracking of commercial vehicles in EU

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Final Thoughts - 1

• Old economics rules still apply
• Dont think of just the Low Freq. chips there is
  much room for innovation with other chips as well
• Try to think of what consumer pain to solve (is
  an idea a pain killer or just a vitamin?)
• Think of why there may be the winners and the
  losers with RFIDs can we make everyone
  winners?

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Final Thoughts - 2

• RFIDs.. just an asset tracking system ?
• However, in combination w/ other systems, RFID is
  far-reaching capabilities
• What types of implementations will be encouraged?
  Those that track important resources.
• What are important resources?
• Either expensive (cars, razors, electronics)
• Dangerous (toxic wastes, drugs, weapons)
• Emotional Attachment (pets, children, iPod)