Unsavoury terms, lack of tech maturity blamed for Wal-Mart’s failed RFID edict

Five years ago, when Wal-Mart Stores Inc. issued a startling mandate that its suppliers must adopt radio frequency identification technology, Daisy Brand Inc. quickly volunteered to be first out of the gate.

Today, the family-owned dairy products supplier is fully compliant with those Wal-Mart requirements, tagging every pallet that leaves its warehouses.

The effort has been a boon to Dallas-based Daisy Brand, cutting in half the time it takes to load its delivery trucks.

But Wal-Mart’s mandate didn’t work out so well — or even work out at all — for most of its other suppliers.

The retail giant says that many of its 600 top suppliers, which account for three-fourths of the company’s sales volume, use RFID technology today to “some degree.” Most of the rest — some 60,000 strong — are not using it at all.

Once the implementation difficulties for its suppliers — and for Wal-Mart itself — became clear, the retailer backed away from the RFID mandate, which remains in limbo today.

For many of the small and midsize businesses that make a good chunk of revenue selling products to Wal-Mart stores around the country, the long-term benefits of RFID are still not top of mind, but the expense is.

While analysts bicker over exactly how much it costs to implement RFID technology, there’s a general consensus that a small supplier would have to spend between US$15,000 and $20,000 just for the tags, readers and middleware needed to get started. Add the cost of planning, training and handling all the new information compiled by RFID systems, and the price keeps escalating.

Such a significant expense, especially for suppliers that may still be struggling to get bar codes in the right places, is a lot to ask to keep just one customer happy — even one the size of Wal-Mart.

“Without the clarity of immediate benefits, the majority of suppliers are willing to risk not being the perfect trading partner,” said Roy Wildeman, an analyst at Forrester Research Inc.

It all started back in 2003, when Wal-Mart first announced that its suppliers would have to tag crates and pallets. At the time, Wal-Mart mandated that its top 100 suppliers would have to complete the move by January 2005.

Bentonville, Ark.-based Wal-Mart was the first major retailer to demand that its suppliers use RFID technology. The move meant that companies were suddenly confronted with learning the new technology — and paying for it.

While some suppliers, like Daisy Brand, quickly jumped on board, most were less amenable to the plan.

Part of the problem was that the plan was unveiled before the RFID industry was ready for it, users and analysts said. There were no standards, the technology was in its infancy, prices were high, and fly-by-night vendors and consultants littered the industry.

“Gosh, if [someone] could spell ‘RFID,’ it seemed they thought they could hang out a shingle,” said Tom Shields, educational technology service and RFID manager at Texas Instruments Inc. (TI), which became compliant with Wal-Mart’s requirements in January 2006.

He noted that after Wal-Mart issued the RFID mandate, “there were [suppliers] hemorrhaging money to become compliant.” Most were shooting in the dark, trying to implement the technology without having any examples to follow, Shields said.

At the same time, Wal-Mart needed to get its own RFID house in order, according to some analysts.

For example, the company was slow to install RFID equipment in its own stores. John Simley, a Wal-Mart spokesman, said that at least some RFID technology is used in 1,300 of about 3,600 U.S. stores today. Most have full implementations, though some are just getting started, he noted.

The retailer won’t comment on whether it plans to resume the program, or discuss a schedule for installing RFID technology in the remaining Wal-Mart stores.

John Fontanella, an analyst at AMR Research Inc., also noted that Wal-Mart disbanded an internal RFID program office in the months after the mandate, transferring responsibility for the program to a general operations department. Simley declined to discuss the office.

“I think they were very visionary for [seeing] the potential for RFID, but the infrastructure to support that vision was still being built,” Shields said. “The lack of infrastructure, the cost and all the troubles created the perfect storm” that slowed RFID adoption, he noted.

Although Wal-Mart’s mandate has been abandoned at least for the time being, it has led to some successful RFID implementations.

For example, TI has been tagging pallets and cases of goods shipped to Wal-Mart for two years. And Shields said the company is ready, should other major retailers, such as Target Corp., move to RFID.

Shields credited TI’s patience for its successful implementation of the Wal-Mart RFID program.

The electronics provider researched options for implementing RFID for 18 months before spending a single dollar on equipment, he said. The company now tags only shipments headed to Wal-Mart, thus minimizing RFID hardware investments.

In addition, the price of RFID equipment dropped considerably during the evaluation, further reducing start-up costs, Shields noted.

Shields also said that TI created an RFID study team with employees from IT, supply chain operations, field sales and the finance department, letting each part of the organization feel invested in the project.

“We were compliant for under half a million dollars,” said Shields. “We were meeting our customer’s requirements. That’s what business is. You can’t always measure it as ROI. Part of it is more of an ROR — a return on relationship.”

Meanwhile, Daisy Brand has extended the RFID efforts undertaken for Wal-Mart into other parts of its business.

Kevin Brown, director of information systems at Daisy, said the return-on-investment criteria weren’t based meeting a single customer’s requirements, but on how the technology addressed the supplier’s own business needs.

“If you don’t do anything with [RFID for yourself], the payback period is obviously going to be longer,” Brown added.

Five months after Daisy became compliant with Wal-Mart’s edict, an entire inventory management system based on pallet tags had been implemented. As goods move through facilities, workers don’t have to take notes, since all pallets are tracked by RFID readers. A Second Chance

The experiences of Daisy Brand and TI could provide helpful lessons to small and midsize suppliers, should Wal-Mart revive its mandate.

And analysts say that the recent launch of an RFID program at Wal-Mart unit Sam’s Club, a warehouse retail chain, could signal an imminent resumption of the program.

Wildeman noted that more than half of Sam’s Club’s suppliers are also Wal-Mart suppliers. “If you’re asking a large portion of those same suppliers to start tagging to avoid a penalty, is that a step in the overall Wal-Mart journey to get its suppliers to be compliant?” he asked.

Sam’s Club announced its plan on Jan. 7 and ordered that tags be attached to all pallets shipped to its DeSoto, Texas, distribution facility by Feb. 1.

Other distribution centers will come online as part of a graduated rollout over the next two and a half years.

Simley noted that untagged pallets that arrive at distribution centers after deadlines will be tagged by Wal-Mart employees. The suppliers will be charged a $2 fee per missing tag, which could quickly become a major expense.

Meanwhile, the fully equipped Wal-Mart stores have RFID readers installed in receiving bays to keep track of shipments and in so-called transition areas to monitor products as they move from the storage room to the store floor, where workers use handheld readers.

At those Wal-Mart locations, the program seems to be working, according to a report released last month by researchers at the University of Arkansas in Fayetteville.

The study of 16 Wal-Mart stores last year showed that RFID technology improved inventory accuracy by 13 per cent compared with stores that lacked the technology. The study determined that the overall savings can be “measured in millions of dollars.”

“There have been speed bumps … but I don’t think for a second that Wal-Mart is walking away from their RFID commitment,” Fontanella said. “They’ll slowly tighten things down in terms of compliance.”

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