Wal-Mart to throw its weight behind RFID

Inventory management technology that uses wireless signals to track products from the factory to store shelves is set to win a major new ally next week: Wal-Mart.

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The retail giant is expected to throw its weight behind RFID (radio frequency identification) technology at the Retail Systems 2003 industry conference in Chicago on Tuesday. Sources familiar with the company's plans said executives will make a presentation encouraging its top 100 suppliers to start using wireless inventory tracking equipment--chips affixed to products, and scanners in warehouses--by 2005.

Wal-Mart's endorsement of RFID gives an important boost to efforts to overhaul the world's supply chains, a makeover that could provide a shot in the arm for technology companies struggling to find buyers for the latest products and services. RFID is expensive, but backers say it offers long-term benefits that could dwarf the impact of the bar code on inventory control and distribution.

RFID spending will be "bigger than...Y2K," predicted AMR Research analyst Pete Abell. "I imagine there will be a rush on investing in RFID."

Suppliers are already exploring the use of RFID technology in tracking goods from the factory to warehouses. But backing from retailers is considered important because it could ultimately allow products to be tracked on store shelves.

Executives from Bentonville, Ark.-based Wal-Mart are expected to aggressively push for the adoption of RFID technology during a presentation at an upcoming event for retailers, suppliers and distributors, sources said. Part of the discussion will involve the significance of standards development and its effect on the widespread adoption throughout the supply chain.

Wal-Mart representatives did not return calls for comment.

RFID tags have the potential to streamline and improve inventory management by allowing manufacturers to more efficiently enter and track the flow of goods. For example, RFID could let a company add a boxful of goods to its inventory systems all at once, without having to unpack the carton and scan each piece separately. An RFID scanner can pick up signals from all the chips in the sealed box, something bar code systems can't do.

The cost savings could be substantial for Wal-Mart, the world's biggest retailer with sales of $217.8 billion in 2002. AMR's Abell estimates that Wal-Mart's costs associated with supply chain--including storing, transporting and keeping track of goods--are about 10 percent of overall sales. RFID, Abell said, could save 6 percent to 7 percent of those costs annually. Using the 2002 figures as a model, that would amount to about $1.3 billion to $1.5 billion saved.

Such savings are an attractive brass ring, but installing the technology is no small task. Wal-Mart suppliers "may find it difficult to meet the early 2005 time frame," Abell said.

Problems aside, chip and equipment makers are already gearing up for expected demand.

"In 2004, we are going to see a broad range of serious (RFID) pilots," said Vinny Luciano, vice president of product management, mobile computing systems, at Symbol Technologies. "We'll see full-scale rollouts of RFID systems in 2005. It's not too soon to start looking at the impact of RFID on business and what the opportunities will be."

In the past, Wal-Mart has helped to promote other technologies that have helped to streamline inventory and supply-chain management. Teaming with K-Mart and other retailers in the 1980s, Wal-Mart helped to promote the use of bar code scanning.

A bar code standard was approved in 1973, but by 1984 only 15,000 suppliers were using codes on their products. Wal-Mart threw its weight behind bar codes in 1984, and by 1987 there were 75,000 suppliers using bar codes, according to AMR Research.

As it looks to cut costs, Wal-Mart has been quicker with its support of RFID technology than with bar codes. And others are following, such as CVS, Target, Lowe's and Home Depot.

RFID-related technologies such as EPC (Electronic Product Codes) are gradually gaining industry support, which should help penetration.

"While still being developed, EPC will be a common method of tracking inventories and objects using RFID technology," said Ian McPherson, analyst with Wireless Data Research Group. "The two are related in the same way that bar codes and scanners are related."

EPC is being developed by the Auto-ID Center and the Uniform Code Council, and many see it becoming commonplace in pallets and cases over the next five years, according to Paul Fox, a Gillette representative.

Although cartons and pallets are the focus of RFID now, the technology isn't expected to truly take off until RFID tags are used on store shelves to give more up-to-date information on sales and in-store inventory. Trials are ongoing, but cost is the major hitch with such tags.

Currently tags cost 50 cents to 60 cents apiece. To be practical for manufacturers to use, they'll have to drop to around 5 cents, according to Dave Krebs, an analyst with research firm VDC.

"As volumes increase, prices will come down, but suppliers don't really have an incentive at this point," Krebs said. "They are footing the majority of the tag cost, and retailers are reaping a majority of the benefit."

Krebs added that for the benefits of supply chain, products have to be tagged at the source: suppliers.

A large retail company issuing favorable terms or promotions for suppliers could certainly encourage the adoption of the technology.

"Right now, everyone involved in RFID technology is examining the cost ramifications, but we're optimistic that the price hurdles will be overcome," said Fox, who said the tags can be had already for as low as 10 cents each. "The cost of tags and readers will decrease over time."

News.com's Alorie Gilbert contributed to this report.