Assess RFID's Transformational Potential
Get an introduction to Radio Frequency Identification's (RFID) compelling—but controversial—capabilities, and its role in Microsoft's product plans.
by Lynne Harvey Zawada and Peter O'Kelly

October 2003 Issue

Radio Frequency Identification (RFID, often pronounced "riff-id") technology is gaining ground quickly as an effective way to manage products and other objects. This realtime electronic labeling and tracking system uses radio frequency, digital codes, and microchips (called tags) to identify and track objects without scanning them manually, and you can apply the tags to almost anything, from large appliances and heating systems to car parts, razor blades, paper documents, and even currency.

From an IT systems perspective, RFID has major implications for information systems architecture, ushering in compelling Business Intelligence (BI) opportunities and significant data management challenges. Microsoft already has announced its support for RFID as well as its strategy for incorporating RFID into its BizTalk and Microsoft Business Solutions product lines (see Resources). IBM, SAP, Oracle, NCR, and other vendors have also pledged to support RFID. We believe Microsoft might be able to exploit this technology to give itself a significant advantage over its application competitors.

RFID offers many tangible benefits to businesses, especially with regard to managing product quality control and the supply chain. Most notably, RFID eliminates the need to re-scan products constantly to verify inventory status and keep product information complete and up-to-date. In the long run, RFID systems could automate the scanning process completely, replacing manual scanning. The labor savings alone could justify the cost of the system, and large consumer products and manufacturing companies would gain better tracking and inventory location capabilities, from the manufacturing plant to the store shelves.

RFIDs to Reveal Consumer Trends
Many early adopters believe that when RFIDs are deployed on store shelves, companies will better understand the customers' in-store shopping experience. Specifically, when every product in a store is tagged, and the tagged products are placed on the shelves, retailers will be able to determine several things. They'll know when shelves need restocking, which products the customer picked up initially and put back on a shelf, which items customers buy together, and even the sequence in which customers select products.

Further, RFID has transformational potential for many industries and business domains beyond the manufacturing and retail sectors. The consumer packaged goods industry, banking and financial services, the airlines, the automotive industry, healthcare services, the government, and the defense department can all benefit from RFID. Several European Union (EU) Central Banks are considering RFID to help them guard against counterfeiting and currency theft. And automobile, pharmaceutical, and chemical manufacturers hope to use RFID to help them meet federal regulations.

For example, Michelin and Goodyear plan to use RFID to aid their compliance with the Transportation, Recall Enhancement, Accountability and Documentation (TREAD) Act. The TREAD Act was created in the wake of the Firestone/Ford Explorer debacle. It mandates that carmakers track tires from the 2004 model year and beyond to streamline recalls if problems arise. In the pharmaceutical industry, Information Mediary Corp. and Shorewood Packaging Corp. (a business of International Paper Corp.) have developed a RFID-based smart drug packaging solution, the Med-ic ECM (Electronic Compliance Monitor), which monitors patient compliance with prescriptions during clinical drug trials. And, to comply with federal and international chemical manufacturing and distribution regulations, The Dow Chemical Company has invested in RFID to improve its manufacturing process control networks and track the location of chemicals from production to delivery. Even the US Postal Service and the United Parcel Service (UPS) want to use RFID to track mail and packages.

Although most people don't realize it, RFID technology is similar to smart cards. In fact, many banks and credit card companies, including American Express, MasterCard, and Visa, are looking into combining the two technologies to create contactless payment systems. American Express is now testing its ExpressPay RFID payment product, a device similar to ExxonMobil's Speedpass. It attaches to a user's key chain and she can wave the device in front of an RFID reader to pay for small items she purchases normally with cash. The RFID transponder transmits a serial number that identifies the customer, and the transaction is charged to the customer's credit card that's registered with the system. Consumers also can opt for ExpressPay Pre-Loaded, which stores a prepaid amount of money in the system. The price of the purchase is deducted each time the user makes a transaction.

Tackling the RFID Privacy Controversy
Although RFID can simplify business transactions greatly, its adoption isn't without controversy. Privacy groups assert that RFID infringes on an individual's right to privacy. Recently, Consumers Against Supermarket Privacy Invasion and Numbering (CASPIAN), a consumer group opposed to loyalty cards and RFID, unveiled federal legislation calling for mandatory disclosures on consumer products containing RFID chips in the United States. The RFID Right to Know Act of 2003 would require companies to label all products that contain RFID tags, and make it illegal for companies to link the chips with personal identifying information (see Resources). Specifically, CASPIAN has proposed amendments to the Fair Packaging and Labeling Program; the Federal Food, Drug and Cosmetic Act; and the Federal Alcohol Administration Act.

