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Commentary: Think big on Wal-Mart tags

Wal-Mart suppliers must ask the retailer and themselves some tough questions about their RFID initiatives to reap long-term benefits.

Commentary: Think big on Wal-Mart tags
By Forrester Research
Special to CNET News.com
November 4, 2003, 9:30AM PT

By Noha Tohamy, Senior Analyst

Consumer goods suppliers anxiously await Wal-Mart Stores' Bentonville, Ark., meeting this week before they finalize budgets, kick off new projects, and lay out plans to meet the retailer's 2005 deadline to add tracking tags on their cases and containers.

But the suppliers must ask Wal-Mart and themselves some tough questions to ensure that their initiatives reap long-term benefits beyond compliance.

Through discussions with Wal-Mart's top suppliers, Forrester has identified some questions that suppliers must ask themselves and Wal-Mart.


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The retailer and its largest suppliers
meet to discuss a project expected to
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• How will RFID (radio frequency identification) improve my business?

As one supplier told us, "If you are a top Wal-Mart supplier, chances are they control a good percent of your sales. This changes the business case question to: How much can I afford to lose?" But Forrester estimates that 10 percent to 15 percent of Wal-Mart's top suppliers have independently embarked on RFID initiatives and identified benefits such as providing their suppliers with better visibility of their raw material needs throughout the production process. To build the business case for this investment, suppliers must identify current pain points. For example, a supplier like Kraft Foods must focus on problematic product categories with low fill rates that result in lost sales at Wal-Mart stores.

• What will become of the Auto-ID vision?

According to one supplier, the timing of Wal-Mart's mandate is "a self-serving means to expand its competitive advantage." Unwilling to wait for the Electronic Product Code (EPC) Network vision to materialize, the retailer is requiring that RFID-captured data be transferred through existing point-to-point connections with its suppliers. Forrester expects the Department of Defense, as well as other retailers such as Target, to follow in Wal-Mart's footsteps and use existing hub-and-spoke networks with their suppliers. EPCglobal must reassess the validity of the highly academic EPC Network and offer a viable road map from current industry requirements to the vision.

• What are the technical requirements?

As one supplier put it, Wal-Mart is "only one step up the knowledge ladder" and has yet to describe the details of the required identification data from tagged cases and palettes. With few precious months to the deadline, the retailer must provide its suppliers with additional technical guidance, since to date, price of tags and quality of readers have varied. Suppliers, such as Procter & Gamble, that are in a position of knowing the right technical questions to ask must take a leadership role and help create a preferred tech-provider list that other suppliers can look to for help.

• What constitutes compliance?

For the suppliers that are just embarking on RFID studies in full compliance with the Wal-Mart requirement, tagging all palettes and cases for all receivables at all regions by 2005 is a far-fetched goal. But as one supplier told us, Wal-Mart "will not trim its supplier base come January 2005" as long as there are signs of progress. Suppliers must work with Wal-Mart to create a plan with interim deliverables--by possibly prioritizing the products and regions to start with. For example, a supplier like Hershey Foods can plan on tagging palettes within one important product category--specially packaged Halloween Hershey's Kisses--in its Northeast region to achieve partial compliance status.

• How will increased demand affect tag prices in the short term?

While the Wal-Mart initiative will drive adoption and reduce tag prices in the long run, it can result in high prices in the short term because of a shortage in supply. One top supplier asserted that it "would be foolish to expect enough capacity for all manufacturers, all products and all locations to comply by 2005." Vendors like Alien Technology, which is ramping up its production by opening new plants and using contract manufacturers, must provide the industry with forecasted capacity estimates. Wal-Mart must work with the top tag vendors to reassess the feasibility of their requirements given the forecasted demand.

• What will be required next?

With the cancellation of the Wal-Mart/Gillette pilot last summer, it is unclear what the next phase will be in the retailer's push for RFID adoption. Yet, to map a longer-term strategy, suppliers must develop a better understanding of what will be required next, possibly tagging high-priced product items or focusing on in-transit tracking to facilitate compliance with cross-border security requirements. With an understanding of the nature and timing of future mandates, a beverage supplier like Miller Brewing can start investigating how tagging its glass-bottled products will impact current business processes such as recycling operations.

© 2003, Forrester Research, Inc. All rights reserved. Information is based on best available resources. Opinions reflect judgment at the time and are subject to change.