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When Things Become Self-Aware: The 7 Forces of Change

In the 2007 sci-fi movie Transformers, a toaster sprung into life just by coming in contact with the allspark. Now imagine a world in which each individual thing—whether it be a bottle of pills, a pair of jeans, a truck in a parking lot, a hospital bed, a portable medical machine, a generator in a cell phone tower, a household appliance, a package of filet mignon, or an automobile component—could have a sense of identity. Get ready. They're coming.

When Things Become Self-Aware: The 7 Forces of Change

In the 2007 sci-fi movie Transformers, the allspark was a cube-shaped artifact adorned with glyphs and designs which breathed life, self-awareness, and personality to normal electronic and mechanical objects. A toaster sprung into life just by coming in contact with the allspark.

Now imagine a world in which each individual thing—whether it be a bottle of pills, a pair of jeans, a truck in a parking lot, a hospital bed, a portable medical machine, a generator in a cell phone tower, a household appliance, a package of filet mignon, or an automobile component—can report their location, quantities, temperature, status, price, last user, or any other attribute that is deemed important.

Lucky for us, retailers, pharmaceutical companies, telcos, and manufacturers will have to settle for something less spectacular, but equally as powerful, as the allspark. Modern asset management solutions provide remote and real-time management, visibility, and full-lifecycle tracking of things at the item-level. RTAL (Real-Time Asset Locator) and RTLS (Real-Time Location System) are asset management solutions which employ sensor subsystems such as RFID (Radio Frequency Identification), barcode, surveillance, and other condition sensors. I believe that in the next 4 years, we will see a marked increase in adoption of these technologies. Get ready for the next wave.

In fact, this wave is more a resurgence than emergence. A few years ago, RTAL and RFID technologies created a lot of buzz in retail, distribution, and supply chain circles. But the barriers (both technical and economic) to full-fledge adoption of RFID at the item-level were numerous. Most implementations were limited to pilots and pallet-level tracking which eventually failed to prove out strong business cases.

So what are the 7 forces of change that are driving the adoption of item-level asset management?

#1: The crappy economy

With a wobbling economy, large retailers who were particularly hurt in an already margin-squeezed industry will take a closer look at solutions that provide item-level visibility to drive benefits, not just in their distribution centers and supply chain, but also inside their stores. The financial impact is awfully enticing. For example, in an RFID pilot study I conducted at a gargantuan apparel retailer (not Walmart), test stores revealed benefits from a number of sources:

  • Labor savings: In control stores, stock counts continued to be a laborious and time-consuming activity which yielded inventory readings whose accuracy and timeliness remained questionable. However, in test stores, an employee could wave a wand-like reader over a rack of clothes and instantly see quantities and details of the items hanging there.
  • Increased conversion rates, basket size, and transaction size: With fewer items getting lost, either on the floor or in the back room, customers were more easily able to locate items in their desired color, size, or style. For example, at Walmart, it is estimated that "out-of-stocks" result in lost sales as high as 2% of total retail sales. A 10% reduction of that lost sales could drive over $30 million in annual profits. That's no small chunk of change.
  • Loss prevention: Real-time visibility about what was where, and at what quantities, acted as a deterrent as much as a reactive countermeasure to employee and customer theft. With average shrink of about 1.8% of sales, again taking Walmart as an example, a 10% reduction in shrink could drive an additional $25 million in annual profits.
  • Increased average selling price: With a real-time view into what was selling and what wasn't, store managers and merchandisers were able to quickly respond by ramping up on popular items at non-discounted prices (i.e., higher margins), and ramping down on the slower-moving items.

#2: Technology now within reach

In spite of some early hiccups in adoption, RTAL and RFID solutions have had time to mature and work out some kinks. Today, RTAL technologies aren't just better, they're becoming more affordable.

  • Better technology: People are already talking about "RFID 2.0", technologies that allow longer read ranges, ability to read through RF-unfriendly objects, and greater reader precision. Just a couple of years ago, during my pilot study, we had to train employees not to press piles of clothes too tightly towards their bodies as they carried them past the readers at the stock room exits. Why? Because the RF readers couldn't read through wet squishy objects like human bodies. Well, today, that shouldn't be a problem.
  • Economies of scale: The more tags that are produced, the cheaper the per unit cost. Today, a tag for retail usage could cost between 7 and 25 cents depending on the memory, packaging, frequency, and passive/active mode. If adoption rises as predicted, we could expect to see the average price drop to 5 cents in the next few years. For a business that may have tens of thousands of SKU's in its inventory, these cost savings could add up.
  • Mature partner ecosystems: RTAL solutions are rarely provided by just one single vendor. The most robust end-to-end solutions often come from an ecosystem of partners who each do what they do best in their respective component areas, whether it is RFID tags, reader hardware, mobile devices, RTAL software, middleware integration, databases, reporting tools, or consulting services. These vendors have had time to pre-integrate and pre-test the "value stack" such that deployment would be more off-the-shelf, repeatable, and cost-effective.