The amendments would require labels on consumer products to "state, at a minimum, that the consumer commodity or package contains or bears a radio frequency identification tag, and that the tag can transmit unique identification information to an independent reader both before and after purchase." It would require the labels "be in a conspicuous type-size and location and in print that contrasts with the background against which it appears." The proposed legislation also would insert a clause into a federal law dealing with personal privacy to prevent a business from combining or linking an individual's personal information with RFID tag information beyond what's required to manage inventory. Other clauses in the same law would prevent companies from disclosing directly or indirectly an individual's personal information in association with RFID tag information to a third party and from using RFID tags directly or indirectly to identify an individual.

On the other hand, although the technology has sparked concerns about consumer privacy, some industry analysts maintain that RFID won't be deployed in consumer shopping environments for at least 10 years, primarily due to cost. (A retail-oriented RFID tag currently costs approximately a dime, while a penny is often considered to be the mainstream deployment price point.) Ten years should be a long enough period to resolve some of the privacy issues through legislative action. Moving forward, we believe the cost of the RFID tags should decrease substantially as production increases. Five cents or less per tag will be a reality within five years. And though the federal, state, and municipal governments will regulate privacy issues, they won't ban the adoption of RFID technology. Despite the controversy, it's likely RFIDs will make their way into the mainstream. If you're in the IT department of a company that's currently planning, or even considering, to use RFID technology, it's essential you get up to speed on how they function.

Learn How RFIDs Work
RFIDs use a wireless electronic coding system that assigns a unique 96-digit number or Electronic Product Code (ePC) with a chip applied to each item. Each chip or tag is mated to an antenna that enables a radio frequency "reader" to scan the tag and broadcast the ePC data back to a central network or data warehouse (see Figure 1). The first generation RFID tags are read-only devices. However, in the future, the RFID tags will have read-and-write capabilities, so they'll be able to store and dynamically update more detailed product information.

Retailers such as Tesco and Sam's Club plan initially to integrate their product ID cataloging systems with the ePC codes and to apply RFID tags to products at the case and pallet level. Over time, you can expect these companies to apply the tags to individual products stocked on the store shelves. Their systems will feed RFID data into a central data warehouse where BI tools will slice and dice the data, along with other product and customer data, to help deliver the insight necessary to invoke and manage customer-centric processes and services.

At the moment, most companies are still in the planning stages in their RFID deployments. However, German retailer METRO AG has deployed RFIDs successfully. The company uses RFIDs in its Future Store in Rheinberg, Germany. As the Wall Street Journal reported recently, METRO AG tagged all its merchandise with RFIDs (see Resources). Each shopping cart has a keyboard-sized computer with a touch-screen monitor attached to the handle. When a customer swipes his loyalty or customer identification card through the device, the computer generates a list of items the customer purchases frequently and alerts the shopper to related special offers. When he selects a product from the store shelves, the computer on the shopping cart scans the tagged product as he places it in the cart. The computer then sends the prices to the cash register system at the checkout counter by radio signals through a wireless local area network, so when the customer checks out, the system displays the total automatically. Without RFID devices, this type of on-the-fly, self-service shopping wouldn't be possible.

Achieve Integration With Telematic Devices
When you integrate RFIDs with telematic sensors, you can monitor a product's performance in addition to its location and status. You also can use RFIDs to support highly automated maintenance, repair, and overhaul activities, as well as the operation and management of any facility, equipment, or asset.

For example, an integrated RFID/telematic solution can monitor the life span of manufacturing equipment—from installation and basic usage to any damage, repairs, overhauls, and equipment decommissioning. It can send alerts for preventative maintenance, cleaning, or upgrades, and it can help identify system parts, sending alerts when replacement parts are needed and even creating an audit trail of the business processes or operations performed using the tagged piece of equipment.

Also, when the sensors are integrated with business and service intelligence solutions, companies can calculate and track performance measurements, helping them meet industry standards and comply with performance mandates. Tire maker Michelin's plans to install RFIDs within its tires to improve compliance with the TREAD Act is one example.

RFIDs also provide a significant opportunity for e-commerce, Customer Relationship Management (CRM), Enterprise Resource Planning (ERP), BI, and data warehousing vendors to develop services around processing, analyzing, and managing RFID data to extend customer-centric business processes and services. When integrated with an enterprise CRM system, RFIDs can trigger marketing campaigns, sending digital coupons and even broadcasting commercials to the terminal on the cart while the customer shops. Also, by integrating RFID data with customer-facing systems such as self-service checkout counters and in-store security systems, retailers can minimize checkout errors and theft.

Survey the Current RFID Technology Landscape
RFID is one of the few technologies that businesses have adopted before software vendors have provided the solutions. And at this time, standardization is an issue. Wireless transmission standards must be created to overcome radio frequency interference, and the Federal Communications Commission (FCC) must allocate bandwidth for an operating frequency. Most of these technical challenges should be resolved within the next two years as companies work with federal agencies to develop the appropriate standards.

