Radio frequency identification (RFID) has the potential to revolutionise supply chains of retailers the world over. However, for a 20-year-old technology, it still has significant teething problems.

Given all the hype around RFID, you'd be forgiven for thinking that it was some new, blue-sky technology. But the system of electronic tags and radio readers, being heralded as the saviour of the supply chain by retail mammoths like Wal-Mart and Tesco, has actually been used for everything from animal husbandry to tracking missiles.

RFID roots can be traced to '60s technology called Electronic Article Surveillance or EAS. These systems used 1-bit tags, with a tag simply detected as either absent or present. By the '70s, interest in RF technology was accelerating around a diverse set of uses, from animal and vehicle tracking to factory automation. In 1991, one of the world's first open-highway electronic tolling system opened in Oklahoma, removing the need for cars to stop at gates or barriers.

In the mid-to-late '90s, the possibility of using RFID as a replacement for the barcode began to gain ground. RF has the advantage of enabling automatic scanning; crates or pallets equipped with an RF tag can be scanned by readers attached to a factory door. Barcodes have to be scanned by hand -- a process that is open to human error.

Better than barcode
"If you are trying to receive goods of all shaped and sizes, it is very difficult to scan the barcodes automatically; in fact it is almost impossible, so that makes it a manual process. Manual operations aren't perfect; you need a lot of discipline to make sure the code is found every time. With RF, all you have to do is make sure that every product that comes on goes through the portal with the readers on it," explains Andrew Osbourne, director of policy and research at RFID standards body e.centre.

RF tags will give retailers and suppliers greater visibility through the supply chains, says Wal-Mart's RFID strategy manager Simon Langford. "It's all about total supply-chain visibility. We have visibility today but it is quite fragmented."

Langford recounts an incident involving Tylenol in the US, when two contaminated batches resulted in the painkiller being recalled from every store in the country. The manufacturer had no way of knowing where a specific batch had been sent.

Big retailers such as Wal-Mart have been quick to seize on RFID's potential. Last year, the supermarket giant set a deadline of January 2005 for 100 of its biggest suppliers to adopt the technology. Initially this will only be at a case-and-pallet level but the retailer has long term goals of item-level tagging and further.

"Our focus is at case and pallet. The Holy Grail is the automated checkout but that is not going to happen for 10 -15 years. We need some significant breakthroughs in price and technology for that to happen," says Wal-Mart's Langford.

Negative press for Wal-Mart
The retail mammoth has attracted a lot of negative press for taking the initiative with RFID, with many suppliers concerned about the steep implementation costs and the relative immaturity of the technology in the supply chain. At the end of March, industry analyst Forrester Research issued a report warning that most RFID technology is still immature and it would cost the average Wal-Mart supplier up to US$9 million to comply with the mandate.

"There is no business case for most suppliers in the short term," said Forrester Research senior analyst Christine Spivey Overby. "The technology is not ready, and there is a lack of deep expertise in the industry to help suppliers implant RFID."

Despite this warning, Wal-Mart is sticking to its commitment, says Langford. He claims that since making the announcement in June 2003, another 36 suppliers have actually volunteered to become RFID compliant. "We are not backing off; we are accelerating. By the end of 2006, we will be live in all stores in the US with all suppliers."

Despite this ambitious target, Langford claims that Wal-Mart is taking a realistic approach to the technology and admits that some suppliers have already encountered problems adopting it.

"At no time did we expect all 100 suppliers to tag 100 percent of their products from day one," he says. "We have had two suppliers that have major internal challenges, so we are working with them on the other options," he says.

According to Langford, there isn't a fixed deadline for every category and suppliers will be judged by product type. "We know that water in glass bottles is very difficult compared to dry goods and there will be different deadlines applied."

Better, simpler, cheaper
Wal-Mart is not the only retailer to come up against the problem of how to get small supplies, with small IT budgets, to commit to RFID. Tesco, an up-market UK equivalent of Wal-Mart, has seized on the potential of RFID in the same way as its US counterpart and is expected to lay down a similar mandate to its supplier base in the coming months.

"The radio barcode (Tesco's term for RFID) may be smaller than the barcode but the way it will transform the industry will be just as great," says Tesco IT director Colin Cobain. As far as he is concerned, the technology has passed his three-point test: better, simpler and cheaper; and it's all systems go.

Tesco plans to have readers and tags in all the key points of its supply chain and has carried out four significant trials to date, including an item-level tagging project with Gillette.

But during a recent conference organised by UK RFID standards organisation e.centre, it became clear that Tesco could face some of the same supplier issues as Wal-Mart. During the question and answer session following a talk by Cobain, one supplier questioned Tesco's aggressive adoption plan.

"Many people are asleep on this issue and many suppliers of Tesco will be caught sleeping. I think many of your suppliers will let you down," said the supplier.

Tesco's Cobain responded by pointing out that Tesco wasn't trying to catch anyone out with its RFID strategy and that suppliers would have six months' notice to comply with any adoption mandate. "We think six months is enough providing you start looking now which is why I am attending events like this. We intend to run an event later this year to give our suppliers more info."

