In mid-2003, there was no end of grumbling and no shortage of skepticism when Wal-Mart Stores Inc. asked its top 100 suppliers to put electronic tags on their cases and pallets by the beginning of January 2005.

But the requirement—and it was more requirement than request—was the right thing to do. Give or take a few weeks, Wal-Mart's top-tier suppliers hit the deadline. The company has since expanded the program to another 500 large suppliers. Today, its rapid rollout of radio frequency identification (RFID) data collection and analysis initiatives is being replicated by other major players in the retail sector worldwide. The technology is improving efficiencies and reducing costs far outside the retail industry as well. For example, Europeans and Americans are implementing RFID to streamline shipping processes at ports of entry. Also, North American drivers using E-Z Pass highway toll lanes have either unknowingly used the technology or have chosen to trade their time for privacy rights.

However, the global shift from early adoption to steady growth does not imply that there is a universal blueprint for success with RFID. Although retailers everywhere share many of the most daunting challenges to the technologies' full adoption, there are many marked differences in levels of implementation and in strategic approaches between regions and between companies. Those differences—in everything from tagging strategies and tag costs to technology standards and distribution-network alignment—will continue to have an impact on integration of the technologies and, ultimately, on RFID implementation and its use across country boundaries.

The authors (both of whom specialize in operations management, supply chain management, technology management, research and development, and project management) have studied the development and expansion of RFID initiatives over several decades. We have observed the emergence of technology standards and tracked the trajectory of RFID's acceptance as a tool for creating business value. And we have seen how quickly the retail industry has moved out in front of other sectors in both the scope of its vision and the scale of its implementation. As such, we felt it would be instructive for supply chain managers in a wide range of industries to read a status report on RFID's penetration in the retail business.

In our analysis, we systematically compared the leading retailers in each region that are incorporating the new technology, such as Wal-Mart, Target, Best Buy, Marks & Spencer (the United Kingdom), Tesco (the United Kingdom), and Metro Group (Germany). The comparisons have been tracked over the past five years as retailers moved from initiation through to the growth phase.

This article offers a “compare and contrast” snapshot of RFID developments at the end of 2006 in the three main global economic regions: North America, Europe, and Asia. (Activities in other regions are not as far along. Brazil, for instance, lacks the factors that make RFID attractive, such as high labor costs and low technology costs.) As we illustrate involvement with and challenges to RFID, we will look first at activity in North America, followed by Europe and then the Asia-Pacific region. The article evaluates the primary opportunities and scrutinizes the challenges that remain in areas such as tagging strategies, tag costs and frequency, consumer privacy, standards, data sharing, and distribution networks.

Before we begin discussing retail RFID efforts in particular, it is important to recognize the wide disparities in approach among different industries worldwide. In North America, for example, retailers, pharmaceutical industries, and the U.S. Department of Defense (DoD) are in the vanguard of RFID adoption efforts at the case/pallet level, while Canadians have taken a “follower” strategy. A recent study by research firm IDTechEx identified the United States as the largest adopter of RFID technology by a wide margin, followed by the United Kingdom, Japan, Germany, China, France, Australia, the Netherlands, Korea, and Canada, in that order. In the U.S. consumer goods category, RFID adoption efforts have occurred at the case/pallet level and are focused on improving backroom inventory-management practices and the verification of incoming material from the distribution center (DC).

Initial mandates by leading implementers have been met, and current efforts are now focused on expanding to extended levels of the supply chain. Wal-Mart remains the world retail RFID leader, issuing several mandates to their suppliers to become compliant with RFID EPCglobal, Generation-2 technologies at the case/pallet tagging level. (Generation-2 tags significantly improve “read rates” on metal surfaces and with liquids.) Wal-Mart's mandates have achieved their objectives, according to a University of Arkansas study, which compared daily stockouts at 12 RFID-enabled stores with those at 12 control stores from February to September 2005. The study found that tagging items enabled replenishment rates three times faster than those for non-RFID-tagged products (which means huge reductions in stockouts), a proactive pick list process, and estimated annual savings for RFID-equipped Wal-Mart stores of more than $1.7 billion.

