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Eighteen months ago, Wal-Mart (WMT) decreed that its top 100 suppliers place radio-frequency identification tags on certain shipments by Jan. 1, 2005. RFID boosters applauded the move as the impetus the retail world and its suppliers needed -- a mandate for RFID laid down by the only company big enough to get away with it.
In the minds of many, RFID is the most important technological development for retailers since the bar code. Manufacturers can apply the small, 25-cent tags containing a chip, antenna, and lots of product information to a anything from a DVD player to a case of several hundred rolls of toilet paper. Then, strategically positioned machines in a warehouse or store read the RFID signals, continually scanning and collecting information. It's a more efficient way to track inventory, possibly even to prevent theft.
With the Wal-Mart deadline come and gone, it's fair to say most of its suppliers have lived up to the letter of the mandate, if not the spirit. While they have technically met Wal-Mart's order to tag specified bulk shipments sent to three Texas warehouses, they haven't exactly rallied to the RFID banner.
SHOPLIFTERS, BEWARE. So while Wal-Mart may be satisfied, few other outfits have made the investments necessary to turn RIFD's potential to their benefit. Instead of buying thousands of readers and the software necessary to use all that RFID data, many Wal-Mart suppliers have simply tagged the minimum required shipments and hoped for the best --"slap-and-ship" is what the industry calls it.
It's a shame, because the potential savings for retailers and their suppliers are tremendous. The cost of labor necessary to take inventory -- manually writing down deliveries as they come through the warehouse doors -- can be reduced by as much as 65% by RFID. And the need to physically count boxes can be virtually eliminated, according to the tech consulting firm Accenture (ACN).
If used properly, RFID can help sales, too. A reader could alert store managers if, say, a DVD player is on the wrong retail shelf. And tagging every product can curb both shoplifting and theft en route to the warehouse.
But turning this vision into reality takes time, trial and error, and, most important, billions of dollars. Wal-Mart spokespeople did not return repeated calls for comment. But the fact that this behemoth, which has a long history of forcing its suppliers to embrace cutting-edge technologies, has met resistance in its efforts to drag them into the realm of RFID speaks volumes about how difficult this is going to be for other retailers. "Even the big [suppliers] are very afraid of Wal-Mart," says Kara Romanow research director of AMR Research.
"LEARNING BY DOING." To their credit, 37 companies that weren't on Wal-Mart's "must do RFID" list have jumped on board anyway. And others have adopted the program, with the hope that RFID fans are right. Take Kimberly-Clark (KMB), the $15 billion maker of brands like Kleenex, Pull Ups, and Kotex. For now, 400 of Kimberly Clark's products are tagged either by the case or pallet -- sizes that can range from hundreds of paper towel rolls to thousands of feminine-hygiene products.
Kimberly-Clark also has built a 5,000-square-foot working replica of a warehouse in Wisconsin to test software, readers, and tags before settling on a technology supplier. "We are learning by doing," says Mike O'Shea, director of corporate RFID strategies at Kimberly-Clark, whose execs declined to say how much they spent on the project.
But for all that work, Kimberly-Clark has seen little benefit so far. And it probably won't until it redoes business processes from the ground up to take advantage of RFID -- a daunting task, admits O'Shea. "The business case is there, but not all of the tools to make it happen," he says. "I can understand where [reluctant] companies are coming from. It's not like turning on a light switch."
LINGERING MISCONCEPTIONS. Consultants and analysts say many outfits, unlike Kimberly-Clark, haven't even been able to articulate a clear business case for making such large investments -- aside from appeasing Wal-Mart, that is. Most of the near-term payoffs have to do with reducing labor costs in stores, stemming shoplifting, or increasing sales by keeping hot products on the shelves -- all clear benefits for a retailer.
But few really know how manufacturers will use this torrent of data and whether such info will lead to higher sales or better cost savings. "They haven't figured out what the quantum leap in information will be," says Chris Jones, analyst at Boston research firm Aberdeen Group, who adds: "It's just a higher-cost bar code."
Also, the technology is still new. Many of the suppliers are small, unknown startups, like Alien Technology in Morgan Hill, Calif., which produces tags, or ThinkMagic in Cambridge, Mass., which makes readers. EPC Global, the retail and manufacturing industries' technology standard-setter in December signed off on a long-awaited set of specifications for RFID chips. Now, with one standard, manufacturers won't have to worry about the chip they buy being incompatible with a retailer's readers.
RELUCTANT PIONEERS. In fairness, few retail suppliers are fond of using cutting-edge technology, and no one should expect that attitude to change. Only 20% of the suppliers that fell under Wal-Mart's mandate consider themselves early adopters of technology, according to an Aberdeen Group report from March. "The mandates are putting tremendous pressure on companies that don't have histories of early adoption of technology and experience preparing for the risk associated with those new technologies," says Aberdeen.
Most still buy the ultimate RFID vision -- but they say it's at least a decade off. It's a technological catch-22: They're reluctant to spend the money because they think its benefits are a long way off, yet they can never see those benefits if they don't spend the money. "Most suppliers are considering their entire technology investments in RFID a throwaway," Jones says.
The result? Much less money was spent before Wal-Mart's January deadline than was generally anticipated just six months ago. More than 130 Wal-Mart suppliers collectively have laid out $250 million on RFID to date, according to AMR Research. That boils down to $1 million to $3 million per company -- a far cry from the $13 million to $23 million per company AMR predicted in August.
GROWING PRESSURE. Analysts -- and suppliers -- hope outfits issuing mandates will take note of Wal-Mart's experience and alter their approaches. The Defense Dept., for one, has taken a more measured approach, as have retailers like Best Buy (BBY), analysts say. "Target (TGT) had a similar stance to Wal-Mart in technical requirements, but it learned from the backlash and has been more open to collaboration," says AMR's Romanow. "When you're No. 2, you can see the path that's already been paved."
But suppliers can hold out only so long. As the big retailers' march toward RFID continues, even the basic slapping-and-shipping costs will be unsustainable without investing in the readers and software to get the real value from RFID data. "I haven't heard any of these [mandating companies] say 'just kidding,' so there's still pressure out there to keep this thing moving," says Lyle Ginsburg, managing partner of Accenture's RFID group.
One way or another, RFID will become common. It's just a question of who takes advantage of the technology -- and when.