Witness Testimony Ms. Sandra R. Hughes Global Privacy Executive The Procter & Gamble Company One Proctor & Gamble Plaza Cincinnati, OH, 45202 Radio Frequency Identification (RFID) Technology: What the Future Holds for Commerce, Security, and the Consumer Subcommittee on Commerce, Trade, and Consumer Protection July 14, 2004 11:30 AM Thank you, Chairman Stearns and members of the Subcommittee, for the opportunity to testify today on this important issue. My name is Sandy Hughes and I am Global Privacy Executive for The Procter & Gamble Company. I oversee P&G’s global privacy program and am a member of P&G’s Electronic Product Code (EPC) team. As background, Procter & Gamble manufactures and markets over 300 consumer product brands to people in 140 countries. Two billion times a day, P&G brands touch the lives of people around the world. These brands include Tide, Crest, Pantene, Pampers, Vicks, Olay and Prilosec. We have over 90,000 employees worldwide and are headquartered in Cincinnati, Ohio. I will briefly explain why P&G is investing in Electronic Product Code technology and how we are using EPC. We are currently in the early phases of testing and learning about the costs and benefits of the technology and we are working to gain consumers’ confidence and trust in EPC and ensure that their privacy is protected. Why P&G is investing in EPC Procter & Gamble is pursuing the use of Electronic Product Code (EPC) to create efficiencies in the supply chain. As you have heard from Dr. Sarma, EPC is a way to uniquely identify a pallet, case or individual product using radio frequency identification (RFID) technology. It’s similar to today’s bar code, but with many more potential uses and benefits. P&G is a founding sponsor of MIT’s Auto-ID Center because we realized the enormous potential to improve processes in the entire supply chain – from our plants to retail distribution centers to store shelves. The real time, automated, accurate information that EPC generates will benefit manufacturers, retailers, suppliers and most importantly, consumers. Today’s supply chain systems are outdated and not meeting the needs of our consumers. EPC offers potential solutions for problems like out-of-stocks, theft and counterfeiting, as well as reducing inventory levels. We know that out of stock levels are higher than we, our retail partners and our consumers want. It is frustrating when you go to your local supermarket to buy your favorite flavor of Pringles and the shelf is bare. It can result in a lost sale for P&G and for the retailer. To guard against out of stocks, we keep an average of 65 days worth of product inventory, which costs us $3 billion a year. Theft and counterfeiting are growing problems as well. Worldwide theft costs retailers $50 billion a year and counterfeiting is a $500 billion problem. Testing and Learning about EPC Since the inception of EPC in 1999, we have moved from the laboratory to testing the technology in real world supply chain situations where we are conducting pilot tests with pallets and cases with partners Wal-Mart and Target in the US and Metro in Europe. The technology is still evolving and we are continuing to learn about EPC. In this test phase, we are still working to resolve technical issues with EPC. For example, the speed at which tagged cases and pallets pass by the readers as well as the type of products, such as liquids and metallic packaging, affect the reliability of the technology to read information about the product. P&G is also a member of a pharmaceutical industry group, supported by the FDA, to test how EPC can help prevent drug shortages and counterfeiting and make product recalls easier and more efficient. EPC is a powerful tool to deal with expiration date management, diversion, reduction in medication errors, product security and consumer safety, all important issues for the pharmaceutical industry. Down the road as P&G learns more about the technology, there may be opportunities to eliminate costs and generate additional benefits for the supply chain and consumers through item level tagging. We believe it will be several years before the technology is affordable enough and the benefits great enough to be used on individual consumer product items. Like any new technology, as has been the case with the Internet, responsible use requires considerable forethought by those developing and using the technology. That is why we have worked at these early stages to address privacy concerns associated with item level tags. Privacy Issues P&G recognizes that in order for consumers to accept EPC, they must understand the benefits for them and be confident that their privacy will be protected. P&G has a long history of responsible treatment of personal information and commitment to good privacy practices. Why? As a consumer products manufacturer, we rely on information about our consumers to better understand their needs in order to produce superior products, information and services to meet them. As a result, P&G has an enormous stake in fostering an environment of trust in which consumers confidently share their information with us. Creating this climate includes making sure that