Linda Dillman explains why the retailing giant is so gung ho about the tracking technology and why suppliers are signing up to test it when the world's largest retailer, Wal-Mart, announced last summer that it would require its suppliers to move to a new system called RFID (radio frequency identification) for tagging cases and pallets of goods, it left the retail industry all shook up. Afraid to fall behind, competitors began looking into implementing the technology, which allows stores and their suppliers to track goods -- everything from toothpaste to TVs -- in real time. Hundreds of suppliers have begun pilot-testing the technology, and that could soon turn RFID chips and related gear into hot sellers.
While many suppliers have feared that RFID will lead to lots of extra costs, that hasn't been Wal-Mart's experience, says Linda Dillman, the retailer's chief information officer. She adds that its suppliers
are, in fact, volunteering to adopt RFID.
On Jan. 29, Dillman talked about this technology with BusinessWeek Online reporter Olga Kharif. Here are edited excerpts of their conversation:
Q: What are the benefits of RFID for Wal-Mart?
A: The technology will help us know where inventory is all the time. Today, we might know a case is somewhere in the store, but we don't know if it's in the back room or on the shelves. RFID will tell us it's in the back room, for example. That will help improve our shelf management, so we can make sure merchandise is available
when it's needed.
That, in turn, could increase our sales, as well as sales of our suppliers. Cost savings isn't the primary benefit for us of RFID, keeping goods in stock is. We'll see better tracking and moving of inventory, faster receiving and shipping, improved quality inspection, fewer out-of-stock items resulting in improved shopper
satisfaction, greater predictability in product demand, and better value for the shopper as efficiencies occur.
Q: What kind of equipment will you need for RFID? Do you expect the implementation to be speedy?
A: We'll install RFID tag readers at our distribution centers and our stores. We'll also buy equipment for printing tags. But we expect this will be covered within our normal capital budget. We invest in new technologies every year.
Q: A lot of suppliers are worried that this will be a tough transition. What are you hearing from them?
A: We've met a few times already with the suppliers who'll be among the first to implement RFID. We've also assigned a Wal-Mart executive sponsor and a Wal-Mart program sponsor to each supplier to ensure that we're all working together in good faith to make this happen.
Now, we're going through planning with every supplier. And we're getting very positive feedback. As of two days ago, we had 129 suppliers signed up for the RFID program, though we've only asked our top 100 suppliers to participate.
The amount of money suppliers will need to spend on RFID technology isn't as big as some people fear. In our stores, we essentially put in a black box that sits at the top of our legacy IT systems and sends us information from the tags. For suppliers, the setup will be similar. RFID also won't lead to a significant change in the amount of data we'll have to deal with -- so it won't, in most cases, require extra spending on basic software and hardware.
Q: What's the timeline for the implementation at Wal-Mart?
A: We will pilot-test it through 2004 in the Dallas market area starting with a small group of suppliers. Our goal is to be live with the top 129 suppliers by January, 2005, in the Dallas market. All other suppliers are being asked to comply by the end of 2006.
Q: A lot of people are skeptical about RFID. They say that, due to the technology's limitations, accurate read rates on some items can be very low. How soon do you think these difficulties can be overcome?
A: The technology has been moving at an incredible pace the past 12 months. Only in the past 60 days, researchers have figured out how to tag cases containing liquids. We expect that, by 2006, most of these issues will be past us, and that prices [for RFID] will fall substantially -- leading to an explosion in
the technology's adoption.
RFID: On Track for a Rapid Rise
Electronic inventory-tracking tags may be a headache for suppliers who have to adopt them -- and a potential goldmine for tech companies. Many packaged-products companies got the surprise of their lives last year when Wal-Mart, which buys $178 billion worth of such goods annually, said that as of January, 2005, it'll require
its top 100 suppliers to adopt radio frequency identification (RFID) tags for shipments to some of its stores. What's more, the Defense Dept., which buys $24 billion worth, announced a similar requirement, also slated to begin early next year. That has businesses rushing to implement real-time tracking of cases and pallets holding everything from bullets to baby wipes.
