Wal-Mart's RFID revolution a tough sell

Even for the world's biggest retailer, championing an unproven technology with no clear ROI has been difficult

Pacific Coast Producers represents an important RFID success story, but the company's enthusiastic embrace of the technology is the exception more than the rule.

Pacific Coast Producers might never have considered radio frequency identification technology had Wal-Mart not mandated in 2003 that its suppliers start tagging cases and pallets of merchandise.

See a slideshow of the Pacific Coast's RFID project.

But when CIO Peter Wtulich took a closer look at the technology, he became convinced that RFID could deliver significant ROI to the $450 million canned fruit company.

"A lot of other companies saw this as a tax on their business, but we saw a way to enhance our business and improve overall as a company that is forward looking and customer focused," Wtulich says.

Adds distribution center manager Jim Farmer, "RFID was out there and we'd heard about it, but we didn't deploy it until Wal-Mart mandated it. But at that point, we decided to really commit to the technology, and we went beyond the mandate to make it a more valuable addition to the company."

Today, Pacific Coast Producers downloads data from Wal-Mart's RetailLink supply chain system to its own Oat Systems RFID software. As a result, Wtulich says, the company has gone from having no way to analyze where inventory is, to having a complete picture. Bottom line: out-of-stocks have been reduced by about 50%.

Pacific Coast Producers represents an important RFID success story, but the company's enthusiastic embrace of the technology is the exception more than the rule.

The more typical reaction of suppliers faced with Wal-Mart's mandate was: "I have to do this now, but what's in it for me? What do you do with the data? What will it look like? Wal-Mart wants me to tag, so I have to manually slap a label on a case and a palette and have a printer at the end of the line," says Michael Laird, an analyst at ABI Research.

Gartner analyst Charles Eschinger adds that the transition to RFID technology has been "a forced march" for most of Wal-Mart's suppliers. "They wouldn't have done it on their own and some have only a bare-bones system."

The money required to implement an RFID infrastructure is one key barrier. Eschinger estimates that smaller companies have to invest $100,000 to $300,000, while the price tag for a large manufacturer could hit $20 million.

And in 2003, when Wal-Mart CIO Linda Dillman shocked the retail world by announcing that Wal-Mart was going to require all of its suppliers (beginning with the top 100) to tag pallets and cases of merchandise with RFID chips, the technology was immature and untested.

Standards didn't exist. There was no off-the-shelf software. The chips themselves were expensive. The readers had a high error rate, especially when it came to materials like liquids and metals. Most importantly, the return on investment was unclear.

For tech watchers, Wal-Mart's push into RFID represented a fascinating case of a private company using its huge market clout to drive the use of a new, unproven technology.

Falling expectations

Five years into the RFID revolution, it's clear that implementation is occurring more slowly than Wal-Mart originally envisioned. "Our goal is to track all pallets and cases," Dillman said in 2003.

Today, 600 of Wal-Mart's 60,000 suppliers (plus 750 Sam's Club suppliers) have deployed RFID. On Wal-Mart's end, RFID has been rolled out at 1,000 of the roughly 4,000 Wal-Mart and Sam's Club stores in the United States.

Wal-Mart's original goal was to have 12 of its roughly 120 distribution centers outfitted for RFID by 2006. Today, only five are set up for RFID, as the company has shifted its RFID focus to in-store implementations.

Analysts give Wal-Mart full credit for being on the bleeding edge of a new technology. But the company's timetables – having all suppliers on board by the end of 2006 -- may have been a bit too ambitious.

"They've backed off a bit with the mandates and maybe missed some milestones," Eschinger says. 

"Wal-Mart has let some suppliers off the hook," adds Anne Grackin, CEO of ChainLink Research.

Bullish on benchmarks

Simon Langford, who now leads Wal-Mart's RFID efforts, sees things in a more positive light. He says the company has met its benchmarks for reductions in out-of-stock items and improvements in inventory data.

"At every point where we've expanded the technology to widen the number of suppliers, we've exceeded our goals. More of them are saying, 'I want to get engaged in this.' We saw the value, and when they saw it, suppliers came to us as well," Langford adds.

He points out that after Wal-Mart issued the mandate to its top 100 suppliers, an additional 34 suppliers volunteered. And while 600 suppliers represents a fraction of total number, they account for three-quarters of the company's sales volume, Langford says.

He concedes that getting suppliers to embrace RFID required some "teaching." He adds, "Our advice for suppliers is what was sensible for the first 100 suppliers, who can better see what the data means for business, is sensible for all of them.''

He recognizes that smaller companies might not have the money to invest in a full-blown RFID-based supply chain system. "Smaller companies are more nimble, but maybe they have less to invest in IT. They look at it and say, 'What is my road map? Where do I want to go with this? They can start small, but it's a start," Langford says.

Many happy returns

Wal-Mart is unshakable in its belief that RFID delivers business benefits. "We've reduced out of stocks by 8% worldwide, and we can re-supply three times faster. Suppliers have seen a significant increase in sales, which is where the rubber meets the road. We've also done recent tests that showed perpetual inventory (inventory that is constantly being updated) improving by 20%," Langford says.

As Wal-Mart and its suppliers become more familiar with RFID, new ways to gain benefits from the technology are emerging. The initial focus was on simple inventory tracking – Did the pallet arrive in Dallas?

