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Posted Date: 8/13/2009

Is RFID a Victim of Identity Theft?

By Marshall Kay
As a consultant who has devoted many years to helping retailers understand the value of item-level RFID, it has been gratifying to see that RFID tags are now being used in the United States on garments that retail for well under $10. But I have been troubled lately by retailers' increasing confusion about the interplay between this multi-purpose retail technology and the shrink management solutions they currently use. The reduction of shrink is just a minor element of the broader RFID value proposition. Letting shrink management considerations dictate the pace of a retailer's RFID adoption is like having the tail wag the dog.

The purpose of this article is to:
* Help retailers view RFID and EAS tagging solutions in proper context
* Ensure that retailers treat RFID primarily as a revenue opportunity, championed by their Store Operations organization, and not merely a shrink management opportunity
* Outline how RFID can support retailers' shrink management goals
* Address retailers' growing interest in phasing out EAS investments and using those dollars to fund RFID solutions
RFID delivers meaningful improvement in top-line growth, customer service and store labor productivity. Retailers can quickly begin putting it to work in their stores, regardless of their present or future use of EAS tagging.

RFID for beginners
The acronym RFID stands for Radio Frequency Identification. It constitutes a major advancement over the barcode. Each garment gets its own serially encoded microchip. The chip sits inside a tag that can take one of several forms - usually a paper ticket, but occasionally an adhesive label or a plastic casing. Hundreds of garments per minute can be read, from distances as far away as 20 feet, via radio waves. The tags communicate their unique identities back to handheld or stationary readers. Employees can take cycle counts 90 percent more quickly. "Smart" shelves that literally take their own inventory are becoming more affordable too. Stationary readers are sometimes placed at doorways or at the checkout counter. Regardless of what type of reader is used, the readers pass the data along to an information system.

Because each garment has a serialized tag, apparel retailers using RFID now have much better visibility into the merchandise they receive and its location within the store, allowing them to keep their sales floors properly stocked and use store labor more effectively. RFID enables innovative customer-facing applications such as "smart" fitting rooms and "magic" mirrors, and it can even expedite the checkout process. It is also an effective deterrent to employee theft. Sales lift of 10 percent to 20 percent is frequently achieved.

RFID is sometimes characterized as a supply chain technology. Wal-Mart and others have drawn attention to applications involving the tagging and tracking of pallets and cartons. Tagging individual garments takes the proposition to another level, opening the door to specific improvements in upstream accuracy, efficiency and visibility not obtainable with mere carton tracking.

Sources of confusion
Beginners can be forgiven for assuming a connection between today's dominant anti-theft technology (called EAS) and RFID. After all, each involves the application of a tag to a garment. And the fact that the world's two dominant EAS technology providers are both looking to grow their RFID solution sets and compete with other RFID technology firms - each acquiring a prominent RFID software company in 2008 - also suggests a linkage. Further complicating matters is the suggestion, being made by some in the EAS community, that there is a "progression path" from EAS to RFID.

Together this helps explain why some retailers quickly assume that RFID is simply an improved version of EAS. This of course is not true. The road to RFID does not start with EAS. Retailers that make the mistake of viewing RFID primarily through the lens of shrink management miss out on the bigger and richer picture. The value that an RFID tag can generate far surpasses what can be accomplished with an EAS tag.

RFID as an EAS replacement
EAS technologies are proprietary. Retailers cannot easily switch between products and providers, which in turn reduces their bargaining power with the EAS vendors. This is not the case with RFID. It is therefore not a surprise that virtually all retailers - even those who understand that RFID is not linked to EAS - want to know whether RFID tagging will allow them to phase out their EAS tagging programs. The answer is yes, but there are tradeoffs involved.

Traditional EAS tags are often referred to as "dumb" tags because there is no association between the tag and the article of clothing to which it is affixed. When a thief leaves the premises and the security alarm sounds, the employees have no idea what items were stolen or in what quantity. The tag itself, even if recovered, can offer no clues. RFID tags, by contrast, are "smart." There is a direct association between the tag and the article of clothing to which it is affixed. Retailers can see precisely what shoplifters take through the security gates.

Retailers attach EAS hard tags to provide a visual deterrent to casual thieves and to complicate the perpetration of theft by those who are not deterred. Experienced thieves have found ways to discreetly remove these plastic tags or exit the premises with the tags shielded from the sensor. And smart thieves know that retailers seldom chase down shoplifters in instances when the alarm gets triggered. As a result, many items tagged with EAS are stolen every day.