Other retailers—such as Target and Best Buy in the United States and Metro, Marks & Spencer, and Tesco in Europe—are waiting for Wal-Mart to work out the complexities and problems that still slow RFID adoption. Canadian retail RFID efforts are trailing U.S. efforts because mandates have not been issued by major Canadian retailers and requirements from Wal-Mart and other U.S. retailers have not affected their Canadian suppliers. Several Canadian companies—Staples-Canada, for instance—have completed pilot studies and expect to begin implementation by 2008.

In Europe, the leading examples of RFID adoption are found in the supply chain and logistics sectors. In general, European retailers are bypassing case/pallet tracking and moving directly to item-level tagging. Within Europe, the U.K. and Germany are the major participants, with 40 percent of the $1.1 billion of RFID activity expected in 2007.¹

Asia-Pacific retailers are also lagging behind their U.S. counterparts, with China and Japan pursuing different implementation strategies. In both Japan and China, the government is responsible for pushing RFID adoption, with efforts to date focused mainly on the logistics sector. Chinese retailers are not insisting on RFID tags, and Wal-Mart like mandates have not filtered down to Chinese suppliers. In China, the main use of RFID will be in government programs for personal identification, asset application to government property (such as manhole covers), logistics (airport luggage tracking, railroad tickets, and highway toll collection), and in the printing industry (as a deterrent to fraud).There is also broader use in transportation. For example, in an effort to combat ticket fraud, China's Guangshen Railway Co. expects commuters to consume 125 million RFID-enabled single-use tickets annually on journeys between Shenzhen and Guangzhou.

In Japan, RFID implementations are mainly government-sponsored projects; they include library systems and RFID-enabled cell phones set up to process payment for users of the Japanese national rail system. Three Japanese technology leaders—HP Japan, Internet Initiative Japan, and IIJ Technology—have formed an alliance to jointly develop an EPCglobal Network–compliant RFID platform for the Asia-Pacific region and to build the necessary technological infrastructure for intercompany and international logistics.

North American, European, and Asian retailers all acknowledge the significant opportunities in RFID tagging. In the United States, retail efforts focus on backroom inventory-management practices at the case/pallet tagging level, which helps reduce inventory and lead times (order placement through fulfillment), while improving customer service and decreasing stockouts. But consumer-privacy issues deter U.S. retailers from moving into item-level tagging; instead, they continue to work on integration at the case/pallet level with all suppliers and across as many product lines as possible. Additionally, U.S. and European suppliers are struggling with high implementation costs for hardware and tags, so they are mainly using “slap-and-ship” case/pallet approaches to meet retailers' mandates.

In the near future, more suppliers will be pushed to implement RFID. However, they are likely to continue case/pallet tagging at the end of their processes because of the issues that we expose in this article—particularly escalating consumer-privacy issues in the United States and RFID equipment and implementation costs, which are expected to remain high. That is not to say that suppliers are not capable of item-level tagging in closed-loop supply chains. Quite the opposite: for example, Hewlett-Packard in Brazil, Kraft in Europe, and Tandy as a supplier to Wal-Mart, have all begun item-level tagging.

European retailers are using an item-level tagging strategy to achieve benefits within the supply chain. Although human-rights groups in both the U.S. and the U.K. have launched campaigns against retailers that employ RFID technology, Europe's cultural climate has made it easier to deploy RFID. Retailers there have educated consumers on RFID use and changed procedures to accommodate consumers' fears by developing tag-removal policies. Germany's Metro is assertively pushing these ideas; item-level tagging is used every day by consumers in its “store of the future.” In England, Marks & Spencer is using RFID tags for category management by tagging all garments from one or more suppliers within a specific department. While continuing to educate consumers on RFID in-store benefits, European retailers are expected to concentrate on increasing the volumes of items tagged and on expanding item-level tagging back to their suppliers.

