You can’t sell an item you haven’t got in stock.

That is the basic-but-true approach of the U.K.’s John Lewis Partnership as it pushes out deployment of RFID for item-level cycle counting and store replenishment.

Operator of the John Lewis Department Stores and other U.K. retail businesses, John Lewis Partnership has been testing item-level RFID for more than a year, seeking a better handle on the millions of items it sources into inventory each year and to commingle that data with sales visibility.

“The idea was that we would have real-time inventory information,” says Nick Ager, John Lewis’ project manager for RFID. “The whole drive is to improve stock accuracy; as a consequence of that, we would improve availability.”

John Lewis likes what it sees so far in its piloting. Though some issues need to be resolved to establish a viable business case for RFID, “we’ve had some very encouraging results,” Ager says.

The company views adoption of RFID as part of a forward-thinking approach to retail — for both the customer and the business. In an April 2008 survey, 6,000 British consumers voted John Lewis the U.K.’s “favourite retailer.” Shoppers gave John Lewis the highest marks for price, convenience, quality and service in the polling done by London retail consultancy Verdict Research.

RFID testing was hardly uneventful, Ager says, but it provided John Lewis with a laboratory to study obstacles to efficient RFID use in a department store setting. For its program, John Lewis partnered with OATSystems, a Waltham, Mass.-based RFID solutions provider with offices in London and Bangalore, India. (Checkpoint Systems, a provider retail shrink management solutions, acquired OATSystems in June.)

Last year, John Lewis began its first RFID pilot with women’s shoes, but the counting went askew. The challenge, Ager says, was finding a way to place RFID tags on the shoes rather than on the box.

“If the customer is trying on three or four pairs of shoes, sometimes the shoes go back in the wrong box,” he says, “so you’re only counting boxes and not shoes.”

Putting tags on shoes – women’s shoes, in particular — presents an issue because “they’re quite small and the sole is quite small,” Ager says. Another problem: the tags could be removed easily by customers or broken when the shoes are tried on.

John Lewis “learned a lot about some of the limitations of RFID from that particular trial,” Ager says. The retailer moved on to hanging garments, which it found to be more conducive for cycle counting. “We realized very high tag-count rates,” Ager says.

Accurate stock data
In March, John Lewis piloted men’s suits for RFID counting in four stores. Cycle counting occurred on Mondays; replenishment runs based on the counts began on Tuesdays. John Lewis staff could perform cycle counting on the suits at least 20 times more quickly using RFID than using the existing bar-code processes, Ager says.

As a result, “when our systems look to replenish gaps on our sales floor, they’re using real, accurate stock information,” he says. “The idea is that you are replenishing to a true stock figure.”

In a February 2008 report, research firm Gartner notes that retail commands about 14 percent of the RFID market, trailing discrete manufacturing (21 percent), national and international government (20 percent) and transportation (20 percent).

In the government sector, new applications are focused on assisting with national security and curtailing identity theft, among other uses. The U.S. and other governments are moving quickly, for instance, to replace paper passports and plastic ID cards with electronic passports and smartcards that use contactless chip technologies.

Paul Cataldo, vice president of marketing for OATSystems, says RFID applications are helping retailers address two key issues: shelf availability and the underlying problem of what he calls inaccurate perpetual inventory.

“The root of all the evil in retail is imprecise, inaccurate perpetual inventory,” he says. “What retailers do, of course, to correct this problem is go through a manual process once or twice a year of cycle counting their inventory. But as soon as they do that … errors start to propagate the system.”

In the case of inventory that is inaccurate as the result of shrink, not only are retailers “losing that item, they are losing follow-up sales of that item,” Cataldo says. “And because that item isn’t being reordered, they could be in an out-of-stock situation for a period of time.”

Avoiding the black hole
Retailers also can pinpoint errors in their supply chain, distribution points and at the store level with RFID applications, avoiding what Cataldo terms an “operational black hole,” not knowing the fate of some stock.

Tagging items at the manufacturer’s location is emerging as the preferred method for retailers, depending on their operational capabilities and those of the manufacturer. “Then you can use those tags to track merchandise throughout the entire supply chain and start to get visibility as soon as it leaves the manufacturer’s site,” Cataldo says.

Ager hopes that John Lewis stores “will have millions of items tagged” within a few years, but the key to building the long-term business case for item-level RFID continues to be the cost of the tags.

“I can foresee a time when most of our hanging garments are tagged,” he says. “The barrier to that, at the moment, is the unit cost of the tag and label; that is still quite high.” Pricing “needs to come down by 50 percent to make it an absolute no-brainer.”