Wal-Mart''s Tall Order

Wal-Mart''s Tall Order

Copyright 2003, Traffic World, Inc.

Shippers being pressed to jump on the RFID bandwagon fear they may fall under its wheels.

From banana pickers to diaper makers, Wal-Mart Stores suppliers privately are blanching at the retail giant''s demand that they adopt radio frequency identification technology, billed as a revolutionary - though perhaps costly - step up from the barcode.

With Wal-Mart''s deadline little more than two years away, experts say manufacturers, logistics companies and transportation operators, are trying to figure out how to comply with Wal-Mart''s edict without losing millions of dollars.

"Wal-Mart is being unreal," said Kara Romanow, senior analyst for AMR Research, a technology consulting group. "They don''t have a pilot. There is no return on investment for manufacturers."

Romanow describes Wal-Mart''s behavior as "threatening." But no supplier will stand up to Wal-Mart publicly, she said. "Not even the big consumer package goods manufacturers are in a position to tell Wal-Mart ''no.'' It''s 20 to 50 percent of their business. They are not going to tell their biggest customer to go take a hike."

Not everyone agrees. Kevin Ashton, executive director of the Auto-ID Center at the Massachusetts Institute of Technology, sees suppliers'' concerns as "just whining and moaning" without basis. "I just don''t have much sympathy. Get with the program," he said.

Ashton, a Procter & Gamble executive "on loan" to the Auto-ID Center (a partnership between academia and private industry), says RFID technology is cheap enough, reliable enough and standardized enough for companies to implement right away. "If Wal-Mart can see the value, and Gillette and Procter & Gamble can, what are you missing?" he asked. "I am baffled by those people who can''t find any ways to solve their problems."

Transportation companies and 3PLs will be critical to Wal-Mart''s supply-chain RFID strategy, but that role remains unclear as they consider their own investments. UPS Chairman and Chief Executive Officer Mike Eskew told a technology conference the carrier hosted last month that UPS hasn''t decided whether it will implement RFID technology.

UPS has invested heavily in advanced barcode technology and Eskew said he hopes Wal-Mart''s initiative will drive down the price of the technology.

Said UPS technology spokeswoman Donna Barrettr. "We are still working on the business case for it." UPS plans to finish its analysis early next year.

But Wal-Mart doesn''t plan to discuss RFID with 3PLs or carriers until it has worked out many details with its shipper-suppliers. "We have to take step A before we take step B," said Tom Williams, a spokesman for Wal-Mart.

The retailer will meet with suppliers early next month to go over specifics of the program. Williams said RFID has been tested "with a number of cases at our DCs," including a test late last year tracking pallets of paper towels.

Wal-Mart has ordered all its suppliers to put RFID tags on all pallets and cases by January 2006. The top 100 suppliers have only until January 2005, said Williams. The tags represent "a light-year leap from barcodes and scanners," he said.

RFID technology will give Wal-Mart more information, better tracking and greater automation across its supply chain but at a higher upfront cost. Williams describes the move from barcode to RFID as "synonymous with going from the telegraph to the Internet." Wal-Mart would use the technology to keep track of items in its 108 distribution centers, many of which cover more than 1 million square feet, he said. Wal-Mart moved about 2.5 billion boxes at the pallet and case level between January and June last year alone, he said.

But the roadblocks to Wal-Mart''s plan are as varied as the information that the tags are supposed to provide, Romanow said. They include the interpretation of what defines a carton or case; standards for RFID chips; the cost of the chips, currently 20 to 30 cents apiece; and high failure rates for the chips - 20 percent, in some cases.

The chips have not performed well in pilot tests and no one knows how they will perform in extreme conditions, say during the summer in Florida, Romanow said. Then there is the issue of what to do when the tags don''t work. "The technology is not there yet," she said.

With Wal-Mart publicly digging in its heels, companies will lose time and money trying to comply with Wal-Mart''s directive, said Romanow. She anticipates Wal-Mart''s suppliers affixing tags manually. "It will be a huge time waster," she said.

Wal-Mart''s suppliers still are evaluating their options.

Cathy Pernu, senior manager of corporate communications for Kraft Foods, said "we are still evaluating our strategy as it relates to RFID. Any discussion at this time would be premature."

Michael Mitchell, spokesman for Chiquita Brands International, said the company was "still examining what impact (Wal-Mart''s edict) might have."

Carriers are watching closely the responses of their customers, the shippers, as they work on a technology that would have to be integrated into intricate tracking and tracing networks they have created.

UPS''s Barrett cited the lack of standards as the biggest challenge to implementation, the second being the cost of the tags. UPS is helping one customer complete a pilot test with the technology, she said.

Penske Logistics, part of Penske Truck Leasing, also is helping a client test RFID, said Tom McKenna, senior vice president of logistics engineering. Penske doesn''t expect its customers to need help physically tagging the boxes, unless it manages a warehouse for a customer that would need to tag its items. Instead, the 3PL will be called on to help shippers gain more value from the technology, he said.

McKenna believes shippers can meet Wal-Mart''s deadline, but says cost remains a major concern. "I don''t think it''s a technology issue. The issue is can they afford to pay for it? Can you afford not to do it?" he asked. "What our customers are seeing is if we are going to have to do it anyway, then we have to find a way to make it pay."

Ashton says concern over cost is misplaced. "It depends on how good a manager you are, frankly. The assumption has been that it has to be under 10 cents a tag or it''s of no use. What you are doing is trying to capture that value back," he said.

Procter & Gamble''s "supply chains aren''t so radically different from everybody else''s," said Ashton. "Why is it that the companies with the most efficient supply chains see savings (in RFID) and the companies with the least efficient supply chains don''t?"

The first thing concerned suppliers should do is talk to similar companies to find ways to generate a return on the RFID investment, said Ashton. Meeting Wal-Mart''s deadline "really has a lot more to do with will than anything else," he said.

"I don''t think anyone should see RFID as a cost but as an opportunity to increase profitability," he said. "It''s just not that hard to get started. You stick one tag on one pallet and then you move forward."