More Findings on Impact of RFID

FAYETTEVILLE, Ark. — RFID technology has the greatest impact on a critical category of products -- those that sell between 7 and 15 units per day -- according to further analysis by University of Arkansas researchers on the impact of RFID on out-of-stock products at select Wal-Mart stores.

“This is a very important category,” said Bill Hardgrave, founder and director of the RFID Research Center, a subunit of the Information Technology Research Institute in the Sam M. Walton College of Business. “These items are fast movers and would be expected to stock out frequently. But they probably do not disappear from shelves frequently enough to demand close attention from store associates who are responsible for their replenishment.”

In May, Hardgrave announced that RFID technology was responsible for a 30-percent reduction in out of stocks for products selling, on average, between 0.1 and 15 units per day. A deeper analysis of the impact of RFID on various sales-velocity categories demonstrates that the technology was responsible for a 62-percent reduction of out of stocks for products that sold between 7 and 15 units per day.

Interestingly, for those rare products that sell more than 15 units per day, Hardgrave did not detect a reduction in out of stocks due to RFID technology. His findings for this category were inconclusive.

“I can only speculate that for very high-velocity items such as milk and soda, for example, replenishment is going to be almost continual,” said Hardgrave. “Associates have to pay very close attention to these items. However, we had very few items in this category during our analysis; thus, our results are inconclusive.”

The study, sponsored by Wal-Mart Stores Inc. and conducted by Walton College research faculty from Feb. 14, 2005, to Sept. 12, 2005, examined 24 stores, half of which were RFID-enabled and the other half of which were control stores. The test stores and control stores were each made up of six Supercenters, three Neighborhood Markets and three traditional stores. The stores were located in Texas and southern Oklahoma. The study included 4,554 different products and controlled for things such as pack size of cases and shelf quantity.

For stores that were not RFID enabled, associates had to create manual lists of items that needed to be taken from the backroom to the sales floor. Although handheld scanners helped associates, the lists were based on human observation of shelves for items that were out of stock or soon to be out of stock. For test stores, lists were created automatically based on RFID-generated knowledge of item location within a store -- backroom or sales floor -- and point-of-sale data.

Further breakdown based on sales velocity demonstrated that RFID reduced out of stocks:

• by 32 percent for products that sold 0.1 to 0.2 times per week, which is the same as one to two items every 10 days.
• by 32 percent for products that sold 0.2 to 0.3 times per week.
• by 20 percent for products that sold 0.3 to 0.5 times per week.
• by 36 percent for products that sold 0.5 to 1 times per week.
• by 29 percent for products that sold 1 to 3 times per week.
• by 32 percent for products that sold 3 to 7 times per week.

For products that sold less than 0.1 units per day, RFID made no difference in reducing out of stocks. Hardgrave said these are extremely slow-moving items that do not frequently experience out-of-stock occurrences.

In June 2003, Wal-Mart asked its top 100 suppliers to begin using RFID on pallets and cases shipped to a select group of distribution centers and stores in the Dallas region. With that request, Wal-Mart jump-started a 50-year-old technology that previously had found limited, but successful use in a variety of areas. Since that announcement, the RFID industry has blossomed. Several major retailers have launched RFID initiatives.

Radio frequency identification is a wireless data collection technology that uses electronic tags for storing data. Like bar codes, they are used to identify items. Unlike bar codes, which must be brought close to the scanner for reading, RFID tags are read when they are within the proximity of a transmitted radio signal. The technology has applications for business and industry including retailers, suppliers and transportation providers.

In the retail sector, RFID is expected to address what industry experts and business researchers call “shelf replenishment,” one of six categories that explains how items become out of stock. As a root cause, shelf-replenishment is responsible for 22 percent of all out of stocks on retail shelves in the United States.

Due to consumer buying behavior, an out-of-stock occurrence doesn’t always translate into a lost sale, but it can contribute to significant financial losses for retailers and suppliers. Nationally, retailers absorb about 42 percent of the impact of an out of stock, while suppliers absorb about 33 percent. For a store with a national average of 8 percent of its products being out of stock, the estimated potential lost sales are 3.4 percent, Hardgrave said.

“As a percentage, this may not seem like much,” Hardgrave said, “but assume a retailer has annual sales of $100 billion. If this retailer could eliminate all out of stocks and thus lift sales by 3.4 percent, the retailer would experience as much as $3.4 billion in increased sales annually.”

In addition to his position as director of the RFID Research Center, Hardgrave is executive director of Walton College’s Information Technology Research Institute and holds the Edwin and Karlee Bradberry Chair in Information Systems.

To read Hardgrave’s full report on the impact of RFID on out of stocks, please go to: http://itrc.uark.edu/research/display.asp?article=ITRI-WP068-0606 .