#3: Well-prepared early adopters

Leaders are getting stronger. Laggards are getting weaker. Even before the downturn, many industries were already experiencing a bifurcation between leaders and laggards. For example, in the retail industry, we saw highly differentiated value-oriented and specialty retailers become stronger while many slower-moving department stores languished.

The leaders who continued to seek ways to differentiate themselves and increase profits are now in a better position to reap the benefits of RTAL and item-level RFID. They are the kind of primed early adopters any technology diffusion needs to cross the chasm. Why? Because these leaders continued to invest in technology essentials which, as an unintended by-product, lay the groundwork for successful future RTAL deployments.

  • Better glue: Seeking to uncover every opportunity for cost reduction and sales growth, leaders went back to the basics. They invested in breaking down siloed applications and processes in order to achieve a single view of customer and product. You can't do much with your customer data if your customer's transactions exist independently of each other in your e-commerce site, point-of-sale, loyalty program, and campaign management systems. So leaders began investing in infrastructure, networks, middleware integration, data transformation tools, and data warehouses—the kind of glue that's necessary for processing massive amounts of sensor data originating from different points along the supply chain.
  • Better analytics: You need more than just databases and new data models to handle the sheer quantity of new item-level data. You need analytical tools to make sense of the flood of raw data, lest your end users become overwhelmed with data overload. In spite of the downturn, leaders continued to invest in their business intelligence capabilities. According to Gartner Research:

"Even though growth was nowhere near the levels of 2008, and by no means immune to the recession, BI showed that it is not as cyclical as many other software areas, recording healthy growth in one of the toughest years recorded in software history. Organizations largely continued their BI projects, hoping that resulting transparency and insight would enable cost-cuts and improved productivity and agility." (Gartner, Market Share: Business Intelligence, Analytics and Performance Management Software, Worldwide, 2009)

  • Better access: You need to make information available to end users both at headquarters and at remote locations. For example, in a rapid-response apparel retail environment, store sales and inventory levels should be available to merchandisers and planners so they can adjust style, color, and quantity as quickly as possible. Leaders continued to invest in portal infrastructure—exactly what's needed to share RTAL information.

#4: The 900 pound gorilla

Most industries have a 900 pound gorilla that can re-set the rules of the game. I'll name two.

  • For retail, it's Walmart: In the summer of this year, Walmart began tracking clothing items such as underwear and jeans at the item-level using RFID. This is a major signal to its suppliers that it fully intends on pressing ahead with its RFID efforts which began several years ago at the pallet-level. If the pilot is successful, Wal-Mart will roll out to all its stores. And it is likely that fast-followers will take similar steps.
  • For pharma, it's the government: In an effort to protect consumers from substandard or counterfeit drugs, the U.S. Food and Drug Administration introduced The 1987 Prescription Drug Marketing Act which contained the following requirement:

"A drug pedigree is a statement of origin that identifies each prior sale, purchase, or trade of a drug, including the date of those transactions and the names and addresses of all parties to them."

Today, the implications of this on drug companies, distributors, and pharmacists are significant. First, there are serialization requirements, meaning that each individual item, such as a bottle of pills, will require a unique serial number, i.e., item-level tracking. Second, in some stricter states, there are requirements for automated e-pedigree that would require track-and-trace technologies such as RFID. Third, California's e-pedigree law is expected to go into effect in 2015; thus, creating a sense of urgency to move fast.

#5: Infidelity and stolen milk crates

OK, this may seem like a stretch at first, but bear with me. Empowering technologies at the consumer level are setting expectations in the executive board room. Let me explain:

  • Cheating husbands: On an airplane, I was flipping through an in-flight shopping catalogue. The section dedicated to affordable, miniaturized, do-it-yourself spy equipment and surveillance devices was bigger than the sections for fashion and jewelry combined! One ad boasted that an amateur detective could catch her husband cheating simply by planting a tiny camera in the bedroom and monitoring it in real-time from her iPhone.
  • Mischievous neighbors: A recent NY Times article - "Neighborhood Mischief Caught on Tape"—reported how people are using surveillance devices to catch neighbors dumping garbage on others' property, unleashed pets destroying gardens, angry passerbys scratching expensive cars, and professional thieves stealing milk crates behind restaurants.

