28 April 2005—Wal-Mart, the world's largest retailer, sells everything from diapers to tires at prices that draw in customers and run off rivals. It has been able to wring out healthy profits by economizing on labor and inventory—which is somewhat contradictory because it takes a lot of manpower to track thousands of goods from suppliers to customers.
To further reduce those costs, the company last year set a January 2005 deadline for its 100 largest suppliers to begin phasing in an inventory-management system based on radio-frequency identification (RFID) tags [see box, " "]. The tags were to be placed on the pallets and cases shipped to three of the discount chain's distribution centers in Texas. Yet although Wal-Mart is the 800-pound gorilla of retailing, with 3500 stores, 1.2 million employees, and sales making up about 2.5 percent of the United States' gross national product, it has had difficulty getting most of its suppliers to adequately fund the transformation.
The rollout of the RFID system is running late. Wal-Mart has insisted that things are going well, but analysts say it has deliberately built enough ambiguity into its plans to explain the missed deadlines. (Wal-Mart declined to respond to repeated calls for comment.)
Wal-Mart is not the only company trying to make use of RFID. Other retailers, notably Target in the United States, Metro in Germany, and Tesco in the United Kingdom, are pursuing the technology. So are nonretail organizations. The U.S. Department of Defense requires any single shipment valued at more than US $5000 to carry an RFID tag, and the U.S. Food and Drug Administration and several of the world's largest pharmaceutical companies are planning to use RFID to fight the spread of counterfeit prescription drugs.
It's easy to see what RFID can do for Wal-Mart. The tags can be read en masse and from a distance, so that one person can do the work of many. Faster tracking should enable the company to cut back on inventory, close some of its distribution centers, and lay off the employees who man them, as well as some of the workers who track inventory inside stores. By keeping track of every last item, RFID should also be able to cut shrinkage—losses due to shoplifting and employee theft—which costs the retailer up to 2 percent of sales, or as much as $2 billion per year.
But what can RFID do for Wal-Mart's suppliers? In three to five years, when tag prices are lower and the suppliers presumably know much more about how to implement the technology, it may begin to help many of them save money, says Kara Romanow, an analyst at AMR Research, a business-technology consulting firm in Boston. Closer tracking of goods would let them cut back the goods in their own supply chains, freeing up capital for other purposes.
Right now, though, RFID will only cost them, and they know it. In a December report, Romanow wrote that Wal-Mart's designated suppliers, together with 37 others who complied voluntarily, had spent just $250 million on implementing the technology. That sum was less than a quarter of what AMR estimates was needed to provide a working system that meets Wal-Mart's goals. The implementation on the cheap leaves problems for Wal-Mart, such as getting the electronic scanners to read enough of the tags. Some tags are being scanned twice, by two readers in close proximity, or left unscanned because the RF signal has been reflected by, say, the metal of aluminum cans.
Nevertheless, some suppliers, focusing on the future, have complied with the spirit and not just the letter of the edict. Procter and Gamble Co. (P&G), maker of soaps, snacks, and more, is itself one of the world's largest companies, especially following its recent $57 billion acquisition of Gillette. The conglomerate, based in Cincinnati, hopes to use RFID to solve its own inventory problems. One sort of problem is having to maintaining excessive inventories, which cost money to finance. The converse problem, a stockout, happens when a customer wants something that is not available at the time.
Larry Kellam, P&G's director of business-to-business supply innovation, estimates that stockouts cost the company about $2 billion in lost sales annually. According to Kellam, the company's attitude is that electronic product coding using technologies such as RFID "is going to happen. We don't think it is a question of if, but a question of when."
But if P&G and a few other big Wal-Mart suppliers are enthusiastic about RFID and have invested accordingly, there were many more who did not, to bring down the average.
For them, any money they did spend will have largely been for naught if they did not adapt their internal procedures to take advantage of RFID, says Bill Hardgrave, an information systems professor at the University of Arkansas Sam M. Walton School of Business in Fayetteville. Hardgrave says he suspects that many companies are using the tags merely as a high-priced substitute for bar codes. "Just slapping a tag on the side of a product without changing anything else about how the supply chain is managed will obviously limit its value," he says.
Andrew White, an analyst at Gartner, says much of the advantage attributed to RFID really should be credited to the thinking that managers are forced to do in order to adopt the technology. "There's lots of technology around that we have not used properly," White says. "If we did use it properly, we'd actually get many of the benefits we want to get with RFID."
The point at which RFID becomes attractive to retailers hinges more on how well a system is implemented it than on how much the tags cost. Today the cheapest tags cost roughly 20 cents apiece, and the prices will drop only slowly, White says. He advises vendors not to make overly hopeful cost projections. "You take whatever price you've got, plug that number into your business plan, and see if you can make money out of it," he says.
Sometimes there's no doubt that RFID makes sense. It's critical for airlines to track luggage and for hospitals to track patients, and that's why the health-care and airline industries like the technology. They're adopting RFID of their own free will, not because an 800-pound gorilla told them to do it.