The new year signaled a turning point in the deployment of supply chain management's "next big thing"—radio frequency identification, or RFID.

RFID isn't really new. For several years, military and security applications have deployed fairly sophisticated implementations of active RFID, which uses battery-powered radio-equipped tags to transmit pertinent information. However, the next wave of RFID, known as passive RFID, features cheaper nonenergized tags and is just poking into the marketplace.

As of 1 January, the US Defense Department mandated (http://www.acq.osd.mil/log/rfid/index.htm) suppliers of certain items—including varieties of field rations and clothing, plus weapons repair matériel—to equip their products with passive RFID tags. Also in January, Wal-Mart, the largest US retailer, began its mandated migration to passive RFID, contracting with its biggest 100 suppliers to attach RFID tags to shipments at the case and pallet level.

Concurrent with these new contractual mandates came announcements indicating a rapidly maturing RFID channel infrastructure. EPCglobal, an RFID industry standards organization, announced its next-generation standard (http://www.epcglobalinc.org/news/pr_detail_epcinc.cfm?release_id=183) on 16 December. That standard is expected to streamline deployment of RFID tags and readers, which have hitherto been manufactured under several class guidelines, not all of which were interoperable.

The same day, IBM announced it was developing standards-based WebSphere middleware to integrate raw RFID data with servers and databases throughout enterprise networks, enabling customers to deploy end-to-end RFID integration.

Paradoxically, all this activity seemed to underscore observations that RFID is still an immature technology—one that has failed to live up to early rationales for deploying it. However, industry executives and analysts agree that RFID's disruptive potential in the marketplace makes waiting for more mature technology, standards, and operating guidelines, such as privacy protection, an unrealistic option.

"It's a chicken-egg thing," says Kara Romanow, research director at AMR Research. "Wal-Mart is pushing the envelope and you have to give them credit for pushing the envelope."

Romanow says the Wal-Mart mandate has driven the entire industry, including analyst and consulting firms such as AMR, RFID vendors, journalists, and policy groups, to keep RFID a high-priority issue, thus enabling quicker development of an overall RFID architecture.

"However, that doesn't mean they should've done this national rollout with all of their suppliers before it really worked," Romanow says.

Romanow says Wal-Mart's suppliers have spent US$1 million to $3 million apiece to meet the mandate. Those expenses include tags, readers, and minimal software. However, to fully realize the promise of RFID, she estimates suppliers would have had to spend between $13 million and $23 million.

Yet another RFID analyst, Gartner Group's Jeff Woods, says the technology isn't the only part of the RFID landscape that needs maturing and that spending alone cannot rationalize an RFID investment.

"Spending aside, most suppliers cannot figure out how RFID will make business sense for them," Woods says. "For the last year and a half, people have been looking for some operational justification for the use of RFID inside their warehouse, and there just isn't one there. You can run a warehouse better with bar codes than with RFID. It's not a question of cost or maturity, just a question of suitability of the technology for the process. One of the big problems here is, the consultants and the Auto-ID Center and EPCglobal sent all these users off on a wild goose chase to find this business case because some of the early adopters said 'We have a business case,' when they probably really didn't. So, as a result, a lot of people felt burned by RFID."

Wal-Mart spokesman Gus Whitcomb said the company's CIO, Linda Dillman, and other executives familiar with the RFID rollout, were too busy monitoring the program's development to comment.

Rainer Kerth, senior architect for IBM's RFID division, says the true payback on RFID will come when the technology is integrated with an enterprise's business process architecture. In fact, he says, RFID could be considered one of the essential building blocks for a smoothly integrated service-oriented architecture (SOA).

"The business process is, in fact, the one component in the overall RFID infrastructure where you can actually generate return on investment—significant value beyond the fact you just captured RFID data," Kerth says. "Yes, you can do that, but the fact of having it in your database doesn't represent anything particularly valuable. The trick is to take that data, analyze it, turn it into key performance indicators, drive the business process off that data you captured, and use the business process to integrate it into your back-end system."

