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Issue Date: Vol. 44, No. 11, November 2004, Posted On: 11/12/2004


RFID Product Coding Is Next Step In Sales Data Capture Automation


by Faranak Sarbaz, University of Southern California Student


EDITOR'S NOTE: While the vending industry has tended to see RFID technology as a potential cashless payment system, the wider retailing world has come to regard it more as an improved product tracking approach, the next step beyond UPC barcodes. RFID has proved its practicality for payment in a variety of applications ranging from ExxonMobil's "SpeedPass" to the Coca-Cola vending machines deployed in Salt Lake City at the 2002 Winter Olympics, which were fitted with RFID payment systems from Stitch Networks (now part of USA Technologies). Fobs shaped like little "Coca-Cola" bottles contained Texas Instruments devices that identified their bearers (see VT, April 2002). Last year, Wal-Mart announced that it would require its 100 largest suppliers to mark cases and pallets delivered to its stores with RFID tags by 2005. The new EPC (Electronic Product Code) standard is being promulgated by an alliance (EPCglobal) between the Uniform Code Council (UCC) in the United States and European Article Numbering International (EAN) in the European Community. The logical next step is the imprinting of RFID labels on individual product packages. There is no consensus on how soon the cost will drop to a level at which this will become feasible, but there is general confidence that it will happen. The following paper, by USC student Faranak Sarbaz, explores the implications of RFID product coding for the vending industry. We believe that she underrates operators' ability to determine machine inventories and insure product freshness. But her discussion of likely developments in smart labeling raises some possibilities that we have not previously seen proposed, and should interest everyone.
LOS ANGELES - Flashback: The Year is 1996. A man and his thirsty seven-year-old son are leaving the Little League baseball field after batting practice. Father and son stand before a fieldside vending machine, scramble for enough change, finally drop just enough coins in, pull a lever, and out comes a can of stale apple juice. Later, when the man stops quickly by a convenience store to pick up some fresh milk and realizes he has no quarters, he chances the meter and loses, getting a parking ticket.

Flash-forward: The Year is 2006. A woman and her thirsty seven-year old son are leaving a Little League baseball field after practice. Mother and son stand before three fieldside vending machines, the woman waves her key chain in one fluid arc, touches two spots on one of the machines, and receives not only a fresh can of apple juice but also a quart of milk with an expiration date six days in the future. For a 50% discount, she chooses to receive a second quart of milk with an expiration date two days in the future. Finally, she presses a spot on another of the machines and a fresh loaf of white bread drops conveniently into a bag that she carries away with the rest of her purchases. Her bank account is instantly debited. She skips the convenience store and the parking ticket.

A brighter future for vending machine customers? Indeed. Less evident, but even brighter, is the future for vending machine operators. The magic of a new technology is just beginning to revolutionize retailing, with perhaps the biggest impact to be felt by the companies that sell goods through the vending machine channel.

THE NEW TECHNOLOGY

This technology is called Radio Frequency Identification, often referred to as RFID. In simplest terms, RFID is much like an intelligent, interactive barcoding and scanning system. The technology uses radio waves to interrogate the "barcode" (actually an integrated circuit) and to receive very detailed information in response.

In business-speak, RFID is often described (as Texas Instruments phrases it) as "an emerging, advanced wireless technology for item-tagging that enables end-to-end asset awareness."

In tech-speak, RFID has been described as "Low frequency (30KHz-500KHz) and high frequency (850MHz-950MHz/2.4GHz-2.5GHz) systems of active 'interrogator' transponder chips that communicate with passive radio-signal emitting 'tag' chips, some systems with readable ranges from 30 to 90 feet or more." Whatever the definition, the potential for revolution in the vending industry is large.

Whereas barcodes are static and can only identify groups of products (e.g., one code for all cans of Smith Brand Sweetened Apple Juice), RFID tags can provide a unique serial number for every single item (e.g., a unique code for each can of juice).

The two-way nature of the technology will soon allow vending operators to remotely monitor details as precise as exact product temperatures and approaching expiration dates of each item making its way into a vending machine,and the date that each makes its way into customers' hands (or doesn't). Some industry players characterize the RFID chip technology as an advanced technology that will allow vending operators to collect, analyze, and act upon huge amounts of data, thus enabling operators to more easily pull expiring products from machines before spoilage, and to offer a wider range of perishable products through vending machines.

RFID technology, applied in the vending industry, is also expected to create new marketing opportunities that will be "win-win" for both vendor and consumer. To do that, it will build on new capabilities that are taking the field right now, such as remote monitoring.

For example, if a vending operator knows that he or she will need to pull a short-dated can of apple juice, the operator can instantly put the juice on "immediate sale" at a deep discount, to move the merchandise and to avoid having to pull it and throw it away. Information about the product can be downloaded while new pricing can be uploaded.

The operator will also be able to accumulate, assess, and learn quickly from this new wealth of highly customized supply-and-demand data. The technology-driven process will help make the pricing of products in vending machines worldwide more of a science. These advantages create a big "win" for suppliers.

