Despite technological advances in supply chain management, it's estimated that as much as $45 billion worth of inventory is lost in retail supply chains at any given moment, and the Food and Drug Administration claims that up to 20% of foods spoil in transit each year. These statistics exclude the impact of counterfeit products, which cost companies more than $100 billion a year. All of this means that while supply chain management is relatively invisible to most of us, it's obviously a high visibility issue for retailers striving to remain competitive.
Enter RFID. Radio Frequency Identification, or RFID, offers a solution to many of the retail industry's supply chain problems. Already, companies such as Wal-Mart (NYSE: WMT), Target (NYSE: TGT), and Home Depot (NYSE: HD) are tapping into the RFID promise to optimize their supply processes.
A study done by Hewlett-Packard (NYSE: HPQ) last year described a vision for the RFID-enabled supply chain, starting with a unique RFID tag applied to each production unit during manufacturing. This tagging will give everyone in the supply chain instant visibility, without the current process of bar code scanning and manual verification. This will enable retailers to track products in real time through the distribution channel, receive them into inventory, and automatically send electronic payments to the manufacturer -- all without being touched by a human. Eliminating costly human intervention will save these companies billions in inventory and reduce errors, savings that can then be passed on to consumers through lower prices or shareholders in the form of higher margins. I expect some combination of both.
Of course, this wonderful vision is more theory than practice at the moment. Large investments in database technology and information systems, as well as new production techniques to lower RFID implementation costs, will be necessary. Supplying RFID solutions is quickly becoming a crowded marketplace, driven by mandates from Wal-Mart, the Department of Defense, and others. Big companies such as HP and IBM (NYSE: IBM) are committed to spending hundreds of millions on RFID over the next few years, and the number of smaller companies in the market seems to grow every day.
Mixed first-quarter results from some highly visible RFID suppliers underscores how difficult it is to predict success, or failure, at this early stage. Zebra Technologies (Nasdaq: ZBRA), which specializes in RFID tags, posted lower profits on higher sales, while Unova's (NYSE: UNA) Intermec subsidiary showed a 31% growth in operating profit on increased revenues. While it's too early to separate winners and losers amongst the RFID companies, I can tell you this -- regardless of who comes out on top supplying RFID technology, the retail industry is a winner.
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Fool contributor
Chris Mallon
owns shares of Home Depot but none of the other companies mentioned.
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