Countdown to RFID

When Wal-Mart first mandated that its top suppliers start using RFID to help it track shipments, the Jan. 1, 2005 deadline seemed a long time away. With that target date upon us, the automatic identification and tracking of products in the supply chain remain a work in progress.

“When they first mandated the pilot, it was 100 percent of all products flowing through, physics be darned,” said Yankee Group analyst John Fontanella. “They’ve learned along with everyone else, there are some legit problems to be overcome.”

Fontanella’s report on Wal-Mart’s initial RFID rollout, released this week, shows that despite the big-box retailer’s reputation for hard-nosed business practices, Wal-Mart has learned to take a collaborative approach with suppliers in this case.

“Its been a real cultural shift for Wal-Mart,” he said.

Wal-Mart goosed the consumer packaged goods industry by mandating in 2003 that its top 100 suppliers must apply RFID tags to cases and pallets of goods they shipped to the retailer. Later, the U.S. Department of Defense, Target Stores and Albertsons got on board, telling their own top suppliers to follow suit.

At this point, Fontanella said, Wal-Mart is flexible on proposed rollout strategies, as long as the supplier shows it’s committed to making RFID work. It’s willing to accept “slap-and-ship” tagging, in which an RFID-enabled label is simply placed on the crate as it leaves the supplier’s warehouse, without the supplier itself electronically tracking the crate.

Wal-Mart also has been willing to eliminate products from the program. Jeff Richards, CEO of R4 Global, an RFID systems integrator, said, “Wal-Mart, since day one, has worked with every supplier to let them scope the project,” determining which products should be included, and which facilities needed to do tagging.

Finally, the big-box retailer has lowered expectations about the read rates for shipments, that is, how many of the tags are successfully read automatically when they come into the vicinity of the reader. Some suppliers are only managing 50 percent read rates, according to Fontanella.

Richards said that while R4’s test center can get 100 percent read rates with any product, the question is whether a product can be tagged and read in a cost-effective manner. “Any product can be tagged, it’s just a question of what it costs,” he said.

According to Richards, the cost analysis includes the number of manufacturing locations involved in shipping the goods, the complexity of the distribution network, how easy it is to segregate products going to retailers with RFID mandates, the ease of tagging and the cost per case of goods.

By the end of January 2005, Fontanella reported, 137 suppliers will be tagging on average 65 percent of their products to ship to three Wal-Mart distribution centers and ultimately 102 Wal-Mart stores and 36 Sam’s Club outlets. A Yankee Group survey found that most were budgeting on average $2 million to $7 million for RFID rollouts in 2005.

According to AMR Research, Wal-Mart’s top suppliers have spent just $1 million to $3 million to meet the mandate. The IT research firm took a more negative view of the initiative. “Many of Wal-Mart’s suppliers are more convinced than ever that there is no ROI, and even worse, consider their technology investments to be a throwaway thus far,” research director Kara Romanow said in a research note. “Because of this, they’ve only spent the bare minimum needed to comply.”

While Sun Microsystems’ RFID unit initially saw a lot of pushback and complaints from suppliers under the mandate, Jim Del Rossi, chief engagement manager for RFID at Sun, said now customers are buckling down to figure out the reasonable, meaningful steps they need to take to become compliant with the mandates.

“They’re accepting the fact that in all these processes, you want statistical improvement [in business processes]. It never will be perfect, and you have to plan for those conditions,” he said.

While where and how much return on investment suppliers will see from complying with Wal-Mart’s demands, Fontanella said, “They should stop obsessing about the cost of tags. There is an incremental cost to serve Wal-Mart, but it pales in comparison to trade promotions — which they can’t track anyway.” He said most manufacturers will spend around $2 million to comply with Wal-Mart’s initial mandate.

For the retailer itself, he said, the action is in the back room. Sales associates often can’t find merchandise in storage in order to get the right product on the shelf. “All of a sudden, maybe it is worth it to tag cheap stuff like toilet paper,” Fontanella said. “It may be the margin, not the item value, that makes the product a candidate for tagging.”

Sun’s customers still are evaluating where they’ll get return on investment, Del Rossi said. “The system integrators will have a much bigger impact. They look at [the RFID mandates] as a supply chain management revamp opportunity. They’ll use the technology to squeeze inefficiencies out of the system.”

Del Rossi said it was a risky move for Wal-Mart to push RFID on suppliers, but that the improvements in business processes and supply chain operations will benefit the industry down the road.

“Wal-Mart was pretty farsighted to say, ‘This is something that has to happen.’ It was good for a market leader to take the risk,” he said.

Fontanella too gave Wal-Mart the credit for moving RFID into the technology mainstream. While other retailers and purchasers, including Albertsons, Target Stores and the U.S. Department of Defense, have imposed their own Jan. 1 mandates, he said they really are waiting to see how Wal-Mart’s rollout goes.

“Wal-Mart is the test case,” he said. “If they can’t make it work, the whole thing will stop dead in its tracks.”

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