Kerth sees a lot of work before software can achieve SOA goals.

"The problem is, the back-end systems haven't been written to anticipate this kind of fine-grained data you now get from RFID," he says. "Back-end systems would understand the notion a shipment has arrived, but couldn't typically resolve a statement such as, 'I have received case number 20 from this pallet.' That's just not a level of granularity back-end systems have been designed to support. Integration has to be done to translate from the new RFID infrastructure's granularity into granularity back-end systems can manage and that is potentially quite a challenge, depending on how much of a mismatch there is."

Woods and Romanow are split as to whether developing software that can integrate the many possible systems in a given architecture will become the purview of major players such as IBM and Sun. Romanow believes many of the small, pioneering RFID-centric firms will disappear as the major companies roll out end-to-end architectures incorporating RFID. Woods, however, believes the market is still in flux enough that innovative RFID specialists such as Oat Systems will be able to maintain strong footholds in the market.

Perhaps because Wal-Mart is conducting the earliest trials and, further, Gillette and Procter & Gamble were two of the earliest proponents, much of the early public perception of RFID deployment has centered on disposable consumer goods such as razors and shampoo. Romanow says these low-cost items simply don't have sufficient payback to rationalize attaching RFID tags to them at the item level—at least not until the current price of chips, hovering in the 40- to 50-cent range, comes way down.

"If you're a supplier of low-value products—less than $10, say—there is no ROI," she says. "If you're Buena Vista Home Video and you're stamping out DVDs, we can talk about going to the item level pretty quickly. If you're a pharmaceutical manufacturer, there is absolutely ROI, because you've got a big counterfeiting issue there. If you're Nike and you've got Tiger Woods golf clubs ending up in Costco, you've got a big diversion issue. A low-value product that doesn't make sense of the cost margin, though—there's no value to RFID at the item level."

Animal identification is one pioneering RFID sector that has gone almost completely unnoticed in the public discussion of consumer goods, RFID chip costs, and privacy concerns. As governments worldwide seek ways to quickly track the origins of contaminated beef or sick cattle, RFID has demonstrated a valuable role in eliminating guesswork during a public health crisis.

"Most people like to believe milk tends to arrive in cartons, and very few people wish to associate the cooler shelf in a deli with an animal walking around in a field," says Brian Bolton, CEO of Allflex USA, a global leader in supplying the livestock industry with RFID chips.

Bolton says the disconnect between the farmyard and the store shelf, plus the overriding public perception that the food supply is safe, are probably the primary reasons why Wal-Mart's program has received far more exposure than the US Department of Agriculture's voluntary RFID program for livestock. Despite little publicity, however, Bolton says the issue is just as hot within agricultural circles as the Wal-Mart pilot is in retailing.

"Inside this industry, it is the issue of the moment," he says.

For example, while the USDA RFID pilots are thus far voluntary, Canada has instituted a mandatory RFID program.

Bolton says the Canadian government has opted for mandatory RFID capability because so much more cattle industry revenue in Canada is export-based, around 80 percent compared to 10 percent in the US . An importing nation could very well use uncertainty about a beef shipment's healthfulness to impose nontariff trade barriers.

Thus, while individual cattle dealers might balk at initiating an RFID program for their herds, Bolton says the safety demands of the global market will eventually lead to two scenarios mandating industrywide deployment. In the first, early adopters will gain competitive advantage and premium prices by being able to demonstrate beyond doubt their animals are disease-free. As the adoption rate increases, the second scenario, in which laggards are punished by deep discounting, will kick in.

