It is just the kind of thing that has retailers excited and privacy campaigners worried. When customers at the upmarket Prada Epicenter fashion store in New York approach the checkout, an RFID (radio frequency identification) tag attached to their chosen item flashes a radio message to the till – as does a similar tag embedded in the customer’s Prada card.

A quick database check, and now the customer can be offered complimentary or alternative items, based not just on this purchase, but on the shopper’s history. Prada is a retailing trendsetter, but not unique. Rival Benetton, for example, has its RFID plans, as do the supermarket giants Wal-Mart and Tesco. And within a decade, analysts expect, goods will be tagged and tracked throughout the entire supply chain. Systems such as Prada’s will be in almost every outlet.

But the use of RFID in the retail sector is just one part of a revolution that is sweeping through commerce – a movement capable of changing the economics of many businesses, easing the lives of customers and creating opportunities for competitive edge.

In the US, for example, millions of motorists are already using RFID to pay for fuel, simply by waving their ‘Speedpass’ key fobs in front of the petrol pump. Loaded with the user’s credit card details, the fob is authenticated over the Internet and the motorist can fill up without troubling an attendant or swiping their credit card.

In London, Tube and bus fares in future will be paid for not with coins and notes, but a smartcard containing an RFID chip. Forward-thinking cities elsewhere around the world, including Hong Kong and Singapore, have rolled out similar schemes.

Yet all these projects are trivial compared to the major applications for RFID that consumer goods manufacturers and retailers are planning in the supply chain – to track goods through the factory, distribution system, on to the shop floor and, in some cases, beyond.

“RFID will absolutely turn the supply chain inside out,” says Glover Ferguson, chief technology officer of Accenture, the IT services company.

Accenture recently worked with the Auto-ID Center, an industry group based at the Massachusetts Institute of Technology (MIT), to produce three white papers. These conclude that manufacturers can increase revenues by 1% and retailers by 3%

using RFID. In the supply chain, companies can cut working capital by between 2% to 8% of sales and reduce labour costs and product losses by 1% of sales.

Apply these figures to any company, in any industry, and it is easy to see why RFID is one of the hottest technologies in IT – and why specialist suppliers such as Texas Instruments, Philips Electronics and Alien Technology are taking orders for tens of millions of chips. And why, at the same time, suppliers of systems and software to integrate these devices are also expecting an upsurge in sales and new opportunities.

Slow down

At Accenture Laboratories in France, an RFID demonstration has a model train speeding past a reader, identifying its load as it goes. It is one example of how a virtual world will gradually be constructed, consisting of billions of interacting electronic models, based on physical data.

But such applications are still a long way from becoming commonplace. Many organisations are struggling to build a credible business case for such all-encompassing rollouts of RFID, preferring instead a more strategic implementation. “The technology is evolving too slowly on its own. Readers are still expensive, and unless you are buying RFID tags by the hundreds of millions, the 50¢ to 75¢ unit cost is well beyond a threshold that makes them a compelling value,” says AMR Research’s John Fontanella.

Cost is clearly a barrier to wider implementation. For example, the Royal Mail’s Parcel Force division uses RFID to track the cages that are used for transporting parcels around sorting centres. But it has so far baulked at a nationwide rollout of RFID to better manage and track letter and parcel deliveries. The main reason: cost. Likewise, the technology is being examined in the airline industry as a possible replacement for the barcodes used in baggage handling.

However, a British Airways spokesman says that the technology was examined in 1999 and was found to be wanting on the grounds of cost. “We did do some trials, but found it to be prohibitively expensive,” he says. But BA plans to re-examine the technology in 2004, he adds.

The relatively high cost has not prevented the use of RFID entirely, but rather it has encouraged organisations to implement it tactically, in areas where efficiency and cost savings are clear, says AMR’s Fontanella.

At present, for example, RFID is being widely used in manufacturing and asset tracking, rather than in warehousing and the supply chain. Computer maker Dell – famous for eking out profit margins from a ‘friction-free’ supply chain – uses RFID to build PCs to order at its China plant. “They have a ‘recipe’ on the tag listing the components the PC needs and where it is being shipped to and so on,” says Dirk Morgenroth, segment marketing manager at Philips Semiconductors. To save money, the tags are attached to a plastic tray on which the PC is transported around the plant – and are re-used when the PC has been shipped.

