Wal-Mart’s RFID Supply Chain - CASE UTS (2/3)

In 2003, Wal-Mart of Bentonville, Arkansas announced its vision for an RFID-enabled transparent supply chain. By January 1, 2005 the company decreed that its suppliers would be required to have a system in place for attaching radio frequency identification tags to a portion of its products destined forWal-Mart stores. Unfortunately, as the deadline grew closer many of the company’s suppliers knew that they were not going to be able to meet that deadline.

 One supply chain executive, who wished to remain anonymous, said that his company would stick RFID tags on just enough pallets to satisfy Wal-Mart’s mandate, but he’s not even sure that those tags would work upon arrival because of technical problems. According to Patrick Sweeney, CEO of ODIN Technologies—a software and integration company working with several of Wal-Mart’s top 100 suppliers—there are two camps. About 30 percent of Wal-Mart’s suppliers will integrate RFID fully into their infrastructures now, while the rest will follow the practice of “slap and ship” like the supply chain executive mentioned above. As a result, the efficiencies Wal-Mart envisioned for the RFID supply chain may not be realized any time in the near future.

 In addition, the mandate by Wal-Mart has become a moving target. Originally, only Wal-Mart’s top suppliers were required to put RFID tags on all products shipped to specific distribution centers in Texas. Wal-Mart now wants its suppliers to attach tags to only 65 percent of their products. Several suppliers have confided that the percentage of their products shipped with RFID tags would be much lower—about 10 percent. The method of slap and ship will involve only a small percentage of products shipped to Texas, minimal data integration, and leave the supply chain blind to the movement of product. Not surprisingly, Simon Langford, Wal-Mart’s manager of RFID strategy, says “[The slap and ship method] is something we sort of cringe at.”

 The anonymous supply chain executive also said, “We don’t have a business case for RFID. Because the standards are not complete, the equipment isn’t developed. And because the equipment isn’t developed, I can’t fulfill Wal-Mart’s demand.” In addition, Christine Overby, an RFID analyst at Forrester Research said, “Many of these consumer-packaged goods companies are really struggling with the business case. These are really costly projects, and they’re hard to do with a technology that’s a moving target.”

 The failure of the January 1 deadline for RFID could mean more bad press for the retail giant when it could use some positive publicity. Wal-Mart’s reputation has recently become blemished because of allegations of unfair wage practices, hiring illegal immigrants, and discriminating against female employees. Many believe that Wal-Mart made a critical mistake when it imposed a top-down mandate on its suppliers before the technology and business needs matured to the point where RFID technology made good sense for Wal-Mart and its suppliers and customers.

 Founded in 1999, MIT’s Auto-ID Center began to look at how RFID technology could help organizations track and manage products using embedded sensors. The center proposed an electronic product code (EPC) that replaces bar codes by utilizing radio frequencies to identify computer chips placed in tags. In a controlled environment, RFID works quite well. Although tags can vary in size and shape, they can be affixed to cases and pallets as stickers or labels, or like thin plastic wrist bands. Each tag contains a small antenna and a chip with a unique string of numbers to identify each product. Active tags contain a battery, while the more common passive tags acquire their energy from a reader and are less expensive. Readers are antenna devices that identify the tags as they pass by. The tag transmits its digital electronic product code to the reader and then to a computer system.

 The promise of RFID is to help reduce the number of products that are misplaced or misdirected in a supply chain. According to Paul Fox, director of external relations at Gillett, “There are countless millions of dollars tied up in warehousing because of the inefficiencies in the supply chain.” He believes that RFID technology will tell Gillett “where the product is in our warehouses, what the product is and how much of it we have. No manual counting, no driving around, no question of mispicks, no order number mistakes. Once you get an accurate understanding of inventory position, that information becomes invaluable.”

 Before the year 2000, the price of RFID tags was about $1 to $2 apiece. Recently, the cost became as low as 25 to 75 cents, depending on the volume of the purchase. However, many suppliers contend that the price of an RFID tag must be even lower before they make economic sense. Assuming a cost of 40 cents per tag, a supplier that ships 15.6 million cases and pallets to Wal-Mart per year would spend about $7.6 million in RFID tags. Adding to the problem is Wal-Mart’s one-size-fits all strategy, where there is no difference between such consumer products as razor blades, tires, or computers. Each pallet will require an RFID tag when shipped. Kara Romanow, an RFID analyst at AMR Research, calls this the “toilet paper and toothpaste problem.” She says, “If you look at TVs, DVDs, and video games, the price tag doesn’t matter. But when you’re talking about TP and toothpaste, there is no tag cost at the case and pallet level that makes the numbers work.”

 Another problem with RFID is that no standard for the technology currently exists. Not all tags and readers are compatible. As a result, Wal-Mart may need more than one reader in its warehouses to read different tags. Moreover, the radio waves that are the foundation for the technology have not lived up to expectation in several pilots. One RFID technology provider wasn’t getting a good read rate so their engineer kept increasing the power and adding more antennas. The read-rate still never got higher than 50 percent and one reader kept drowning out another reader. Radio frequency also tends to act abnormally when it’s near certain elements like liquids, metals, or porous objects. Many believe that the next generation of tags that will supposedly be available in two years will overcome many of these problems. Unfortunately, no one is sure how much they will cost.

 According to Wal-Mart executive vice president and CIO Linda Dillman, the business case is, “[RFID] will help us increase customer satisfaction in the near term, and ultimately pay an important role in helping us control costs and continue offering low prices. Moreover, Simon Langford believes that the RFID payback for Wal-Mart’s suppliers will be twofold: First, it will help Wal-Mart’s suppliers reduce their inventory, and second, sales will improve because Wal-Mart will always have its products in stock.

 Some of Wal-Mart’s suppliers need to consider some unpleasant alternatives. If they wait for RFID to mature, they can lower the costs of developing an RFID system that meets Wal-Mart’s demands. However, by waiting they may jeopardize their relationship with Wal-Mart and open the door for their competitors to slip into their place. As a result, some are complying with the mandate via slap and ship. And what if many suppliers can’t meet the deadline? Will this turn into more bad press for Wal-Mart?

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