Benefits of RFID in Retailing

TECHNOLOGY IN MARKETING

-- Pankaj Madhani
Faculty Member, IBS Ahmedabad
The author can be reached at
pmmadhani@yahoo.com

Business firms are increasingly leveraging on the usage of technology to improve operational efficiency and gain competitive advantage. RFID is one such technology that is finding increased usage in various fields. This article takes a look at the advantages of RFID in improved implementation of the marketing mix strategy with a focus on the retail sector.

Radio Frequency Identification (RFID) is an IT tool designed to meet the needs of data collection. RFID systems can directly improve inventory management (by decreasing inventory levels and reducing holding costs and spoilage), thereby resulting in increased profitability. They may also have indirect effects on business performance through the lowering of coordination and administrative costs and the enhancing of decision-making and forecasting accuracies. RFID can ensure significant cost savings in supply chain management and also facilitate effective execution of the marketing mix strategy.
Today, the retail industry is facing serious challenges due to rapidly changing market conditions, fueled by increasing global competition and higher expectations of customers. RFID technology is being offered as a tool to revolutionize the way business gets done because of its broad impact on manufacturing, logistics, material handling, inventory tracking and management. The potential benefits of RFID are, therefore, numerous for all stakeholders in the retailing business.

RFID System: An Overview

RFID uses a wireless system to track products, parts, expensive items and temperature-and time-sensitive goods. Transponders, or RFID tags, are attached to objects. The transponders identify themselves when they detect a signal from a reader that emits a radio frequency transmission. Each RFID tag carries information, such as the item's code number, color, supplier or other types of data. When these tags pass through a field generated by a compatible reader, they transmit this information, to the reader, thereby identifying the object.

System Components

A typical RFID system consists of a number of components, i.e., tags, printers, tag readers, RFID middleware system (to facilitate data exchange between readers and business information systems), a host computer server system and application software. RFID tags are equipped with antennas to enable them to receive and respond to radio signals from RFID readers. They reveal their identity when they pass within the range of a reader, allowing their presence to be recorded. They contain specific information in their memory about the objects to which they are attached. Such information is captured, interpreted and then communicated to a business-application software. With an Internet connection, the information can also be accessed by any authorized users at any place and time.

Active and Passive Tags

In a system using passive tags, the tag is energized by the Radio Frequency (RF) field from the reader and transmits back its identity to the reader. Other data transmission depends on the protocol between the reader and the tag. In the case of active tags, the tag is powered internally by a battery. The tag can be turned on by a suitable RF field from the reader (or other antenna). Once turned on, it communicates with the reader, using pre-determined protocols.

Impact of RFID on the Marketing Mix of the Retail Sector

RFID is an IT enabler for enhancing the effectiveness and efficiency of the supply chain and helps in effectively designing and executing all components of the marketing mix, i.e., Product, Price, Place and Promotion. Refer Annexure to understand the impact of RFID on marketing mix elements of the retail industry.
RFID reduces product tampering and product spoilage, thus, improving product delivery, thereby improving the product component of the marketing mix. With the automation of the supply chain, supply chain partners, i.e., wholesalers, distributors and retailers, can reduce their cost of operations such as warehouse costs, labor costs and loss due to product theft/shrinkage. These savings can be passed on to the customers by reducing the price, and hence influence pricing. Improved inventory management throughout the supply chain reduces the possibility of stock-out and controls shipment errors, thus, improving the place component of the marketing mix (i.e., distribution). RFID indirectly helps in ensuring continuous presence of and visibility for one's products on retail shelves, increases customer satisfaction and thus helps in the promotion component of the marketing mix.

Product

Product Authentication

Product authentication is another potential benefit derived from the application of RFID. The RFID tag is embedded into a product to validate its authenticity. Counterfeiting is a major threat to product authenticity. For example, pharmaceuticals pass through many different points in the distribution chain from the factory to the local pharmacist, thus, leaving the system vulnerable to the introduction of counterfeit drugs. RFID is the best remedy against counterfeit drugs; and item level tagging helps eliminate this problem.
The United States Food and Drug Administration (USFDA) has formulated guidelines on how pharmaceutical companies can implement RFID to reduce drug counterfeiting. Viagra is one of the most counterfeited medicines in the US. To prevent counterfeiting, Pfizer now ships Viagra bottles in the US with RFID chips under the labels. In addition, Viagra bottles continue to feature barcodes with the same electronic product code. As the RFID tags are difficult and expensive to duplicate, they add another layer of security. RFID readers installed at the pharmacy store pick up radio transmissions from the RFID chip and then communicate with Pfizer servers to verify the genuineness of the product.

