The Surprise Driver Behind Today's RFID Projects

VARs capitalize on end users' discovery that RFID is a powerful process-improvement tool

By Shelley Solheim, VARBusiness
From the February 05, 2007 VARBusiness

Three years ago, amid the gold-rush mentality spawned by RFID mandates from the U.S. Department of Defense (DoD) and retail behemoths Wal-Mart and Target, Miles Technologies--like many of its peers and competitors--took action.

After receiving training and certification from RFID vendors, including Alien Technologies, Intermec Technologies and Zebra Technologies, Chicago-based Miles had, by late 2004, scored deals to implement RFID systems for six of Wal-Mart's top 100 suppliers. The systems integrator also invested $500,000 to develop its own RFID software to complement hardware it was selling and to create an education center to train companies on RFID implementations. About 15 miles from Chicago's O'Hare International Airport, Miles bought warehouse space nestled in an active factory, where the company could demonstrate RFID pallet-and-case tagging systems in an environment with realistic interference challenges. The facility, dubbed the RFID Benchmark Lab, includes a 70-by-40-foot training and testing area with 28-foot ceilings, as well as several meeting rooms for delivering seminars on RFID technology to potential clients. With the financial support of several RFID vendors, Miles outfitted the center with a state-of-the-art conveyer system and various IT components required in a real-world RFID setting.

Now, three years later, Miles is among those RFID technology providers still standing, albeit watching the RFID market underdeliver on expectations that arose from the DoD and retail mandates. Many of Wal-Mart's suppliers, for example, are still not in compliance, and many of the consumer-goods companies that have complied have not achieved payback on their RFID implementations--a blow that consumer packaged goods (CPG) companies with thin margins in a highly competitive market can ill afford.

The RFID-related part of Miles' business did grow from $250,000 in 2005 to $1 million in 2006. But the bulk of those sales weren't generated from customers implementing RFID systems to comply with retail or DoD mandates. In fact, Miles estimates that some 70 percent of its projects now are for closed-loop internal systems, instead of open-loop systems, which involve external partners in the supply chain. This is a complete turnaround for Miles, which just two years ago generated up to 95 percent of its business from mandate-driven RFID activity.

"We did extremely well with RFID, but much to our surprise, not in compliance but in process improvement," says Miles president Tom Beusch, from the company's RFID Benchmark Lab in Vernon Hills, Ill. "We did very well with our custom software and doing process improvement and the services that go along with that."

Although many in the RFID market weren't as fortunate as Beusch's company, the shift in customer priority that the VAR witnessed is a trend sweeping the industry.

A recent survey of 275 manufacturers of varying size and across multiple vertical industries found that 41 percent of their RFID implementations were driven by process improvements, compared to 34 percent fueled by mandates and 25 percent driven by both, according to ChainLink Research.

"There was a big shift in 2006 that we saw around midyear that we expect to carry forward in 2007," agrees Joe White, vice president of Motorola's Symbol RFID division.

"While we may not be accelerating the tagging process around mandates as fast as everyone had predicted, it created awareness in companies where they looked through their organization and thought, 'If we're doing RFID for mandates, where else can we benefit?'" White says. "They'd identify opportunities outside of the supply-chain or mandate-driven efforts."

Symbol, for one, in the past year has also focused on more profitable areas outside of retail compliance, such as implementing RFID systems in the airline industry for baggage handling.

"Hong Kong International Airport thought the biggest benefit would be for tracking lost bags, but they got an increase in the number of bags they can handle with their existing infrastructure," White says. "And they don't have to build or expand as much as they would have to with bar-coding."

That's not to say RFID is completely replacing bar-coding technology. In fact, Miles is in the process of setting up a track at the RFID Benchmark Lab that will mix RFID and barcoding technology to help illustrate which works best for specific customer applications.

"There's a lack of understanding of what RFID can do and what it can't," says Miles' Beusch. "Our seminars and lab environment have helped people understand what it can do [and] how it can benefit them."

Among the closed-loop projects Miles assisted last year, about 70 percent involved asset management. Other process-improvement areas included inventory-locator applications, for example, to locate tools in a warehouse, and work-in-process applications.

Symbol, too, saw increasing interest in asset management in 2006 and expects that to continue this year, White says. About 30 percent of Symbol's new beta trials last year were for managing assets as diverse as vehicles, IT equipment and cargo containers.

"For asset management, there are a lot of innovative uses of technology for returnable and reusable applications, both in closed-loop and open-loop applications, for things like bins, totes and containers," says Michael Liard, research director for RFID and contactless technologies at ABI Research.

Tom Beusch, president of Miles Technologies, has adapted to succeed in RFID.

Xterprise, one of the more well-known providers of RFID-enabled supply-chain solutions, has capitalized on that trend. The solution provider also saw its sales shift from predominately compliance-driven activity to mostly process-improvement applications. The ability to easily adapt to that change helped the solution provider grow 100 percent from 2005 to 2006, says Dean Frew, CEO of Xterprise in Carrollton, Texas.