Then companies realized that RFID can play a major role in asset management – Did that HD-TV just walk out the back door?

Taking it up another notch, there's two-way, supply-chain-based communication between the manufacturer and Wal-Mart's RetailLink system – Is the store in North Dallas running low on canned tomatoes and is there more inventory at the Dallas distribution center or does Pacific Coast Producers need to ship more?

Even more valuable is the use of RFID to track the real-time sales of items that sit in the promotional areas of stores.

"Overall, the technology has gone beyond slapping tags on palettes to more collaboration between the supplier and retailer. Gillette, for example, likes to sell through promotions, and have placement on the end-cap instead of the aisle, and with RFID you get the real-time aspect of ensuring that," Gartner's Eschinger says. "Gillette analyzes the data and can take feet off the street--they don't have to have a sales manager check each store, and they can tweak future engagements at various sites. This allows them to do other value-added activities instead of baby-sitting the store."

Procter and Gamble tells a similar story. P&G spokesman Paul Fox says, "The key to learning was seeing the value of the technology, and we struggled to immediately see that."

But P&G has found a specific business application perfectly suited to an RFID-based inventory system – keeping track of merchandise located in expensive, time-sensitive displays.

Milan Turk, RFID manager at P&G, explains that ideally manufacturers want to work with retailers to put products in special locations during certain times of the year, such as batteries during Christmas, or cleaning supplies in the spring.

"This can get messed up when the information is not relayed into the supply chain. For example, how many display materials arrive at which store.'' With RFID information tied into Wal-Mart's RetailLink system, "You can see that it arrived at the store, moved out onto the sales floor and was executed as a display," Turk says.

He adds that the real value to P&G is "for interested shoppers to see the product and find it when it's advertised."

Standard bearer

Wal-Mart was so early to the RFID party that it had to literally help create the standards. "Wal-Mart was on RFID's bleeding edge," Eschinger says. "Standards were waffling back and forth when they first deployed."

According to Langford, Wal-Mart first explored the technology in 2000, but at a time when no global RFID standards even existed.

Along with other early adopters, most of whom were interested in RFID as a way of internally tracking merchandise, (including P&G, Kimberly-Clark, Dial/Unilever) the company helped develop what is now ISO 18006-C and the 'generation 2' standard for RFID tag readers.

"The global, open standard lowers the cost of implementation for everybody. It's complete, it's out there, and it's what was needed," Langford says.

Wal-Mart's high-profile commitment to RFID also helped push the technology forward. "They drove technology development among IT vendors and system vendors," Laird says.

In 2003, first generation chips sold for $1.25 each. Today, second generation chips are 7 to 10 cents. And today, packaged applications are available which make deployment easier for Wal-Mart suppliers

And now that standards are in place, the off-the shelf RFID software market has blossomed. IBM, Oat Systems, Axis, SAP and Oracle all provide RFID middleware.

"It's just the maturity of the whole RFID industry, in terms of the required processes. Middleware has also matured, and standards have matured. There were reports that early read rate accuracy was 60%, but now that is more like 90 to 99%. It's also process improvement, tagging the right way," says Leslie Hand, and analyst at IDC.

Adds Eischenger, "Now that there are more packaged solutions and better integrated standards have been resolved, suppliers know how to tag, and where to place the readers. Over the next couple of years, they'll bake it into their IT infrastructure from sales to stock replenishment and be able to share more data with Wal-Mart."

Quiet period

After making that big splash in 2003, Wal-Mart has been somewhat reluctant to talk publicly about its RFID project. "They've been quiet and moved off the rhetoric," Eschinger says. "They've been a bit more reserved."

That may be because Dillman, the early champion of RFID, has moved on to a different job within Wal-Mart. It may be that Wal-Mart realized that the RFID revolution was going to be more difficult and take longer than it originally announced.

Another possibility is that since its competitors are also moving into RFID, Wal-Mart wants to keep any competitive advantages under wraps, Eschinger says.

Laird agrees. He sees Wal-Mart's low profile as an indication that it sees a real competitive edge by using RFID."They're very guarded about what they've discovered," he says.

Today, Wal-Mart isn't giving out specific numbers in terms of money saved through RFID or specific goals for RFID implementations.

But the company is not backing down on its commitment to RFID. In fact, when The Wall Street Journal reported recently that Wal-Mart's RFID effort was fizzling, CIO Rollin Ford shot back with a feisty letter that defended the push into RFID as a way to increase efficiency and give customers a better shopping experience.

"Stores with RFID have proven to be 60% more effective in replenishing items from the back room to the store shelves than stores without RFID," he wrote. And in a recent appearance at an RFID trade show, Ford said Wal-Mart plans to continue rolling out the technology at a rate of about 400 stores a year.

Still, he concedes that "RFID is still in rollout, the critical stage before widespread implementation."

At the current rate of adoption, Wal-Mart won't reach widespread implementation anytime soon, but the company is certainly committed to getting there eventually. "It's going to be a journey, just like barcodes," Grackin says.

Webster is a freelance writer in Providence, R.I. He can be reached at john.s.webster@verizon.net.

Learn more about this topic

See a slideshow of the Pacific Coast's RFID project.

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