Monday, September 11, 2006

DoD’s New Passive RFID Requirements

RFID Law Journal
Newsletter No. 8
September 11, 2006

Over the upcoming months, the RFID Law Journal will continue its focus on the rollout of the Department of Defense’s passive RFID regulations. In our kickoff newsletter (http://rfidlawjournal.blogspot.com/2006/08/dod-is-critical-early-adopter-rfid-law.html) “The Department of Defense is the Critical Early Adopter,” we noted that the DoD is taking a leadership role in the spread of RFID’s adoption. It is the “teeth” of DFAR 252.211-7006 (RFID) which is separating the DoD’s deployment efforts over those of other noteworthy early adopters, including Wal-Mart and Target. After all, while both Wal-Mart and the Department of Defense maintain tens of thousands of suppliers to provide them with a googlistic number of SKUs, only the DoD can enforce supplier compliance through regulatory measures.[1]

The DoD is mixing both the “carrot” and the “stick” in its attempts to bring its universe of suppliers into its electronic invoice and shipment systems. By electing to use the WAWF and RFID, DoD suppliers can obtain significantly faster payment of their invoices. It is literally a case of “guns” vs. “butter.” In the case of suppliers shipping costly pallets, the impact of receiving early payments (i.e., up to 30 days faster with WAWF/RFID) can make a significant impact on one’s balance sheet (to the point that RFID must be deemed as a ROI benefit). The RFID DFAR also provides suppliers with a mechanism for receiving a credit for installing a RFID system, though the reimbursement mechanism is not widely utilized and is scheduled to be phased out in 2008 (see link referenced at the bottom of this article). It is believed that SMBs, who may otherwise not be able to justify an automated RFID solution, are best positioned to win these credits from the DoD (who is clearly required to maintain its diverse universe of suppliers), but many of these suppliers are, for the time being, staying on the sidelines (i.e., playing chicken with their business) or attempting to use pre-printed labels to bring themselves into compliance. The DoD is also attempting to give incentives to compliant suppliers by incorporating RFID compliance into its vendor scorecard system. A compliant company can improve its vendor scorecard vis-à-vis non-compliant suppliers, enabling it potentially to take business away from other DoD suppliers.

The DoD’s “stick” entails a mix of measures. Standing on its regulatory rights, the DoD can refuse a non-compliant shipment and may withhold payment. It is believed that once the DoD starts more aggressively issuing fines to companies, additional parties (i.e., the ones currently on the sidelines) will pile into the market (i.e., purchase RFID systems, pre-printed labels, etc.).

In May, 2006, the DoD passed its interim RFID DFAR, which substantially expands the original RFID DFAR to encompass more than 20 depots in the Continental United States and expand the classes of affected goods. Since the DoD is busily wiring all of these facilities (and is expected to complete such wiring by the end of September 2006), suppliers should anticipate a significant uptick in contracts being impacted by DFAR 252.211-7006 (RFID) by the end of the year. The DoD has also been bombarding its suppliers with a variety of educational efforts, including workshops, and it has been prominently posting notices on its websites, including those of its primary procurement offices as well as the DLA Internet Bid Board. These RFID notices reiterate the message that the DoD is in the second year of a three year rollout, making it clear that the RFID is here to stay.

© 2006 – RFID Law Journal, LLC. All rights reserved.
Learn more about RFID legal issues at http://www.rfidlawjournal.com/. You contact our editor about this publication at editor@RFIDLawJournal.com. The information provided herein is for your informational purposes only and is not to be construed as legal or other advice (including, without limitation, investment advice) or as a substitute for legal counsel. Online readers should not act upon this information without seeking professional counsel from a trusted advisor. Usage of the information contained herein is subject to the terms and conditions set forth at www.rfidlawjournal.com.

Learn more about cost of compliance reimbursement at Comments 4 & 9 of the following link:
http://a257.g.akamaitech.net/7/257/2422/01jan20051800/edocket.access.gpo.gov/2005/05-18025.htm.
















[1] While the Department of Defense is subject to diversity requirements, major retailers are not signaling that they will use the RFID requirements to “squeeze out” their SMBs, and indeed, if anything, their concentration of their Top 1,000 suppliers suggest more sensitivity to small business suppliers.

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