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Retailers look to RFID item level tagging to kick $430B out-of-stock problem

Why are retailers so anxious to deploy item level RFID technology? For starters, out-of-stocks are robbing them of more than $430 billion in sales each year. A new study from IHL Group says that major retailers could improve sales by close to 10 percent by entirely eliminating out-of-stocks.

While RFID can’t do that on its own, it’s no wonder retailers like Walmart, Kohl’s and Dillard’s are pursuing item level tagging with such vigor. The IHL study says that more than one in five shoppers leave consumer electronics retail outlets empty handed because of out-of-stocks.

“What it comes down to is that there is no good way of counting your items at this point in time,” says Zander Livingston, CEO and co-founder of Truecount Corp., and a pioneer in apparel item level retail tracking. “It’s tedious on the employee, it’s manual labor and employees can easily be distracted, so there are significant problems with trying to manage your inventory with human beings, particularly if you have lot of turnover. So nobody is ignoring RFID any more.”

There are varying reports about the pace of item level tagging at the retail level. Some analysts are calling for explosive year-over-year growth for the foreseeable future. In its 2010 report, VDC Research predicted that retailers would consume 800 million tags in 2011, and 3.4 billion by 2014. Given developments that have taken place over the last year, those estimates will likely be lifted in VDC’s next report. ABI Research, meanwhile, predicted in February that the footwear and apparel sectors would consume 750 million item level tags this year.

However, some tag manufacturers say that major retailers are not adopting as quickly as anticipated. But the intent is certainly there. Major retailers banded together in November to unveil the Item Level RFID Initiative, a group chartered to spread the pace of item level adoption.

And Livingston, who founded his RFID software and services company last year, says his firm signed on four retailers in May alone, although they are mostly Tier 2 and Tier 3 players.

“People are paying attention to RFID now,” he says. “Obviously the smaller retailers can move much quicker and those kinds of companies can jump in and make decisions quickly and see more immediate results.”

Livingston says that he is seeing increased action with retailers of mobile concert items such as T-shirts and hats that travel from venue to venue. The items need to be counted each time they enter and leave a concert venue, creating huge labor costs. RFID can accomplish the task much quicker and more accurately.

“They jumped on this solution immediately,” says Livingston. “They just have really bad inventory numbers and it’s a perfect opportunity for RFID to come in with handheld mobile devices to do cycle counts for them.”

Truecount is also working with a pair of Tier 2 sporting goods stores. Livingston expects those rollouts to be complete sometime this summer. In addition, Truecount is negotiating with a dozen more clients, including a major Tier 1 retailer.

The IHL study outlines how bad the out-of-stock issue is. The study says that the amount of revenue lost to retailers each year through distortion totals $778.5 billion worldwide. More than half (56 percent, or $433.4 billion) is a result of out-of-stock items.

The report says that retailers are in denial about out-of-stocks, and that the true rate experienced by consumers is almost 18 percent, about three times higher than the out-of -stock rate claimed by the retail industry. The report says that Radio Shack has an out-of-stock rate of 22.7 percent, and that Office Max was at 30.6 percent, equal to a loss of $1.96 for each customer entering the store.

North American apparel stores experience about $23.5 billion in annual out-of-stocks, and $16.2 billion in overstocks. “We talk anecdotally about RFID as a help, but the biggest issue is poor planning and lack of staff execution at the store level,” says Greg Buzek, an analyst with IHL. “RFID typically would help about $12 billion of the $39.7 billion inventory distortion problem for apparel retailers in North America.”

According to the Item Level RFID Initiative, EPC tagging can lead to much greater inventory accuracy, moving the industry average from 63 percent to 95 percent. Inventory productivity could be increased by 96 percent, improving from 200 items per hour to 12,000 items/hour with RFID. Item level tagging can also reduce the time it takes for an associate to find a product by 18 percent. Finally, out-of-stocks can be reduced up to 50 percent, with a sales lift of anywhere from 2 percent to 20 percent resulting from item level tagging.

“I’ve always said that a misplaced item is equivalent to not having it available at all,” says Livingston. “There is a breakdown at every level, from the supplier to the DC, the DC to the store, and then store to store transfers. The more times humans touch it, the more distortion you’re going to get because humans are just not 100 percent accurate. So for every one item you are off, it creates two points of distortion within your inventory.

“But once you put in RFID and become confident with the system and you know you are at 99.9 percent inventory accuracy, you will look for that missing item because the system says you have it, and you will always find it.”

For more information: john@rfid24-7.com

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