our practices meet or exceed consumer expectations and contributing to industry and policy initiatives that enable other companies to do the same. P&G’s approach to privacy is guided by two fundamental principles: (1) We strive to treat information provided by individuals as their own, which has been entrusted to us; and (2) We strive for transparency with consumers about how their information is used. We inform people about how we handle information they provide us and give them choices about further communication with us and further use of the data. Our privacy policy is global and we extend the same high level of protection to information from all individuals who provide personal information to us (consumers, shareholders, employees, job applicants, etc), to all locations where we do business and to all channels of contact, such as the Internet, direct mail, telephone, and wireless. EPC does not contain or collect personal information, nor is it intended to. But there is a perception that the technology could be used in this way. That is why we are working so hard to educate consumers about the facts versus the myths surrounding EPC. Based on extensive consumer research undertaken on EPC and our own core mission that "the consumer is boss", we worked with our EPCglobal partners to craft usage guidelines for item level EPC in the fall of 2003. To complement these guidelines, P&G’s internal position, based on the pillars of fair information practices, are as follows: (1) Clear and accurate notice should be provided where EPC is being used and consumers should be informed as to whether products they are buying contain EPC tags; (2) Consumers should have a choice as to whether EPC tags in the products that they buy can be permanently disabled or discarded, and this should be done without incurring cost or penalty; (3) Consumers should have a choice as to whether personally identifiable information about themselves is electronically linked to the EPC number on products they buy beyond what is done with barcodes today. Consumers will make choices based on benefits they perceive from the technology. We are working aggressively to identify and communicate these benefits as well as to identify options to implement these principles together with our partners in the supply chain. We will not pursue item-level tagging with partners who are not able to ensure privacy protection for consumers. We serve consumers. To do otherwise would not meet our core mission or business objectives. In this phase of testing and learning about EPC in 2004, P&G is informing our consumers about the pilot tests we are conducting. Up-to-date information about current tests, locations, brands and type of test (whether pallet/case or case/item) can be found on the company website, www.pg.com. In any pilot where a consumer could come in contact with an EPC tag, P&G affixes a label to the case that notifies the consumer of the presence of a tag. In addition, some retail outlets are providing further information on EPC to consumers in the form of a tear-off card on the store shelf that explains EPC, the symbol, and how the tag can be removed from the carton, and directs consumers to www.EPCglobalinc.org for more information. Need for Consumer Education Consumer research shows a very low awareness and understanding level of EPC at this time. P&G along with other end users in EPCglobal recognize the importance of education in gaining consumers’ trust in the technology and their understanding of the benefits. Last month we participated in the Federal Trade Commission’s workshop on RFID. FTC has played an important role in educating consumers on issues such as safe Internet surfing, online shopping tips, and protecting consumers against ID theft. We are enthusiastic about the potential for FTC to contribute to consumer education and outreach on RFID. EPC is in the Early Stages of Development In summary, I want to emphasize that EPC is in the early stages of development. The success of EPC depends on collaboration, global standards and affordable technology. We need the ongoing support and involvement of retailers, manufacturers and other industry bodies to adopt the EPC system. EPC must become the single global standard in order for the full efficiencies of the technology to be realized. Standards enable cost effective, interoperable technology. And finally EPC technology needs to be affordable. The cost of tags and readers must continue to decline in order to deliver a value proposition at the case and pallet level. Item level tagging for consumer products requires tags to cost one cent or less, a threshold that is some years away. EPC is designed to benefit the consumer. It will help ensure that the right product is in the right place, at the right time and at the right price. In order for EPC to be successful, it must be accepted by consumers, be perceived as offering consumers benefit and be used in ways that provide privacy protection for consumers. Procter & Gamble is working hard to ensure that EPC will be a "win/win" for all. Thank you for the opportunity to appear before the Subcommittee. I will be happy to answer the Subcommittee’s questions.