The tepid earnings report came at a time when the RFID
industry was desperately hoping for a clear signal from Wal-Mart that the technology could produce benefits. It had
been four years since the nation’s largest retailer embarked
on an ambitious program to implement RFID technology
throughout its operations, and so far there was seemingly little
to show for it.
By placing RFID tags with embedded circuits and radio
antennas on pallets, cases and even individual packages, Wal-Mart was supposed to be able to wring out inefficiencies in its
massive logistics operations and slash out-of-stock incidents,
thus boosting same-store sales.
Instead, Wal-Mart turned in a string of disappointing quarters, cost savings failed to materialize, and inventory levels rose
rather than fell. Inventory was up 4. 8 against a 6.5% growth
in sales in the second quarter and an even worse 9% against a
first-quarter 5.6% rise in sales. Those results fell far short of
a corporate goal of keeping inventory growth to half that of
sales, according to Eduardo Castro-Wright, head of Wal-Mart
Stores USA.
Similarly, operating costs continued to climb, particularly
in comparison with major rivals Target and Costco. General
RFID in stores fed by those five distribution centers so it can
gain a bigger window into its supply chain.
Suppliers have also been slow to jump on board. Four years
after Wal-Mart announced its RFID plans, only about 600
of Wal-Mart’s 60,000-odd nationwide suppliers have gotten
involved in the project. Without widespread adoption, the
cost of RFID tags, readers and supporting systems remains
a barrier.
“We haven't lost faith in the potential of the technology,”
says Simon Langford, head of Wal-Mart’s RFID initiative. “But
we have had to change our strategy to provide more benefits
to our suppliers.”
Wal-Mart’s change of plan demonstrates the need for
retailers and suppliers alike to tread carefully with RFID.
As retailers such as Best Buy have observed, widespread
adoption is still years, not months, away. At the same time,
some of the greatest benefits may not be in applications first
thought to be ripe for the technology, such as automating
distribution centers. Instead, retailers are finding early gains
closer to the sales floor, where they are using RFID to track
consumer buying patterns and ensure products are on shelves
in time for promotions.
“WE HAVEN’T LOST FAITH IN THE POTENT IAL OF
THE TECHNOLOGY. BUT WE HAVE HAD TO
CHANGE OUR STRATEGY TO PROVIDE MORE
BENEFITS TO OUR SUPPLIERS.”
and administrative expenses rose to 18.4% of sales in 2006,
compared with 17.9% in 2005.
The lack of any obvious concrete gains has raised questions
as to whether Wal-Mart should delay or freeze its RFID plans.
For now, however, Wal-Mart says it will stay the course. At an
RFID conference in May, CIO Rollin Ford insisted the technology is producing solid results in the company’s supply chain
operations, including a 30% improvement in out-of-stock
rates at stores where RFID has been deployed. “I read we're
slowing down on RFID,” Ford said at the conference. “I can
tell you nothing could be further from the truth.” Wal-Mart
will RFID-enable another 400 stores this year,
according to Ford.
Despite some support for the technology from consumers and key suppliers such as Procter & Gamble,
Kimberly-Clark and Unilever,
Wal-Mart is in the midst of dramatically reshaping its RFID
strategy. By January 2006 the
company hoped to have as
many as 12 of its roughly 130
distribution centers fully outfitted with RFID. That effort
stalled at just five distribution
centers. Instead, the company
is now focusing on implementing
THE RFID PROMISE
When Wal-Mart announced its RFID strategy in 2003, it was
just one of many retailers that had become enamored of the
technology. The concept seemed so simple few questioned its
merits or Wal-Mart’s ability to strong-arm suppliers into compliance. By placing RFID tags on cases and pallets shipped
from manufacturers to Wal-Mart distribution centers, companies would be able to keep close tabs on their shipments. In
turn, that would allow Wal-Mart and its suppliers to streamline
their supply chains and ultimately ensure shelves were always
fully stocked.
RFID tags represented the next big step forward from bar codes, the ubiquitous stripes
on the sides of packages that provide basic
product and pricing information. The
simplest tags, passive RFID tags,
require no internal power supply.
Incoming radio frequency signals
from RFID readers can transmit
a minute electrical current,
enough to power the integrated
circuit in the tag and transmit a
response. The key benefit is that
the bar code on a case or pallet
no longer needs to be swiped to
identify the contents; the tag just
needs to come within range of a