In Asia, most retailers expect to benefit from integrating RFID practices across company lines. China is the exception; in recent years, the Beijing government has become increasingly suspicious of releasing information to foreign businesses out of fear of revealing potentially confidential information. Chinese retailers expect RFID benefits to exist mainly within their own company boundaries. They are also focused on increasing RFID usage in transportation and on personal tagging, a practice that consumer rights advocates in many other countries would vehemently oppose.

By contrast, the Japanese RFID market traditionally emphasizes government applications, logistics usage, and asset tagging. A typical use of RFID in Japan is for payment on the Japanese National rail system. However, in the past few years, RFID tags have also been used to monitor and control distribution and sales of women's shoes and apparel in several department stores. In 2005, Yodobashi, one of Japan's biggest electrical and electronic stores, requested suppliers to use UHF-EPC tags on products, but did not mandate this request to a particular date. Also, as recently as January 2007, Mitsukoshi Ltd., Shiseido Company, Ltd., and Fujitsu Limited, in partnership with the Japanese Ministry of Economy, Trade, and Industry, declared that they will pilot-test the use of RFID tags on cosmetics at Shiseido's flagship store in Tokyo.

The primary driver for RFID implementations is the same worldwide: It is being used to reduce stockouts that typically delay consumers' purchases or send them to competitors. The University of Arkansas study found that RFID trimmed out-of-stocks by up to 16 percent. However, the leading causes of stockouts differ by region. According to a 2002 survey by Grocery Manufacturers of America, a leading industry trade group, inaccurate ordering at the store level is the biggest leading cause of stockouts in Asia (49 percent of respondents said so) and the U.S. (33 percent) and the second leading cause in Europe (38 percent). Store-shelving practices are flagged as the top reason for stockouts in Europe (38 percent) but the secondary cause in the United States (22 percent) and Asia (15 percent). Store-ordering and store-shelving practices clearly account for a significant portion of stockouts regardless of the region.

So if RFID is being implemented with such enthusiasm throughout the retail sector, what's stopping this technology from being rolled out even faster? There are plenty of challenges, among them tagging strategies, tag costs and frequency, standards, consumer privacy (perhaps the largest constraint to continued implementation in North America and Europe), data sharing, and distribution-network alignments. Let us look more closely at each area of challenge.

Tagging strategies differ significantly by region. In the United States, leaders such as Wal-Mart, Target, and Best Buy are aiming for 100 percent case/pallet tagging by suppliers in the near future. Currently, Wal-Mart is working toward having 1,000 suppliers achieve its mandate by the end of 2007, while Best Buy is looking to have all of its cases and pallets tagged by May 2007. In response to the significant costs and complexities of RFID implementation, Target and Best Buy are deliberately letting Wal-Mart blaze the trail; they lag by about six months. Best Buy, whose item costs tend to be higher than at other retailers, wants to move toward item-level tagging soon. Best Buy executives indicate that RFID item-level tagging can help its salespeople locate products. It can also assist with customer service by giving customers access to product information (such as in-store location) as well as information on bundled items available on the store floor.

Meanwhile the Europeans are leading efforts to use item-level tagging. As a rule, they have been able to educate consumers about any concerns over data privacy. Also, European companies have chosen to concentrate on tagging products where the theft rate is high in relation to the product value. A few examples: Germany's Metro is tagging individual items at its “store of the future” in Rheinberg—concentrating on high-end items such as CDs and DVDs—and at its Galeria Kaufhof store, where it has conducted item-level RFID tracking with one of its women's fashion providers. Metro's vision is to have everything it sells item-tagged by 2011.

In the United Kingdom, Marks & Spencer, because of its success with tracking men's apparel, is using item-level RFID apparel tracking at 42 of its stores. And Tesco uses item-level tagging for DVDs, cosmetics, and electronic games to thwart pilferage and track on-shelf availability. Further efforts to roll out RFID have been held up by the lack of firm return on investment (ROI) numbers, by manual tag application, and by still-developing standards throughout the supply chain.