Product Recall

Product recalls are an expensive source of loss in the supply chain. The inability to pinpoint only the faulty products often leads to the destruction of perfectly good ones (i.e., throwing the good out with the bad). Product recalls also interrupt the flow of other products in the supply chain. Automated supply chain also helps in FIFO (First In, First Out) management and reduces recall of expired products.

Product Spoilage

Up to 20% of foods are discarded due to spoilage in the supply chain as they become unusable before they reach the consumer. RFID helps to address this issue too, by providing reliable recording of the factors leading to spoilage, and when and where they occur, and help in controlling the wastage of perishable products due to spoilage during distribution.

Price

Pricing decisions should take into account profit margins and the probable response of competitors. The `price' element of the marketing mix looks at what the customer gives up, and what the seller gains. Customers usually welcome price reduction. For this to happen profitably, the supplier and retailer must reduce their own costs.
RFID directly improves cost efficiency by reducing excess stocks and work in progress and reducing the time taken from the raw materials stage to delivering the finished items to the retailer's shelf. RFID helps in improving on-shelf availability, reducing inventory handling and warehousing costs. In competitive markets, the potential cost improvements get largely passed on to the customers, resulting in more attractive pricing without any reduction in the profit margin. The increased volume of sales due to price reduction, thus, results in significant increase in the total profits earned.

Reduction in Labor Costs

With labor comprising a significant percentage of overall supply chain costs, this is an area that is frequently targeted for cost reduction. RFID helps to almost eliminate labor-intensive check-in processes, thereby reducing labor costs associated with receiving and checking in goods. It also enhances accuracy and throughput. These benefits also percolate to replenishment and order-filling processes, resulting in labor cost reductions in these areas too. RFID also enables reduction in order-filling labor costs by eliminating manual verification of quantities filled and consequent resolution of discrepancies against the purchase order.

Reduction in Product Shrinkage

Product shrinkage is another problem that affects many retailers and poses significant threat to profitability. Shrinkage refers to loss of product through damage, misplacement or pilferage. Total global shrinkage amounts to over $60 bn annually. Faced with competitive pressures to reduce costs, many retailers find themselves short staffed on quality security and surveillance systems. This renders their products vulnerable to theft by both employees and customers. Hence, retailers, today, are using RFID tags on pallets, cases and trays to track items internally.
However, while item-level tagging is more likely to reduce employee theft and shoplifting, case level tagging will probably have little impact on this problem. Nonetheless, case level tagging can virtually eliminate vendor fraud. Item-level tagging in the store is expensive, and may be justified only for high-value items such as expensive apparels, which are likely to be moved by customers, resulting in an "out of stock" shelf, while the product is misplaced in a different location. In addition, item-level RFID can also improve the speed and accuracy of the check out process.

Place

The promised benefits of having an RFID system in place (distribution and supply chain management) related decisions include productivity gains in the warehouse, better product visibility in the distribution channel, improved inventory accuracy, less shrinkage, reduced number of transaction errors, better asset tracking and utilization, and easier detection of counterfeit products.

Enhanced Inventory Turnover

The use of RFID in inventory management helps to provide accurate, real-time information and insight regarding the movement of goods across the supply chain. RFID tagged inventory can be tracked automatically with minimum manual intervention, validation and reconfiguration. This helps to substantially reduce expensive inventory errors, improve inventory forecasting and enhance inventory turnover. Improved inventory management processes also help to improve the matching of production and demand models.

Reduction in Inventory Write-Offs

Inventory write-off in the retail industry from spoilage and obsolescence amounts to $120 bn worldwide each year. Expiry information, recorded on the write portion of the RFID tag, enables warehouse systems to identify products that need to be moved relatively quickly to points of sale or removed from distribution. Further, some items, such as fresh and frozen foods, spoil more easily and quickly, and unfavorable temperatures may further reduce their shelf life.

Decrease in Shipment Errors

Several retail studies show that defective, damaged, and/or incorrect merchandise shipped to consumers account for a significant percentage of customer returns. RFID has the potential to eliminate shipment errors and consequently, reduce corresponding costs. As store personnel process and ship a particular customer order, an RFID reader will discern what items constitute the shipment, compare it with the customer order, and alert the store personnel if there is any discrepancy.

