Forty years ago, when Sam Walton was still an enterprising young merchant in northwest Arkansas, he'd buy products directly from manufacturers. Then he'd personally deliver the stuff to garages, where he stored the merchandise until it was placed on store shelves.
Things have changed since then. Walton has passed away. And inventory control at the company he started—Wal-Mart Stores Inc.—has grown slightly more complex. The Bentonville, Ark.-based business now operates 4,300 stores globally and maintains a fleet of 7,000 tractors and 35,000 trailers. It owns and operates 108 distribution centers in the United States alone—many of them more than a million square feet.
Those distribution centers are at the heart of Wal-Mart's remarkable success. By strategically placing retail outlets near distribution centers, the company can resupply its stores directly—often on a daily basis. "We follow what the stores sell, and orders are customized for the stores," says Tom Williams, a company spokesman. "For us, tracking inventory is extremely important."
This may explain Wal-Mart's recent supply-chain jaw-dropper. In June, management at the world's most powerful retailer issued a stunning edict: the company wants all its suppliers to place radio frequency identification (RFID) tags on all cases and pallets shipped to Wal-Mart distribution centers by January 1, 2006. "RFIDs is a chance to move to a more advanced system...in our distribution centers," notes Williams. "It's somewhat akin to moving from tapping out telegraph signals to moving to the Internet."
RFID tags are whiz-bang technology, that's for sure. Unlike traditional bar codes, which rely on line-of-sight technology, RFID tags (think microchips with antennae) emit signals that are read by electronic readers. The readers, in turn, are integrated with a company's enterprise applications, such as an inventory-management system. When all goes well, RFID tags provide precise information about the whereabouts of merchandise as it moves along a company's supply chain.
Wal-Mart executives, who have given the company's top 100 vendors a January 2005 RFID deadline, believe the tags will help supercharge Wal-Mart's inventory management. "What we see at the base of all this information is efficiency; moving product more efficiently," claims Williams. "That translates into lower costs."
For Wal-Mart, anyway. According to technology consultancy AMR Research, Wal-Mart's suppliers will have to shell out, on average, $20 million to comply with the company's request. Half of that will go for system integration and changes to existing supply-chain software. "The tag is just the tip of the iceberg," says one analyst. "Manufacturers may have to change their packaging lines and their finished-goods warehouses."
Reportedly, a number of Wal-Mart's vendors are not exactly sure what the requirement entails. Wal-Mart management has called a meeting for this month to explain its plan to its top suppliers.
Part of the explaining: convincing vendors that the tags will actually work. Research from AMR shows that early adopters of RFID technology reported failure rates as high as 20 percent, requiring additional internal-quality-control procedures.
Problems abound with the technology. For starters, RFID tags don't work particularly well with liquid products or when merchandise comes in metal cans. "The radio-frequency energy doesn't typically run through the case," notes Scott Lundstrom, chief technology officer at AMR.
In addition, when they are running, conveyor belts emit their own brand of radio frequency—manufacturing white noise, if you will. Those emissions can scramble or mask the RFID transmission of any tagged item placed on a moving belt. In some cases, whole pallets can be rendered invisible to an inventory-tracking system. Correcting the problem—if spotted—requires manual intervention.
Moreover, experts say some suppliers could have a tough time meeting Wal-Mart's deadline, particularly since no single standard yet exists for wireless inventory technology. One standard, called the global trade item number, creates an ID for a unique product. Wal-Mart appears to be backing the electronic product code (EPC), which enables companies to track individual iterations of a product.
For those keeping score at home, the EPC standard is being promulgated by Auto-ID, a partnership among 100 global companies (Wal-Mart included) and five research universities. Other groups, including the International Standards Organization, are also debating standards for product identification.
Given the standards mess, the confusion about competing technologies, and the investment necessary to meet this requirement, industry observers say the odds are slim that all of the top 100 suppliers will be 100 percent ready to ship RFID-tagged products on all cases and pallets by January 2005. "It's definitely a tight time line," says Noha Tohamy, a senior analyst (supply chain) at Forrester Research. "Those suppliers that have been independently working on their own RFID initiatives—like Procter & Gamble and Gillette—will be able to meet it. But it is unlikely that a supplier that has just begun to investigate the option will be able to comply by that date."
Even if some vendors aren't able to meet the deadline, the pushing of wireless product identification by the most powerful retailer on the planet is definitely going to speed the RFID plow. According to a survey released in October by Wireless Data Research Group, spending on RFID hardware, software, and services will jump to $3 billion in 2007. Right now, that number is more like $1 billion.
The prediction does not seem overly rosy, either, given the cost-savings potential of wireless inventory tracking. IBM, which rolled out a radio-tag consulting and implementation service in September, claims wireless tagging and tracking of merchandise could help reduce corporate inventory levels by as much as 25 percent. In making the announcement about IBM's new service, Faye Holland, worldwide RFID leader (IBM Global Services) for the company, noted: "IBM believes RFID's time has come."
It's coming for Wal-Mart's vendors, certainly. Jeannie Tharrington, spokeswoman at P&G, says: "We will have to implement new systems to bring these tags on board. Since we have more than 300 products, it's a huge deal." But, she says, the company expects to meet the deadline.
Other consumer-goods manufacturers may have a more difficult time dancing to Wal-Mart's tune, however. For instance, some products with RFID tags slated to go to Wal-Mart will have to be segregated, at least initially.
And then there's the small matter of paying for the technology. "Now you have a group of suppliers who don't know what they have to do to be in compliance, and they've already done their budgets for next year," says Lundstrom. "So they are scrambling to do it and figure out how to pay for it."
It's doubtful many will want to disappoint Wal-Mart, however. Bear in mind, this is a company that once did $1.43 billion in sales—in one day. "This is the cost of doing business with Wal-Mart," says Tohamy flatly. "And [the suppliers] know that and will have to comply on some level."