By  on January 12, 2005

Wal-Mart is pushing ahead with its program to roll out radio frequency identification chips throughout its supply chain, while other major global retailers are taking a more focused and less controversial approach. At issue with the Wal-Mart project is the lack of a proven business case for both the retailer and its suppliers, particularly those that ship low-cost goods or items containing large amounts of metal or liquid, such as canned soup, which interfere with the radio signals.

Some Wal-Mart suppliers, all consumer goods companies with low-margin products, are reportedly unhappy about the rollout, which has been beset by technical difficulties, but all of Wal-Mart’s top 100 suppliers and 37 volunteers are complying with the retailer’s mandate. Not every company made the Jan. 1 deadline on the nose, but all will be shipping some cases and pallets bound for Wal-Mart’s Sanger, Tex., distribution center with RFID tags by mid-February, Wal-Mart told Forrester Research of Cambridge, Mass.

Wal-Mart intends to expand the project to two more distribution centers in Texas later this month. In June, the rollout will continue to six more distribution centers in Texas and one in Arkansas. In October, another distribution center in Arkansas and one in Louisiana will be added, according to suppliers.

The percentage of units each supplier is tagging ranges from 1 percent to 100 percent, and averages out to about 65 percent, according to Wal-Mart.

The retailer has relaxed one requirement: It no longer expects to be able to read every case in a palette, “because for some products, it’s impossible,” said Kara Romanov, an analyst with AMR Research of Boston.

Read rates are averaging in the high 90s at receiving (both at the distribution center and at stores) and the box crusher (where boxes go after items are put on the shelf), according to what Wal-Mart told Forrester. In the back hallways of the stores, they range from about 50 to 90 percent.

Wal-Mart has not said exactly how its system is expected to reduce out-of-stocks — its stated reason for the implementation — but it appears that the store is automatically generating a list of items to be reshelved by subtracting point-of-sale data from box crusher data, said Christine Spivey Overby, a Forrester analyst. Wal-Mart has admitted it didn’t test its business case for RFID before issuing its mandate, unlike U.K. retailers Asda (a Wal-Mart subsidiary), Marks & Spencer, and Tesco. A Dec. 16 Forrester report stated, “When it comes to RFID’s impact on product availability, the [Wal-Mart] team admitted that it and the suppliers are learning how to measure the correlation. [Wal-Mart’s Carolyn] Walton [vice president in charge of RFID] shared the fact that product availability ‘is one number that we [still] can’t measure. We won’t know the impact until we start fixing and measuring.’”Wal-Mart may turn out to be right, but U.K. retailers are taking no chances: They are testing the business case before proceeding. At Asda, plans to roll out RFID were shelved after item-level tests of CDs in 2002 showed that readers could not accurately gauge how many CDs were present on a shelf. Tesco’s test with Gillette razors proved the technology worked but that it wasn’t affordable, Colin Cobain, Tesco’s chief information officer, said in a phone interview. The company was able to send accurate updates about the number of razors on the shelf to its closed circuit TV security system, but wouldn’t see a return on its investment because the price of the razors was so low. On the other hand, the company has found the technology can significantly improve the availability of DVDs for customers and reduce the number of hours it takes an employee to organize a shelf. The company is also using RFID tags on the totes it uses to move high-value goods, such as batteries, from its distribution centers to its stores.

Marks & Spencer has also had excellent technical results with its pilot test of RFID tags on private label men’s suits, which began in October 2003, but is still evaluating whether increased product availability has enough of an effect on sales to make a rollout cost-effective, said spokeswoman Olivia Ross. Late last year, the company began using RFID tags on the bins it uses to ship produce such as apples and oranges between its six food depots and its distribution centers. The new system lets employees know what produce is on hand six times faster than before, which has reduced spoilage and given Marks & Spencer more time to produce its takeout meals, she said.

In Germany, Metro began a rollout in November that closely resembles Wal-Mart’s. However, only 20 suppliers are involved, and they are tagging only pallets, on which read rates are now 100 percent. The tagged goods go to selected warehouses, Cash & Carry stores, Real stores and Kaufhof stores.

At the item level, Metro has tested three products, including razor blades, on  smart shelves in its Rheinberg, Germany, Future Store, and has reduced out-of-stocks on those items by 15 percent, said Metro spokesman Albrecht von Truchsess. The company expects to have RFID on the item level storewide in 10 or 15 years, he said.Nonetheless, for the foreseeable future, even with lower-cost tags, there is no return on investment for low-margin goods — but there is a strong case to be made for tagging high-value products, said AMR analyst Romanov. These include electronics, DVDs, pharmaceuticals, high-end apparel and sporting goods, she wrote in a report last month.

Wal-Mart told Forrester’s Overby that it would expand geographically and by “focusing” on CDs, DVDs and pharmaceuticals, perhaps indicating that it intends to require item-level tags on those goods before others. (Wal-Mart declined to comment for this story.)

It’s the suppliers of low-margin packaged goods that are unhappy about the Wal-Mart mandate, said Romanov. “Wal-Mart’s suppliers will be compliant, but that doesn’t mean that 137 suppliers will tag all the products they ship to Wal-Mart, and it doesn’t mean there are 137 happy suppliers fully embracing RFID as the latest and greatest technology,” she said.

But with makers of high-value items, it’s another story. “I don’t know of any time that Wal-Mart’s been wrong,” said Jim McMasters, information systems director for Tandy Brand Accessories of Arlington, Tex., one of Wal-Mart’s 37 volunteers. “With something as big as this and the impact it will have on us in the future to better manage our inventory, there’s no doubt in our minds that it will happen.”

The company began shipping 100 percent of its cases and pallets with RFID tags on the first business day of the year, Jan. 3. Tandy already gets data for every stockkeeping unit at every location from Wal-Mart’s point of sale, but would like to know the exact time it takes for a shipment to go through Wal-Mart’s system.

“What we’re after is developing a profile for goods movement” so Tandy can build the right amount of time into its shipping schedule, McMasters said.

At VF Corp., one of Wal-Mart’s top 100 suppliers, its already efficient warehouses don’t need RFID for speed, but the company would like to use wireless tags to ensure its cases are packed correctly, if the price were right, said Jim Jackson, VF’s project manager for RFID. Right now, the company weighs its goods as a check, but RFID would be more accurate, he said. He applauded the retailer for advancing RFID and bringing down tag costs.He added that press about Wal-Mart on the RFID issue has been unfair, both condemning the retailer for being dictatorial and for letting suppliers slide. “They can’t win for losing,” he said. “It’s like the postal service.”

Right now, he said, tags cost less than 25 cents apiece in quantity. That accorded with a recent report from AMR, which said that tags now cost 25 cents to 35 cents in quantity, and 50 cents to 70 cents in small amounts.

Target appears to be the only other retailer who has issued a mandate like Wal-Mart’s, and will require its top suppliers to tag some cases and pallets beginning in the spring, according to a March report in ComputerWorld. (Target did not return phone calls seeking comment.)

While Romanov said she is confident Wal-Mart will eventually work out the kinks in its technology, those improvements will come at the expense of many of its suppliers, she said, who have to bear the cost of the tags, including the more expensive specialized ones that can be read in adverse conditions. In addition, she cautioned against assuming that because the technology works the business case will, too. “Whether it will reduce out-of-stocks remains to be seen,” she said.

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