In China and Japan, retailers lag other sectors in their use of RFID. That said, Gome, a major Chinese retailer of appliances and consumer electronics, opened the first RFID-based trial store in China on October 11, 2004. And in 2005, Yodobashi, one of Japan's biggest electrical and electronic stores, asked suppliers to use UHF EPC tags on products. The company expects competitors to follow with similar requests soon.

Tag and RFID system costs are significant impediments to a faster roll-out everywhere. Tag costs are typically not quoted by manufacturers since the total cost depends upon volumes purchased—and on the capability and reach of the tags themselves. Prices of passive RFID tag costs have approached 7¢ each in the United States, 10¢ in Europe, and 25–30¢ in Asia, according to research we have conducted at Canisius. In the U.S., the average retailer spends more than $500,000 for RFID hardware and software, including chips, inserts, printers, tags, antennae, readers, data aggregations and filtering systems, middleware, and directory services. In Japan, the Hibiki project, a government-backed initiative by Japan's Ministry of Economy, Trade and Industry, led to the development of the mu-chip Hibiki. Currently, the mu-chip is selling for 8¢, and Hitachi, its manufacturer, hopes to drive unit costs toward 4¢ per tag, based on monthly utilization of more than 100 million tags by 2008.

Since 2005, the migration from Generation-1 to Generation-2 RFID tags has been relatively quick. Most retailers and the U.S. Department of Defense are starting to demand that their suppliers use Generation-2 tags. Generation-2 tags have increased accuracy and readability in a variety of environments in comparison to Generation-1 tags. We believe that the costs of tags will reach the 5¢ mark because of several converging factors: the RFID movement is becoming more global, companies are solving many of the frequency and standards problems, and total demand for RFID tags is projected to reach 5.5 billion units annually by 2010. If the mu-chip catches on quickly in the Asia-Pacific, that price could come as early as next year.

Differences between radio-transmission frequencies are another significant hurdle to broader RFID implementation worldwide. The United States favors UHF at 915 MHz, while Europeans also favor UHF, but at 868 MHz. (The difference is not expected to be a lasting problem, however.) But in China, the government has not accepted UHF because the 860-960 MHz bands are already occupied there; instead, China favors low frequencies (below 860 MHz) and bands above 960 MHz. In Japan, the standard is UHF at 950-956 MHz, a frequency that can often create interference with cell phone operation, and is higher than the bands allotted in the United States and Europe.

So, what does this mean to companies that use RFID tags across these frequencies? Compromise solutions appear to be many years away. Earlier, the diverging concepts meant that companies were looking at installing additional readers, platforms, middleware, software, and potentially at costlier tags to handle the different frequencies as products (and their associated tags) crossed borders.

The good news is that within the past year, technologies to overcome these differences have hit the marketplace. For example, Alien Technology has developed high-performance, Gen-2 RFID World readers and World Tags that enable global corporations to use a common RFID reader hardware platform and software in the North American, European, and Asia-Pacific regions. Similarly, UPM Raflatac, a Finnish-based tag manufacturer, is supplying a similar tag to the Advanced Logistics Asia project. As part of this project, Metro plans on using a common platform to track all of its Chinese-manufactured supplies from China to its German warehouses.

At issue here is the extent to which the tag identifies the individual purchaser and product.² Americans are particularly sensitive to their right to privacy. U.S. citizens' rights were upheld in 2003 by the U.S. Supreme Court in “Kyllo v. the United States,” whereby agencies cannot use a device that “is not in general public use to explore details of a private home.” This ruling is limited to government agencies, and few if any restrictions exist on companies or individuals using RFID technology for residential data collection. In 2005, the concept that RFID tags are “spychips,” tracking individuals and violating their rights to privacy, was advocated in Spychips: How Major Corporations and Government Plan to Track Your Every Move with RFID by Albrecht and McIntyre. One consumer advocacy group—Consumers Against Supermarket Privacy Invasion and Numbering (CASPIAN)—that was founded by Albrecht, has launched grassroots campaigns criticizing manufacturers and retailers that are testing RFID to track products at the item-level.