It's no wonder that my recent telco client immediately understood how RTAL solutions could solve its annual $30 million shrink problem. With 800 cell towers and remote sites spread throughout the country, $30 million worth of stuff was mysteriously disappearing. Air conditioners, lap tops, repair equipment, generators, diesel fuel for the generators, inventory sitting in service trucks, even copper cables—if all these things were monitored remotely and could automatically report their whereabouts and status, the RTAL solution would pay itself off in less than 3 years.

#6: Sustainability

With seemingly everyone jumping on the "green" bandwagon, don't be surprised if businesses look at item-level RTAL solutions as part of a bigger effort to reduce their carbon footprint. For example, efficient energy and fuel usage would arise from

  • Reduced "just-in-case" purchasing: Retailers may find that accurate inventory tracking could reduce truck deliveries as stores decrease "just-in-case" inventory purchases. For example, with 7,200 tractors moving products from 21,000 suppliers on board 53,000 trailers between 4,300 stores, the reduction in truck deliveries could be significant for Wal-Mart.
  • Increased first-time-fill rates: Real-time visibility into available products would lead to higher first-time fill rates of customer orders which would result in fewer return trips to the store. If Wal-Mart serves 176 million customers per week, that could translate to 70 million gallons of fuel saved per week.
  • Remote monitoring & control: My telco client had 800 sites each running air conditioners or fans to keep equipment from over-heating. Instead of setting a constant low temperature below an assumed heat tolerance, the telco could remotely monitor temperatures and dynamically re-set air conditioner settings. The resulting savings would be huge. Past green data center studies have shown that each increase in Fahrenheit yields 2% in savings of energy. Further, a reduction of 20% in fan speed, yields a reduction in the fan's electrical use of around 50%.

#7: Crouching tiger, hidden dragon

As manufacturer to the world, and possibly home to the world's largest population of consumers, we can't ignore the role that China will play in driving RTAL and RFID adoption.

  • The 900 pound gorilla, reprised: Almost every robust business case for RFID hinges on a key assumption: items are source-tagged as far upstream in the supply chain as possible, i.e., close to the manufacturing source. If Walmart's RFID pilot is successful, you can be sure that Chinese manufacturers will play nice. Why? Because 70% of products sold at Walmart are made in China. According to China Business Weekly, if Walmart were its own country, it alone would be China's eighth-largest trading partner, ahead of Russia and Canada.
  • Rising currency, rising labor costs: In June of 2010, in the southeastern Chinese city of Zhongshan, 1,700 workers at a Honda plant went on strike with the goal of doubling their wages. This was the third Honda plant to face such a protest in those two weeks. As China's cost advantages erode due to a stronger currency and a tighter labor market, manufacturers are compelled to find new ways to operate more efficiently. The urgency is palpable. An International Labor Organization survey indicated that wages in China's manufacturing sector have risen by 14.3 % per year since 1987.
  • Compelling need to revamp logistics: According to a KPMG study, spending on logistics in China grew 14% since 2004. It now accounts for about 18% of China's GDP, roughly twice that of most developed countries. This is symptomatic of huge operational and regulatory inefficiencies throughout China's transport, storage, and distribution networks. Again, the urgency to look to solutions such as RTAL is real.

  • Sustainability, reprised: China is now the world's biggest source of carbon emissions. The Chinese government recognizes that they can't continue to pollute their way to long-term growth. Just as Special Economic Zones (SEZ) have led to the creation of economically vibrant Chinese cities, we could expect Low Carbon Zones (LCZ) and other government-sponsored green initiatives to create heightened interest in solutions that increase process and energy efficiency.
  • From cheap goods to innovator: The repeated evolution cycle of low-cost producer to innovator also applies to the development and manufacture of RTAL-related technologies. The cycle is already playing out in the green tech space where the "China Price" has allowed China to get an early lead with technologies such as solar and wind. This in turn is triggering a "reverse brain drain" in which companies like Applied Materials are locating their top executives and research facilities in the mainland. We can expect China to become a hotbed of thought-leadership and proven case studies in asset management solutions.