Promotion

RFID can help consumer product manufacturers and retailers increase promotion effectiveness by way of increased promotional sales, decreased execution costs and enhanced shopper satisfaction. RFID-tagged displays and promotion product cases are used to track where the displays and promotion inventory are in the store, and when. Manufacturers and retailers can track when the items reach the store, when they are moved to the sales floor, and for how long they are there - all in almost real time. This information can then be integrated across many stores and analyzed with powerful analytic tools.
Absence of timely store-level information often makes it difficult to make the corrections necessary to quickly fill gaps in the execution of trade promotions, thereby leading to failure of such promotional programs. Retail shelves may go out of stock for a variety of reasons, including insufficient order placement and delays in moving products to the sales floor. RFID technology foresees, diagnoses and helps avoid out-of-stock situations, thus preventing lost sales for both retailers and their suppliers.
Both manufacturers and retailers invest heavily in developing and distributing promotional campaigns. RFID provides access to near real-time information and analytics to answer queries such as:

·         Have the displays arrived at the stores and when?

·         Whether product promotions were displayed on the store floor area on time.

·         For what time duration were the promotions displayed in the store?

·         Was there any impact on sales during the promotional period? If yes, how much?

By monitoring and measuring the results, firms can significantly improve promotional effectiveness. Following are major benefits of RFID in new product launch, in increasing brand loyalty and in providing better customer experience.

Faster New Product Launch

RFID enables faster product launches by providing real time end-to-end visibility in the retail network and actionable information at various key stages along the launch continuum. This helps firms achieve product availability, effectively coordinate marketing plans and manage repeat demand, even when the SKU (Stock Keeping Unit) off-take is different from the plans in different stores and channels.

Reduced Out-of-Stock Situation

Industry studies estimate that 30% of out-of-stock situations in retail occur at the store shelf itself, even though the product is available somewhere else within the store. This kind of a situation occurs because store personnel do not know where the additional stock is located. The problem can be readily addressed by RFID at both supplier and retailer locations by improving the ability to identify and locate products in a warehouse.
Lost sales in the retail industry due to stock-outs are estimated at $60 bn annually. In addition to lost revenue, the availability of products that meet the customer's needs and wants is an important determinant of customer satisfaction and loyalty. As explained below, RFID has the potential to address these supply chain inefficiencies and significantly reduce stock-outs.

·         RFID systems can reduce human error and better match outbound merchandise against the purchase order. For instance, if the wrong number of cases were loaded at the distribution center, RFID readers would scan the case tags, and enterprise systems would compare the pallet information against the purchase order and alert the personnel loading the cases.

·         RFID establishes real time links between the manufacturer, distribution center and retail store, enabling efficient inventory operations across the supply chain.

Superior Customer Experience

RFID can help to improve the overall customer experience by reducing instances of price inaccuracy, inefficient checkouts, product unavailability, etc. RFID can also provide timely and relevant product information to customers, including pricing, availability, customized promotions and product location. By using item level RFID, employees too can identify the exact location of any product at any time, enabling customer requests to be handled quickly and across channels. RFID also allows for self-checkouts that result in shorter wait times for customers. All these contribute to efficient shopping outcomes and processes, and a superior overall shopping experience for customers.

Limitations of RFID

While RFID is a very promising technology, there are also many obstacles in its development, implementation and acceptance. Like in the case of any new technology, RFID is faced with the problems of high cost and standardization issues, lack of prior experience and related user data. A typical RFID project requires significant initial capital outlay and comes with significant business and technological uncertainties. Technological uncertainties include: Higher cost of RFID tags and reader, RFID technology standards, supplier RFID compliance, steep learning curve and privacy issues. At present, in most situations, implementation of RFID would have to be justified based on future growth opportunities, rather than current cash flows. Other deployment barriers are: Extended implementation time, high cost and HR issues, such as non-availability of skilled manpower and training of employees.

Conclusion

To gain competitive advantage in today's scenario of intense competition and changing consumer preference, firms are investing heavily in technology to enhance capabilities of their business processes. RFID deployment in supply chain provides the ability to a firm to communicate in real time with its trading partners. In order to improve top and bottom line, firms must increase supply chain visibility by improving communication mechanisms and deploying RFID for real time tracking and monitoring of goods.
RFID technology is evolving as a major transformative technology enabler for streamlining supply chain management. Many firms are now either considering RFID enabled supply chain for competitive advantage, or are being forced to do so by major trading partners. RFID enabled supply chain positively influences all the elements of the marketing mix strategy, i.e., product, price, place and promotion.