Also, 10 percent of logistics professionals—those typically tasked with RFID implementation—surveyed in a 2006 poll on the Logistics Today Web site said that RFID tags were a serious “spychip” threat and should be outlawed. Similarly, the U.S. Government Accountability Office is raising concerns about RFID intrusiveness into consumers' privacy. To avoid the negative publicity, most U.S. retailers have kept tags off the retail floor by sticking with carton-/pallet-tagging strategies, which consequently limits the value they can gain from RFID utilization. For its part, Wal-Mart is engaging consumer advocacy groups by indicating that RFID will help keep in-store prices lower.

In Canada, the mood is less confrontational. In late 2006, Wal-Mart Canada, Shoppers Drug Mart, and several other companies formed GS1 Canada Public Policy Forum. The Forum examines public policy specific to RFID technology, shares standards information and the results of pilot programs, and addresses public concerns for other Canadian companies involved in RFID implementation.

European consumers are also strong human-rights advocates, but they are more apt to adjust to RFID tag use as long as they feel that there are robust consumer laws to protect them. Article 29 of Directive 95/46/ec is the European Union's data-protection ruling; it forms the platform for European nations' laws for human-rights protection. In addition to complying with this strong directive, companies such as Marks & Spencer have tackled privacy concerns by providing conspicuous tag placement, offering tag-removal services to customers, using tag readers only outside store hours, consulting with consumer groups, and by communicating directly with consumers—for example, with customized pamphlets sent by mail or distributed at the store. Similarly, Metro Group's Galleria Kaufhof, which has used item-level tracking for its RFID pilot program in women's fashion sales, educated consumers regarding RFID and worked with privacy-advocacy groups such as CASPIAN. But there is still much work to be done.

In Asia, consumer privacy is barely an issue at all. Since RFID efforts have been led by government mandates, Asian consumers appear to have little choice in the matter. China is at the other end of the spectrum from the United States: The Beijing government has the authority to implement personal RFID tagging.

In the past few months, there has been plenty of progress on the code-standardization issue—with further to go. The United States and Europe jointly worked on a common standard; while China and Japan each developed their own standards. Failure to reach worldwide agreement on code standardization will increase supply chain costs for all global companies, increase RFID investment costs and trade barriers, and require a complicated set of interface devices. European and U.S. companies, including IBM, Microsoft, Wal-Mart, and Tesco, agreed on code standardization and supported a modified EPCglobal UHF Generation-2 standard (Gen-2 [ISO 18000-6]), which was approved by ISO, the international standards body, in July 2006. The EPCglobal standard, which was designed with the end users' performance requirements in mind, is a short but unique number that allows for global interoperability and enables supply chain members to encode data in a similar manner. However, companies must pay an annual fee to register it in a database and to access it.

Asian countries appear to want their own standards. China supports its National Product Code (NPC), which includes its own EPC-classification system for domestic product labeling. It is highly unlikely that the Chinese government will pay royalties to private standards enterprises outside of China, and the Standardization Administration of China and Radio Management Bureau (part of the Ministry of Information Industry) will have a say over the final standards used in China. In Japan, Ubiquitous ID (UID) is the standard; it is supported by 352 Japanese companies including Sony, Toyota, and Mitsubishi. Lacking several layers of hardware and software, UID and UHF Gen-2 do not communicate well, and global debate over competing standards may eventually lead to the need for costly multi-protocol readers that can handle tags that comply with the different standards.

Standards body EPCglobal, supported and used by most U.S. and European companies, is advocating data sharing through the registry of companies that it maintains. The EPCglobal Network comprises Internet-based technologies that allow for business integration and collaboration by enabling the storage and retrieval of electronic real-time Electronic product codes (that is, RFID data) in secure, controlled databases on the Web. The Electronic product code (EPC) uniquely identifies objects in the supply chain and includes information on the source of the data, the company, and the stock-keeping unit number.