By far, the biggest challenge with RFID adoption lies with enterprise software and backend integration—in particular, getting the mainstream software vendors to provide solutions that support RFID technology. Vendors must develop metadata standards to support the ePC codes and RFID data storage. These standards also must be accessible and compatible with existing enterprise infrastructure so enterprise systems and applications can access RFID data.

As we mentioned earlier, of all the major software vendors in the landscape, Microsoft has the greatest opportunity to gain the competitive advantage. If it defines standards for RFID integration across its applications and platforms, it will be in a position to leapfrog its competitors. Other leading vendors are struggling currently to retrofit their product lines: IBM, Oracle, and SAP have pledged to support RFID, though none has produced a full-fledged solution yet. Out of the pack, SAP and IBM seem the furthest ahead in terms of creating a customized solution for trial. Lately, Oracle seems more preoccupied with its attempted hostile takeover of PeopleSoft than it is with promoting new developments in this space. None of these vendors has gone beyond the initial testing phase in their development efforts.

Microsoft's RFID efforts, too, are still in their infancy. In June 2003, the company announced its support for RFID, and it plans to focus on RFID deployment in the manufacturing and retail supply chain sectors initially. It also will join AutoID Inc., a joint venture of the Uniform Code Council Inc. and EAN International, which will develop and oversee commercial and technical standards for the ePC Network. By joining AutoID standards efforts, Microsoft will be able to contribute to the development of standards for RFID-enabled technology.

In the partnership space, Microsoft is already a certified IN SYNC alliance partner of UCCnet Inc., an industry-endorsed initiative to resolve product data inaccuracies among trading partners. Earlier this year, Microsoft announced the Microsoft BizTalk Toolkit for UCCnet, which allows retailers and their suppliers to connect to UCCnet quickly and cost-effectively and helps bring them together with trading partners.

In a recent interview, Satya Nadella, corporate vice president of Microsoft Business Solutions, stated that Microsoft currently plans to provide RFID support for all of its products related to inventory, retail management, manufacturing, distribution, and point of sale (see Resources). This strategy is similar to what Microsoft did with Web services a few years ago, when it worked with several key standards organizations (in areas such as SOAP and RosettaNet) to help define horizontal cross-industry standards. Then, as the standards matured, Microsoft also contributed to a broad range of vertical market standards, and introduced "accelerator" offerings to help companies rapidly deploy systems based on the standards. The tiered strategy enabled Microsoft to bring the new Web services technology early to market, then innovate on top of it.

Ultimately, Microsoft will adopt RFID horizontal standards not only within the Microsoft Business Solutions product line domain, but also it will extend support to its Microsoft Business Framework and its verticalized metadata models. This strategy might also drive convergence with other wireless data services initiatives such as Smart Personal Objects Technology (SPOT) and smartwatches, and it might eventually provide complementary services. The SPOT initiative focuses on making everyday objects such as alarm clocks, appliances, and clothing more useful by making them capable of wirelessly receiving snippets of information. Smartwatches is a customer notification service that delivers news, weather information, sports scores, entertainment, and instant messages to digital watches.

RFID is a compelling technology. Within the next two years, many of the standardization and privacy issues will be resolved and the vendors that take a proactive stance in incorporating RFID into their applications framework will benefit in the long run. If your company is thinking about adopting RFID, we encourage you to plan for the future. On the other hand, the slow adoption of RFID technologies by enterprise software vendors leaves many early adopters and IT managers in a quandary. If your company has proposed RFID adoption within the next two years, you might not be able to wait for the vendors' solutions. We believe your top priorities should be to:

• Explore RFID and ways it can produce significant cost savings and new business opportunities for your organization.
• Expect a significant increase in inventory-related data. Prepare by analyzing which business scenarios are most promising for RFID, and avoid data overkill situations—don't store all RFID-related data just because you can; ensure it has business value. If you've ever planned for dealing with the flood of data from your Web site (such as Web site traffic data), preparing for RFID data management might be a similar exercise.
• Work proactively with hardware and software vendors to ensure they understand your RFID requirements and priorities.
• Keep current with privacy-related issues (see Resources).

Finally, we believe Microsoft's RFID strategy and product plans are strong indicators of RFID's future role and likely mainstream market uptake timing. Microsoft's approach to RFID is similar to its approach to Web services in many ways: contributing to standards initiatives, being early to market with implementations of the standards, and innovating atop the standards with offerings ranging from BizTalk accelerator tools to future SPOT devices and services. Microsoft clearly is placing a big bet on RFID, and we believe it's a bet that will have significant benefits for its customers.

About the Authors
Lynne Harvey Zawada is an independent software industry analyst and consultant who specializes in CRM and business intelligence solutions and best practices. You can reach Lynne by e-mail at .

Peter O'Kelly is an independent software industry analyst, consultant, and author with more than 20 years of experience in software product management and strategy, application development, and consulting. You can reach Peter by e-mail at or log onto his blog at http://pbokelly.blogspot.com.