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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.

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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

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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

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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

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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:

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  • 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

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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.

About the author

Jeff is a Certified Trained Lean Six Sigma Black Belt with a focus on finding new ways to apply technologies related to process improvement – situations which demand entrepreneurial thinking, a deep understanding of the financial impact of technology decisions, and collaboration with strategic partners. At IBM's Retail Emerging Business Opportunity Group, a corporate "startup", Jeff launched an SMB-focused business which later grew to account for 20% of EBO revenues worldwide.

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