But while moving to any new technology can be daunting, adopting RFID doesn't have to be a massively expensive process, says Geoff Barraclough, from BT Auto-ID Services, the telco's RFID business group. The organisation, created in February this year, offers a hosted RFID service to avoid the massive integration costs of plumbing RF chips and readers into existing enterprise applications.

Although Barraclough advocates companies carrying out a substantial project around RFID rather than toying with small trials, he claims the initial outlay isn't that much. "RFID isn't as expensive to implement as you think. When we mention that the only way to go is to get your feet wet, then that's a 50K decision, it's not a 500k decision. At the end of the day most large companies don't need an away day to make that kind of commitment," he says.

Because the radio end of it is quite new and cannot be done by in-house IT departments, it sometimes seems more scary than it really is, adds Barraclough. "You need to get in touch with people like ourselves who have radio engineers and realise that radio engineers are not SAP consultants and are not hugely expensive people," he says.

BT claims its plan is to make RFID affordable to customers and avoid the need to build expensive bespoke systems. "We disagree with Forrester that it's 9 million to comply with Wal-Mart," says Barraclough.

Exact costs aside, suppliers should at least be researching the subject area and doing some kind of controlled pilot, says e.centre's Andrew Osbourne.

"I think that all companies that are supplying into the major retailers should be looking at RF right now. If they are not at least educating themselves then they are going to be falling behind the game. Whether they need to go to the expense of seriously implementing at the moment is another question," he says.

e.centre is a UK supply chain efficiency organisation that is part owned by EAN International, which is a not-for-profit body which promotes standards for identification technology. Adding another layer of complexity to this organisational hierarchy, EAN International has a joint venture with the Uniform Code Council (UCC) called EPCglobal which is promoting the EPC Network standard originally developed by MIT.

"Standards only work when there is a consensus among the users. So the standards process is really about providing a forum for building a consensus through the exchange of information and expertise," says Osbourne.

E.centre is therefore charged with developing global standards around RFID to avoid pockets of conflicting technology being created around the world. Due to the differing regulatory conditions in Europe, some technology differences already exist. Currently, in the US RFID transponders transmit at 915 MHz with 4 Watt readers, while in the UK the system works at 818 Mhz and 2 Watts.

"We have about 90 percent of the power of the US and the next generation of tags are still in development. Given this diversity across the world, what basis is this for a truly international company to adopt the technology?" asks Chris Tyas, group supply chain director, Nestle UK.

As the world's largest food manufacturer, Nestle, has little choice but to adopt RFID technology given the interest among retailers. Tyas is adamant that for the mass adoption required to drive down the technology costs, there needs to be tightly defined standards. "For us, it's about what percentage of retailers are using this technology. Most of our business goes through the smaller outfits who won't be rushing to do this so there is going to be a lot of wasted tags. It's important to get the whole industry involved," he says.

There are no guarantees that people are going to see sense but RFID is not going to succeed unless the supply chain operators rally around one standard, says e.centre's Osbourne. "It would make no sense at all for different retailers to use different standards and then expect their suppliers to attach different tags for each customer. It would just raise costs and be absolutely absurd."

The standards issue is inextricably linked to implementation costs; the more companies that adhere to standards, the greater the uptake of the technology, and the lower the equipment costs over time. But the lower equipment costs will also help drive uptake for smaller companies. "It's a chicken-and-egg situation. We won't get volume unless the prices drop. Everything we are doing is to drive down those costs and increase functionality," says Wal-Mart's Langford.

The real cost lies in ....
The biggest costs are not the tags and readers but the back-end integration issues with existing applications according to e.centre's Osbourne. "People talk a lot about having to get the cost of the chips down, which is true. If it is going to be used on a can of beans you don't want to be paying 20 cents a tag. In the bigger picture it is the integration issues which are expensive," he says.

And when costing out an RFID project, it's important to remember that most companies have already invested heavily in barcode technology, so the RF implementation needs to be calculated in terms of a technology migration rather than a completely new project. "Barcode and RF both carry data so in that respect they are identical. What that means, of course, is that if you are going to persuade companies to move from them then you need an incremental benefit to make it worthwhile. That is a point that is missed in the hype. People look at the benefits as if you are starting from a blank sheet of paper and that is not the way to cost it out," says Osbourne.

Avoid slap and ship
Standards, costs and immature technology aside, RFID is not going away. Companies have to have an educated view on it, even if it's a negative one. The advice for suppliers from the likes of Tesco and Wal-Mart is to avoid a "slap and ship" approach that contains no overall strategy beyond attaching the chips and pushing the product out the door.

"Make sure you are led by the changes you want to make and not the technology. Some manufacturers seem to be going down the route of slap and ship. If you start slapping and shipping you will get the technology a bad name in your organisation," says Tesco's Cobain.

Wal-Mart's Langford has a similar message for suppliers and other businesses. "Start engaging with RFID today; don't wait for the call. Work out your own roadmap and how it will fit with your business. Start helping the book to be written; don't just wait for it to be delivered."

ZDNet UK's Andrew Donoghue reported from London. For more coverage on ZDNet UK Insight, click here.

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