"We continue to see that happening this year--doubling [our revenue] again," Frew says. "The most exciting part of our business is in the area of asset management, which is a broad area, but specifically in the reusable transport market."

For example, Xterprise recently inked a deal with start-up Intelligent Global Pooling Systems (iGPS) to tag plastic pallet pools for use by large retailers that lease pallets from a pool instead of buying them. iGPS claims its plastic pallets are lighter and more resilient than the wood pallets commonly used by large retailers. As iGPS' solution provider, Xterprise will integrate RFID into the plastic pallets to create a source-tagging and information-management system that tracks those through the supply-chain system.

"We provided everything from business-process consulting and software to consumables," Frew says.

Xterprise is now developing product and solution bundles that it can replicate across multiple clients in the same market, according to Frew. Such canned or turnkey applications will help fuel growth throughout the channel in the RFID market in 2007, Symbol's White predicts.

"In moving forward, the decision of the channel players will be in whether they can develop a canned, repeatable, standard solution," Liard says. "Each implementation of RFID is inherently unique and has its own challenges. Thinking about how to develop canned solutions and make sure they're repeatable and flexible enough to adapt to any customer's requirements is critical. They have to make sure they're not pigeonholing themselves into one application area and just focusing on retail CPG compliance, because that market isn't moving as fast as expected."

Another RFID systems integrator and services provider that was able to adapt its business model to the changing RFID market is Odin Technologies. The company turned heads when it beat out IBM and others for the DoD's $14.6 million Defense Logistics Agency (DLA) contract awarded last year.

Odin, which resells hardware and provides services to optimize the performance of RFID systems, is applying its expertise not only to consumer-goods companies but also to aerospace and defense--two other areas of potential growth. So far, the integrator has completed 100 RFID projects.

Odin's president and CEO Patrick Sweeney, also the author of "RFID For Dummies" and the new "CompTIA RFID+ Study Guide," says that industry mergers and meltdowns in 2006 have created a more VAR-friendly market.

In fact, in 2006 RFID acquisitions and fundraising increased at least five times from 2005, according to RFID market-research firm IDTechEx. Among the notable deals last year was Lockheed Martin's acquisition of Savi Technology, an RFID system supplier that last year won a $425 million deal with the U.S. military--the largest order in the history of RFID, says Peter Harrop, chairman of IDTechEx.

Motorola re-entered the RFID business by acquiring Symbol. And most recently, Zebra, which makes RFID and bar-code printers, said it would shell out $126 million in cash for WhereNet, a provider of RFID systems for asset tracking. WhereNet provides integrated Real Time Locating Systems to companies in the areas of manufacturing, transportation, aerospace and defense.

But the biggest spending spree of late was that of Sweden 's quiet giant Assa Abloy, which acquired 10 RFID companies, making it the world's largest RFID vendor, according to IDTechEx, which estimates the company takes in about $300 million a year.

Another recent surprise in the RFID market is the growing interest in item-level tagging, which most industry pundits predicted would only come after tagging of pallets and cases reached more widespread adoption. Item-level tracking via RFID is starting to grow in use for high-value, fast-moving goods like consumer electronics, and in the pharmaceuticals market to track drugs as they move through the supply chain. One U.S.-based company to watch in that space is Lake Forest, Calif.-based Vue Technology, which has established itself as a provider of item-level tagging solutions.

"In higher-value products like retail apparel, you can get a huge benefit by not only managing assets on the floor by size and brand but also minimizing inventory," Symbol's White says. "One of the things 2006 taught us was to look for opportunities focused on growing top-line revenue through RFID."

Another area that's starting to attract attention is cold-chain tracking, where RFID is used to track perishable goods.

"You think about the amount of revenue a grocery store makes off perishable goods," Symbol's White says. "It helps you get loyal customers. So there's a great deal of motivation for a grocer to ensure that perishable goods are the best."

Going Bananas For RFID?

In cold-chain tracking, Deloitte Consulting and the University of Arkansas RFID Research Center last year conducted a study along with produce supplier Chiquita Brands International. The research team placed RFID tags with temperature sensors on pallets of produce. They found the temperature within a shipping container could vary by 35 percent from pallet to pallet.

"Loss and damage of perishable goods during storage and transportation is a substantial global issue, with some industry sources estimating that losses of up to 33 percent on perishable freight are common," said Doug Standley of Deloitte Consulting, in a statement.

Another RFID mega-trend is the movement toward contactless cards from the likes of Visa, MasterCard and American Express. And the world's largest RFID project to date is China 's National ID card project, a $6 billion initiative that involves issuing cards to some 900 million people prior to the 2008 Olympic games, according to IDTechEx's Harrop.