From Bentonville, Ark. to Washing-ton, D.C., organizations such as Wal-Mart and the Department of Defense are gearing up to make radio frequency identification (RFID) an integral part of their distribution operations in the next few months.

Those mandates, along with others, have made RFID a red-hot supply chain technology. They have also led to some projections of exponential growth and huge user benefits. However, there are others who would prefer to slow down and take a deep breath.

That is the most important finding of a survey of Modern Materials Handling readers conducted by The Aberdeen Group (617-723-7890). (Click here to view the report on Aberdeen's site )

'Only 6% of the respondents have done an RFID project to date,' says Thomas K. Ryan, Aberdeen's vice president for value chain research who conducted the survey. 'And only 48% plan to implement a project in 2004.'

'RFID is for real,' Ryan adds. 'But I think the forecasts for near-term growth are overly optimistic and wrong.'

Some analysts have predicted the market for RFID supply chain technology will triple from an estimated $1 billion to more than $3 billion by 2008. However, Ryan says those estimates are ignoring important obstacles, such as the high cost of tags coupled with benefits that are still hypothetical at best.

In fact, Ryan found, most potential users are being pushed into the adoption of RFID to comply with mandates from Wal-Mart and the Department of Defense.

'The companies implementing RFID projects right now are not traditional technology adopters,' Ryan says. 'They're extremely reluctant to do this; they are concerned about how much it's going to cost them; and they're leery of the benefits. They know these are untested solutions.'

The bottom line is that few of the firms that responded to the survey are planning to use RFID in their own operations beyond compliance with the mandates, according to Ryan.

'I think you'll see a market that grows because of the compliance push, and then it's going to bottom out,' Ryan says. 'The question is: how deep is the bottom and how long is that trough of disillusionment going to last?'

Those are sobering but important conclusions. They go to the heart of why Modern conducted this survey with the Aberdeen Group. 'Given all of the news coverage for RFID, we wanted to understand what's happening in the space from the users' point of view,' Ryan explains.

The survey was e-mailed to a cross-section readers of Modern and sister magazine Logistics Management as well as to a polling list developed by Aberdeen. Over 300 responded, representing a broad range of industries and responsibilities.

Thirty-three percent of respondents are senior level executives, including vice presidents and CEOs. Another 30% are warehouse operations managers.

In terms of responsibility, 41% are directly involved in operations, 25% in the broader logistics space and 16% identify themselves as holding supply chain and procurement positions.

'These are people very much involved in this space and directly impacted by the RFID mandates,' Ryan says.

Twenty-five percent work for Tier 1 companies with revenues over $1 billion, while mid-market companies with revenues above $250 million make up another 13%. Fifty-six percent come from companies with less than $250 million in revenue. Twenty-seven percent are involved in distribution and consumer packaged goods, the two largest verticals represented.

The majority of respondents work for companies doing business on a global basis: only 37% limited distribution of their products to North America.

Finally, there was a split between companies distributing high volumes of low-cost goods (48%) such as dry groceries, and those selling low volumes of high-cost goods (38%) such as electronics or over-the-counter drugs.

The last differentiator is important, says Ryan, because it highlights two distinct and different markets emerging for RFID technology with two very different priorities.

For low-volume/high-cost goods shippers, even the shipping container may have an intrinsic worth that justifies using RFID technology for tracking inventory.

Think of closed-loop wooden pallets or returnable plastic totes, containers, and pallets used in the automotive or electronics industries. End users there are interested in RFID tags that can be used over and over again with new data added each time. Although the tags are expensive, they are very affordable as an adjunct to this supply chain. Here, the costs and benefits are relatively easy to calculate.

The market for high volumes of low-cost goods, like consumer packaged goods shipped to Wal-Mart, is another animal. Those users are looking at tags designed for one trip.

This group knows that RFID is coming their way: Sixty-nine percent view RFID as a higher priority than other technologies they are currently looking at. At the same time, they are the most skeptical and the most confused, says Ryan. In part this is because the benefits of RFID are tenuous at best.

'We found that there is no rush to adopt RFID and there is a great deal of uncertainty about how to proceed,' says Ryan. 'This group's greatest concern isn't the mandates but the cost of executing an RFID project.'

Only 6% of the respondents have done an RFID project. Of the remaining 94%, only 46% plan on doing anything with RFID.

Less than half of those have plans for a project in 2004; the remainder were targeting 2005 or later. And nearly half of the projects (44%) will be limited to pilot projects.

Respondents also say they don't know who can help them on RFID project implementation. 'Thirty percent of the companies that responded had no idea who they would work with, and another 10 to 12% said they were going to develop a solution on their own,' Ryan says.

The survey results, he adds, suggest a market phenomenon that is unique to RFID. Usually, technologists create and prove a solution, then try to develop a market for the product. Bar codes, for instance, have been around for decades and still haven't penetrated all possible applications.

When it comes to RFID, on the other hand, the short-term demand created by the mandates from Wal-Mart and the Department of Defense outstrips the ability of the market to provide those solutions.

'The demand is ahead of the technology,' says Ryan. 'That is absolutely the case.'

Looking beyond the survey, Ryan had more to say. He believes that sudden demand for RFID technology may exacerbate another barrier to the adoption of the technology—the high cost of implementing a system and buying RFID tags.

'We're going to need about 3 billion tags and at least 1,000 system implementations by 2005 to comply with the Wal-Mart and Department of Defense mandates,' says Ryan. 'And those only impact about 300 companies.'

Then 2006 will see an additional 20,000 to 30,000 companies implementing systems to comply with mandates. That will require an additional 30 billion tags and 50,000 to 100,000 system implementations.

Ryan expects a tag shortage that will keep prices high. 'The capacity to produce RFID chips may be there, but the capacity to assemble those chips into a 'smart tag' is going to lag demand by two or three years, especially if other retailers join Wal-Mart,' he says. 'There are similar concerns about the capacity for readers and programmers.'

That means that the cost of implementing an RFID system may actually go up until supply and demand come into balance.

Despite a muddled picture, Ryan does believe that RFID is the supply chain technology of the future. 'Over the last five years, we've been trying to come up with ways to convey more supply chain information,' says Ryan. 'Two-dimensional bar codes have never really caught on. RFID truly does give us a way to do that in a way that dramatically eases the integration between trading partners.'

That means there is an opportunity for systems integrators who can pull together the pieces of a solution that is easily deployed and delivers benefits to users in their own facilities. 'Between mandate compliance and the third-party logistics industry, there is a ready market waiting for someone to show them how it's done,' Ryan says. 'But the business value message isn't out there yet. It's up to the industry to train and educate.'

Click on the icon to see how Jacksonville Airport tracks bags with RFID. - Ready to fly? - March 2003