Likewise, consumers will equally win as they learn to look for the new auction-like pricing phenomenon: deep time-lapse discounting, particularly relevant and beneficial to consumers during instances when they seek items for immediate consumption. Consumers who are (paradoxically) willing to defer spontaneous gratification until an item approaches expiration , and its price falls , will get the best deals on price. The market of consumers will thus fragment and segment according to price sensitivity, allowing for near total price discrimination in economic terms.

In a way, this RFID-enabled pricing model is analogous to the business model that Priceline.com initially built to identify and harness consumer surplus in the service industry, especially the hotel and airline sectors where selling available capacity to consumers at the last-minute (even at steeply discounted prices) could make hugely positive impacts on the bottom line.

In effect, the new RFID technology and its enhancement of supply-chain management and micro-pricing control will allow the economic equilibrium of products sold through vending machines to be calculated on a much shorter-term basis, resulting in a more lucrative and efficient economic vending market for both supplier and consumer.

Even more importantly from the industry's standpoint, Radio Frequency Identification is a technological tool that offers solutions to the most pressing traditional vending industry problems. It has the potential, as RFID pricing drops drastically during the next few years, not only to solve problems with the traditional model, but also to: (1) enable new vending product categories where none previously existed, (2) facilitate new vending distribution points, (3) improve overall service delivery, (4) improve the efficiency of vending employees and (5) revolutionize product tracking, inventory management, and the whole vending industry supply chain.

BUSINESS MODEL

Total annual vending industry sales are variously estimated at $20 to $40 billion. On average, product cost represents only about 46% of the sales price of each product, allowing a favorable gross margin of about 54%. However, labor and administrative costs are steep, leaving the industry with an average operating profit of only about 4.3%. It is the labor and administrative efficiency of this industry that stand to benefit tremendously from the new RFID technology. The operating profit has promising room to grow. And this promise may benefit a very large number of vending players: industry research suggests that the classic vending industry is exceptionally entrepreneurial in composition, with about 75% of operators earning less than $1 million in revenue annually and only 3% earning more than $10 million in revenues.

Besides vending operators, other major players in the traditional vending industry who stand to gain from the new RFID-enabled efficiencies include machine manufacturers, product and service suppliers, distributors and brokers (for equipment and product), and consultants.

The flow chart on the following page shows the fundamental flow , and disjointedness , of the activities that are a daily part of an established vending company. Although this model has been functional, profitable, and in some cases lucrative, this traditional model , along with the traditional vending industry , is also riddled with operational problems and areas of logistical lag that are begging for solutions. The remainder of this article presents 10 significant industry problems and the manner in which RFID technology offers tremendous hope to solve each problem.

10 SOLUTIONS

Problem #1: Customers of vending machines must have cash on their person in order to make a purchase. Although coins are no longer required by many machines, people carrying large bills may not have the necessary cash or may be reluctant to receive many heavy coins in return as change. Many sales are lost for this reason.

Solution #1: In addition to newer machines which do solve this problem by allowing credit and debit card transactions, RFID technology will offer people even greater convenience by allowing them to merely wave their chip-enabled credit or debit cards conveniently from their key chains or other handy objects. Insertion of cards into the machine (with the potential damage or loss) and line-of-sight reading are not required for this newest technology (which works much like an "E-ZPass" in a highway toll booth). An additional benefit of removing the cash requirement, using RFID, is the greater likelihood for multiple sales by one consumer at a given vending machine. If cash is not required, and all purchases will be made immediately to debit or credit card statements, studies show that people are more likely to make multiple purchases from a vending machine.

Problem #2: Employees and others steal cash from the machines routinely.

Solution #2: With RFID technology and the increase in cashless purchases, the total cash that is subject to theft (and thus the total cash liability of the operator) will be substantially reduced. Cashless purchasing will allow for electronic rather than physical transfer of assets from the customer to the operator. Because of encryption and other intensive security measures available in the virtual cash world, cashless purchasing eliminates vendor vulnerability.

Problem #3: Untraceable theft of products from machines (and trucks) by employees or others.

Solution #3: This problem is sometimes called 'shrinkage' of vending machine inventory. With RFID technology, every single item in the vending machine , and every item on its way to the vending machine , will have its own unique identifier. Procedures to read the whereabouts of each item, at every step of the supply-chain process, using radio technology will immediately alert management to missing products and provide early-detection methods to spot potential patterns of thievery. This item-level tracking, tracing, and accountability are not possible under the traditional model with conventional barcodes. Conventional barcodes cannot track at the item level of detail.

Problem #4: The back office staff spends much of its time manually entering sales data.

Solution #4: RFID will allow for the wireless transmission of item-level sales data directly from vending sites to back-office computers, without the need to re-key the data. In addition to reducing the labor costs associated with the entry of data manually, removing the step of re-keying data also massively reduces the number of data entry errors that can occur , this alone has the potential to save thousands of dollars (or more if data entry errors happen to be very severe.)