When we speak of the value of EAS tags, we are really only dealing with the percentage of theft off the selling floor that can be materially impacted by EAS. This is relevant because it is possible to replace the inner hardware of a plastic EAS tag with an RFID inlay. The EAS providers have shied away from offering RFID-only hard tags, presumably out of fear of cannibalizing their EAS revenues. Instead they offer dual-technology hard tags, with EAS and RFID sharing space inside the tag. RFID-only hard tags do exist, and it is only a matter of time before they become more broadly available.

In 2008 the Information Technology Research Institute of the University of Arkansas published a Feasibility Assessment on RFID as an anti-shoplifting solution. The essence of their findings is that RFID is able to trigger an exit alarm almost as effectively as an EAS tag. The researchers suggest that this performance gap could in the future be eliminated completely. Retailers that wish to begin phasing out their use of EAS tags and replacing them with plastic RFID-only tags therefore face a tradeoff - fewer alarms triggered, but full product information on the items that do trigger the alarm.

Because casual shoplifting is not nearly as significant a problem as internal shrink or organized theft rings, I suspect many retailers will elect to make this leap and discontinue their use of EAS tags. Some retailers may even be so bold as to eliminate plastic tags altogether, opting instead to rely solely on the RFID tags embedded in the paper tickets attached to their merchandise. It is no secret that paper tickets are easier to remove than plastic hard tags. The retailers will essentially be betting that any increase in external shrink will be more than offset by the dollars they are no longer spending on EAS.

Deterring employee theft
Unlike EAS tags, RFID tags can significantly deter theft by employees, even if simple paper tickets are used. Employees tend to become less bold once they realize that their employer now has the ability to rapidly confirm each item's presence and location multiple times each week, and trace missing items back to the staff working the store when the items went missing. RFID readers placed in strategic locations - such as back doors, side doors or fitting rooms - can also help detect and deter suspicious product movement. Retailers using RFID have seen internal shrink drop by well over 25 percent.

One specialty retailer recently disclosed that it has fired a number of dishonest employees over the past 12 months based on information captured by its RFID system. In the past there was no practical way to collect such data at this level of detail. The retailer was especially disappointed to learn that theft was being perpetrated by some of its most longstanding and trusted employees. None of this would have been possible without the enhanced visibility provided by RFID.

Paying for RFID with EAS dollars
I understand the attraction of using existing budget dollars to fund RFID. Obviously the ROI that can be generated is even greater if EAS spending is reduced. But retailers need to understand that RFID can easily stand on its own two feet. Incremental revenue and margin contribution, coupled with reductions in store labor and other expenses, together create a very compelling business case. RFID makes good business sense, even without a penny of EAS money.

Final thoughts
Devoting so much of this article to the topic of RFID as an EAS substitute would appear to run counter to my goal of highlighting how disconnected the two really are. But I am not suggesting that retailers devote no thought to RFID's utility as a shrink management tool. I am simply advising that they do not view RFID as primarily a shrink management opportunity. Retailers should pursue the full range of RFID benefits, and not focus narrowly on its ability to render EAS tagging obsolete.

Here are the key takeaways from this article:
* RFID is not an outgrowth of EAS.
* Reducing external theft is a very minor component of the RFID benefit picture.
* RFID helps retailers drive significant improvement in revenues, margins, customer service and store labor productivity.
* RFID provides retailers with a powerful new weapon to combat internal theft.
* Retailers can quickly accelerate their use of RFID regardless of their planned level of future use of EAS tagging solutions.
* Retailers that use RFID can consider phasing out EAS tagging.
* The business case for RFID is very strong and does not depend on even a penny of EAS dollars.

The current retail reality, where clothing stores have "dumb" tags on some goods, is in the process of being eclipsed by a world where these shops have "smart" tags on all goods. We know this will not materialize overnight. Fortunately, a retailer's ability to quickly accelerate with RFID is not in any way tethered or constrained by the retailer's present or future use of EAS. This bodes well for retailers and their customers.

Marshall Kay is the founder of RFID Sherpas LLC, a consulting practice devoted exclusively to Retail RFID. Prior to launching this practice Marshall directed the North American RFID program of retail consulting firm Kurt Salmon Associates. RFID Sherpas LLC advises retailers, suppliers, technology vendors and industry associations. Web Address: www.rfidsherpas.com

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