While U.S. and European companies favor continued use of EPCglobal's Network, it is unlikely that China will allow foreign companies access to RFID information because bureaucrats there believe that anyone could examine factors such as China's industrial output, capacity, and product manufacturing locations in real-time. Chinese officials have indicated that they will develop their own data registry. Information system security is another significant barrier to RFID adoption in China since information systems are not nearly as secure as those used in U.S. and European companies. With that said, China recognizes the information system value gained through RFID; as early as 2005, officials allowed Hewlett-Packard to ship RFID-tagged consumer products directly from manufacturing facilities in China to Wal-Mart's Sanger, Texas, distribution center.³ China appears to be compromising on the data-standardization issue by developing a local standard that is interoperable with those developed abroad—and for which it needs to pay no royalties.

RFID tags offer companies the ability to track and gather critical information about the location of their products throughout the world. However, if companies cannot cost-effectively access this information from trading partners, the benefits of using RFID are reduced. In order to integrate multiple standards, companies will need to budget for significant spending on hardware and software as well as for additional royalty fees. As previously mentioned, platforms to track RFID tags worldwide, such as Alien Technology's World readers and World Tags and UPM Raflatac's systems, have appeared in the past few months. Companies have found a way around the data-sharing issue by setting up dedicated common platforms between trading bodies. What remains to be seen is whether a truly common global database—one that includes China—will ever evolve.

Different regions have markedly different distribution-network strategies, which can dramatically affect shelf-stockout levels. European manufacturers use more direct shipments to stores than their American counterparts do. Asian retailers have networks of suppliers that enable them to source large portions of their goods from local suppliers. China struggles with distributing shipments into its interior, and the cost of land continues to drive the type of distribution networks developed in Japan and on China's coastline. North American companies face the biggest challenges in reducing stockouts, because their supply chains are long, their manufacturers are typically located outside of the continent, and they ship product first to large DCs and then to local stores. For instance, Wal-Mart's Chinese suppliers, which provide 65 percent of the retailer's non-food product, ship across the Pacific to centralized DCs. Compounding their distribution network issues, North American companies typically receive scheduled deliveries. In the future, U.S. retailers may need to switch from daily delivery schedules to more flexible schedules, potentially using smaller DCs and expanding their cross-docking initiatives.

As RFID technology is still in a growth stage as far as the retail market is concerned, supply chain managers will be challenged to evaluate their distribution networks. As of now, networks have not been modified because of RFID. Managers will need to balance the costs associated with their distribution networks against customer satisfaction in order to provide the right goods at the right places in the right quantities at the right times.

It is clear that RFID implementation by retailers has moved from the introductory period into a strong period of growth. But as we have indicated in this article, there are many stark differences in the challenges that companies and countries are facing—and further differences in how they are choosing to tackle those challenges. These differences must be addressed if RFID is to be fully integrated worldwide.

We have limited this article to a review of those differences rather than an exploration of potential solutions. What is evident, though, is that governments, broad economic issues, and political issues will play key roles in future implementation efforts. Nowhere is this more true than in China, where economic development has been simply astonishing.

Indeed, the China factor is worth watching. Due to its large market potential, industrial advancement, rapid increase in logistics demand and increasing role as a world-class manufacturing center, the Middle Kingdom is expected to become a big political player in RFID implementation. For example, if the Beijing government perceives that RFID implementation is exacerbating the nation's unemployment levels, then it may one day put the brakes on broad use of the technology.

At the same time, significant costs and time lags will be added to global supply chain systems if standards differ so much that costly integration equipment is necessary. And there is a major cultural impediment: Chinese companies typically are reluctant to share information with supply chain members, and relatively few have robust internal and external integration skills. Fortunately, recent technological developments and an increasing movement toward the EPCglobal standard appear to be solving some of today's problems.

Suffice it to say that the leaders in RFID implementation will be those with the best grasp on what drives the many differences in approach—and who have the skills and the determination to overcome these differences where they can and exploit them where they cannot.