Problem #5: Management has very little reliable information about products that may have spoiled or expired before their expected expiration date. This is usually learned only upon physical examination of each machine.

Solution #5: RFID will allow for the wireless transmission of item-by-item, real-time product temperature. It will also alert management of any power interruptions to refrigerated machines. With these tools, management will be in a greater position to anticipate early spoilage and to remove non-saleable (and potentially dangerous) food products from machines.

Problem #6: Route supervisors and drivers must plan each day's routes with limited information about the merchandise that has been sold or unsold in each machine. Some unnecessary stops are made while other necessary stops are needlessly delayed or missed.

Solution #6: RFID will allow for the wireless transmission of item-by-item sale status to route supervisors. Back-office efficiency routing software can then analyze all of the data from all of the vending machines on location and create the single most efficient routing matrix for all of its drivers. This will save a great deal of labor and may eventually reduce the need for some drivers.

At the same time, since vending locations and range of goods sold in vending machines will very likely increase due to RFID marketing advantages, there is likely to be a corresponding increase in demand for drivers, so large-scale job loss among drivers does not seem probable.

For smaller vending operations, the new wireless technology can be installed in each vending machine and in each of the few route vehicles, with individual drivers able to collect vending machine data wirelessly while driving along their own specific routes. Instant data retrieval provides the driver with inventory information before physically visiting each machine, eliminating service review time, saving stops, time, and out-of-stocks.

Problem #7: In product warehouses, where products are kept before drivers take them to the vending machines, products must be stacked at certain heights, facing specific directions so that human beings can climb or lower themselves to the products and scan the crates and pallets at very close range. Barcodes require line-of-sight access to be scanned. This slows down the supply-chain process and adds to administrative cost.

Solution #7: In product warehouses, RFID will eventually replace barcodes and will allow for automated reading of crate and pallet information at fairly long range, using radio waves. Line-of-sight is not required, so tagged pallets, crates, and individual items can be facing any direction, on any shelf at any height, and still be read by the RFID interrogator. The scanning process can be human-driven, robot-driven, or automated in many other ways. The relaxing of constraints on warehouse labor and on warehouse height, depth, and space limitations offers enormous cost savings potential in the new model of supply chain management.

Problem #8: Barcodes are easily damaged and information is then lost.

Solution #8: An RFID tag can be protected by a durable coating and can still be read by radio wave transmission. Less information will be lost, thus saving money.

Problem #9: Barcodes have a very limited capacity to store product information.

Solution #9: RFID has almost unlimited potential with regard to carrying information. It can record and plot temperatures, times, dates, individual product characteristics, global positioning, and any other programmable variable that is likely to help operators and consumers. One report recently suggested that some RFID tags will contain specific instructions for each consumer , based on whichever microwave oven brand and model he happens to own , to program the consumer's microwave oven to heat the product ideally. (In the future, with RFID-enabled microwaves, the whole process might become entirely automatic with no human intervention necessary except deciding that one is hungry and putting the object in the microwave!)

Problem #10: Products inside vending machines frequently stock-out and potential sales are lost, representing large opportunity costs. Also, frequent stock-outs can cause consumers to view a particular vending machine,or the vending machine industry,as less reliable a source of purchase than other distribution channels. This snowball effect is not necessarily easily measurable in dollars.

Solution #10: RFID helps prevent stock-outs by sending advanced warning to managers and drivers that particular products in particular machines will soon run out. The routing software described earlier, along with human interpretation of the data and better-informed decision-making will solve this problem.

With all of these very large and very effective potential solutions , in supply chain cost savings, in administrative cost reduction, in enhanced consumer benefits, and in new marketing benefits , on the horizon, industry analysts predict that the new RFID model of vending will achieve by 2007:

* 25% to 40% reduction in direct labor costs;

* 15% to 30% reduction in shrinkage (cash accountability); and

* An 8% to 18% increase annually in sales, and possibly much more.

These estimates are backed by the industry's recognition that progress is made by gradual improvements that, at some point, suddenly give rise to an exponential advance.

OBSTACLES

So the future of vending is illuminated by many bright spots. And even though Wal-Mart, in June 2003 announced its new Electronic Product Code (EPC) initiative , a program requiring its top 100 suppliers by January 2005 to start using RFID tags on its cases and pallets, and elevating Radio Frequency Identification to a new level of visibility , the vending industry must figure out ways to overcome the short-term barriers that prevent immediate, widespread implementation of RFID and all of its benefits.

Current obstacles come in many forms, but they all generally boil down to two factors: prohibitive per-unit cost for the many smaller items traditionally sold through vending machine outlets, and overall human resistance to change. The inevitable cross-industry fact of inertia and people being set in their ways tends to slow down the introduction of any new technology , and this one is no exception. But the vending industry does have its leaders, such as Smartmech Corp. in Canada, that is already marketing an RFID system that allows operators to track sales, improve route efficiency, and provide heightened location management accountability. So the inertia is far from insurmountable.


Topic: Vending Features

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