The livestock sector also demonstrates significant areas of differentiation will remain in the market, with niches such as agriculture remaining profitable for established suppliers. For instance, RFID suppliers cannot depend on economies of scale by supplying the livestock market with chips bearing the new EPCGlobal specifications. Bolton says the UHF frequencies suitable for retail environments won't work in the much tougher environments surrounding feedlots and slaughterhouses. Hence, those companies that have established themselves as leaders in the low-frequency RFID market should enjoy a competitive advantage, and the relatively more expensive chip shouldn't prove too high a barrier to deployment.

"It's silly to argue about a three-dollar chip instead of a two-dollar chip," Bolton says. "The cost of the system to an individual producer is an issue; but if we wait for the technology, the cost to the industry will far exceed the simple savings you could make on a unit basis. A premium animal can be fetching six to eight dollars per hundredweight quite easily. So you're talking $50 to $60 for an investment of three."

In the wider retail market, suppliers are expected to be able to leverage existing RFID architectures to new customers. The Defense Department, for example, has told suppliers to use the EPCglobal specifications in their RFID tags.

Alan Estevez, assistant deputy undersecretary for supply chain management, says the Defense Department's suppliers such as General Electric, which sells aircraft engines to the government, should be able to use its buying power across divisions.

"Of course, GE is also a major vendor of Wal-Mart on the retail side, so a company like that can leverage its spending," he says. "GE Aircraft may not talk at every meeting with GE Consumer Products, but the capability is there for them to do that."

While the next-generation EPCglobal standard will consolidate the current landscape of RFID chips from two classes to one, and thus should lead to greater economies of scale for suppliers and lower costs for customers, the group has yet to gain the International Standards Organization's approval for the new technology. Sue Hutchinson, director of product management at EPCglobal, says the industry group has formally submitted the new standard to ISO but had no timetable for adoption.

Gartner's Woods says several issues remain unresolved between EPCglobal and ISO that could delay coordination of the standard, notably differences in defining the Application Family Identifier protocols that describe how different RFID systems coexist across frequencies, geographies, and industries. Hutchinson says the two bodies' AFI specifications differ, "but we think we've come to an equitable resolution for both parties that will be included as part of our submission."

Additionally, Woods says intellectual property issues could compel vendors to pay royalties—both an advance fee plus a percentage over the life of affected patents—to RFID vendor Intermec Technologies for certain aspects of RFID design. That could slow wider deployment if other manufacturers balk at Intermec's terms.

Some consumer groups have waged stiff resistance to item-level RFID deployment, claiming merchants will be able to track consumers, both in a store when they select an item and after they have made a purchase and taken the item home.

AMR's Romanow says such fears are premature and the issue should be given more time to work itself out as industry groups, government agencies, and consumer groups discuss likely scenarios.

"What privacy advocates don't understand is that we're not talking about tagging at the item level," she says. "We're talking about tagging at the case and pallet level. In the rare cases where we are talking about tagging at the item level—printers, for example—there's a huge mark on the outside of the box. The consumer takes the box away, throws it out, and we're done.

"When we talk about tagging apparel and footwear and consumer electronics at the item level, there needs to be a lot of communication between the retailer and the consumer, and it's going to be a decision. The consumer will have to balance benefits of keeping it versus throwing it away. But we're not there yet."

Ari Schwartz, associate director of the Center for Democracy and Technology, a Washington, D.C.-based technology policy think tank, agrees it's early in the discussion. Schwartz says there's much confusion over what constitutes RFID technology, from inventory tags to smart cards, and that a comprehensive privacy rights law might be a more efficient way to ensure privacy rights.

"If you start trying to regulate by every technology, you'll be doing this every six months," he says.

Romanow also says fears of Big Retail Brother are probably badly overestimated.

"Retailers don't have a clue what to do with that data. At this point, they get a very low return on loyalty card data they've had for some time. If they looked at that, they'd know everything about me they'd need to know. Retailers in a lot of cases are not technology visionaries."

Perhaps wise RFID deployment will change that, perhaps not. But the market is chock full of companies that are technology visionaries, and the horizon is getting just a bit more focused.