French car maker Peugeot also uses RFID tagging to help it build-to-order 206 and 307 cars at its Poissy plant near Paris. It has deployed a network of 80 decoders and uses 2000 reusable read/write tags. One of these is attached to the chassis of the car at the start of the production line, providing details of the customer’s order. The data on the tag is updated at each stage to provide a history of the production process.

These tags are ‘active’ and thus expensive; they require a battery and are removed and reused before the car is sent to the dealer.

At Toyota in South Africa, the flexibility of RFID is clearly evident. The heavy-duty tags attached to the car’s chassis must endure four 30-minute sessions in the paint oven at 240 degrees Celsius.

Unlike at Peugeot, these are not removed when the car is finished. “In the future, they are thinking about set-ups in which they can use the tags for marketing purposes,” says Philips’ Morgenroth.

Another hurdle to wider adoption is the lack of genuine global standards. When Gillette, for example, ordered 500 million RFID tags from Philips and Alien Technology to track its ‘Mach 3’ premium razor blades through the supply chain, it quickly discovered that the tags would not work in Europe. Gillette was forced to go to Philips Semiconductors in the Netherlands to source tags that it could use in Europe.

Several complementary initiatives are underway to develop standards, involving the FCC, the US communications regulator, the International Organization for Standardization (ISO), the global network of national standards bodies, and industry groups working on specific applications or vertical markets. One initiative that is expected to open a floodgate of new applications is the electronic product code (ePC) being led by the Auto-ID Center.

The ePC is the RFID equivalent of the bar code, providing a straightforward way of identifying any product produced anywhere in the world. The idea behind it is partly driven by the need to keep the amount of data held on the simplest RFID tags to a minimum, to ensure that they are as cheap as possible to manufacture and can therefore gain the widest possible adoption.

However, Kevin Ashton, executive director of the Auto-ID Center, believes the ePC can be used as a serial number to track more information about a specific item over the Internet, rather than storing it on a bloated and therefore more expensive tag. “The ePC network is designed to be a general purpose system for automatically identifying objects,” says Ashton.

Foiled again

RFID evangelists have sometimes demonstrated how a shopper can simply push a trolley full of groceries under an RFID scanner, with the bill being debited from an online bank account. But even if the price comes down, RFID is still plagued with other shortcomings that need to be overcome.

Shoplifters, for example, might still be able to walk out of stores with goods without paying by putting aluminium foil around the tags or by strategically placing tins of food on the RFID tags of the objects they want to steal, suggests David Birch, a director at Consult Hyperion.

An equally intractable problem for supermarkets is the fact that liquids tend to absorb radio waves. “RFID ain’t magic and there are still physical restrictions,” says Accenture’s Ferguson.

And there are the classic trade-offs that have defined the communications industry: the higher the range, for example, the less data can be transmitted. “Different frequencies do different things. The low ones allow us to pass through solids that you couldn’t do with high frequencies. The high ones have a longer range,” says Ferguson.

There are also security concerns, particularly when the technology is used in payment systems.

Mastercard, for example, has been testing a system in Florida in which an RFID tag is embedded in credit cards from Citibank, JP Morgan Chase and MBNA. These need only be waved within 10 centimetres of a reader for a transaction to be completed.

The idea is to speed up transactions and to encourage the use of Mastercard for lower value goods that would normally be purchased with cash, says Murdo Munro, the credit card company’s vice president of mobile commerce and wireless.

But because the tags lack the power to encrypt data, Mastercard has had to employ an algorithm that means there is only ever a one-time transmission of data. “The data that is passed is not usable again,” says Munro. That raises fears that the algorithm could be reverse engineered and copied.

But all these concerns will not hold back the spread of RFID in the supply chain – still widely viewed as an area crying out for better computerisation. At first, the focus will be on pallets and boxes. Later on, it will move to item-level tracking (as Gillette is doing, for example).

“Organisations need better visibility and flexibility within their supply chains,” says Forrester Research analyst David Metcalfe. “They need to drive efficiency and ensure that they do not run out of stock.”

But eventually, falling prices and the increased power and performance of RFID technology – not to mention the advent of genuine global standards – suggests that it will eventually become ubiquitous.

“You can draw an analogy with the history of computing: the first computers were expensive and relatively low performance and only found niche applications. But over time, their price dropped and their performance improved and the market for them expanded massively. We are on the verge of that happening with RFID,” says Ashton of the Auto-ID Center.

For articles on How RFID works; RFID at BA and Delta Airlines; and RFID standards initiatives – search for RFID at www.infoconomy.com.