An RFID tag is a chip that, even in its simplest form, is superior to standard bar codes. It can contain information such as a product's expiration date and temperature, and it can be scanned from a distance of up to 30 feet. This makes it a lot easier for a retailer to find products in a warehouse and keep track of what condition they're in -- big advantages when it comes to managing inventory.
Suppliers are worried about RFID's costs: They'll have to buy the tags, as well as tag readers that receive or transmit data, plus software that manages the data that are collected. As they've begun pilot-tests, moreover, suppliers to Wal-Mart and Defense have ended up doing a lot more than they planned: redesigning
warehouses, packaging, and even business processes to accommodate RFID.
RAISING THE BAR.
Suppliers will likely have to upgrade their info-tech systems -- servers, storage, wireless infrastructure, and software -- to handle the data that RFID will spit out. So their new headache could be a blessing to tech companies searching for sources of new revenue. Certainly, leaders in the industry sense an opportunity: Software king Microsoft, No. 1 chipmaker Intel, server giant Sun Microsystems, big software suppliers such as SAP and Oracle, plus computer-services titan IBM have all recently announced or are expected to announce products or services related to RFID.
The involvement of such tech giants should help speed the adoption of an industrywide standard for the version of RFID called UHF (for ultrahigh frequency), which is used to read data on pallet tags. Assuming that the standard is ratified this year by the ISO (International Organization for Standardization) and by EPCglobal
(Electronic Product Code), the price of tags such as those made by Texas Instruments should fall from 30 cents a piece to pennies within several years and encourage further adoption of RFID.
For now, Wal-Mart mainly expects RFID to make its inventory management more efficient and boost sales. Bar codes can tell the retailer only that a case of toothpaste is somewhere inside a store. But with RFID, it will know the product's exact location -- and eliminate instances when an item is out of stock, says Linda
Dillman, Wal-Mart's chief information officer.
HOME ON THE RANGE.
In RFID, Wal-Mart is running a little behind some of its international competitors. Britain's largest retailer, Tesco, plans to implement the technology in April, 2004. And suppliers of German retailer Metro,
which recorded $52 billion in sales in 2002, will begin using it in November.
That may signal the arrival of a long-awaited boom for RFID, a technology born about 15 years ago. Already, some 40 million farm animals worldwide carry an RFID chip that aids in tracking health hazards such as mad cow disease. Auto makers have put chips in the keys of about 100 million cars to prevent theft -- no more stealing cars by copying keys. Even marathon runners carry RFID chips on their shoes for an accurate record of their finish time.
Once retailers get involved, the number of tags in use will jump from the millions to billions, predicts Bill Allen, a marketing manager at TI, which has sold RFID chips for 15 years. "The supply chain has long been considered the holy grail for RFID," he says. That explains why the $1 billion market for RFID-specific hardware,
software, and services could balloon to $3.2 billion by 2008, says Erik Michielsen, senior analyst at tech consultancy ABI Research in Oyster Bay, N.Y.
NEW INVESTMENT.
The extra hardware needed to manage the information RFID chips transmit could add up to billions more. Suppliers might want to collect such info to better optimize their flow of goods. For instance, were a truck carrying perishables to break down, RFID could tell the supplier just when these products would expire and whether to wait for repairs, transfer them into a different truck -- or simply take the loss and make another delivery.
Sun is already testing a server device that's designed to handle the data collected by sensors and tags. Ultimately, a need will arise for a server to safeguard and share that information between suppliers and customers, predicts Vijay Sarthy, Sun's product-line manager for RFID.
What's more, suppliers and stores might have to install additional wireless infrastructure in order to use RFID and enable other automated sensors to do machine-to-machine interactions. Germany's Metro, which operates 2,300 stores in Europe and Asia, is testing the use of Wi-Fi technology for the high-speed wireless
transmission of RFID data from each location to Metro's back office.
TALKING BACK.
RFID may also work its way into other devices. Later this year, wireless device maker Symbol Technologies will come out with a handheld computer featuring an ergonomic grip and an embedded RFID reader, says Phil Lazo, vice-president and general manager of the company's RFID division. The device will allow an employee
who normally uses a computer for entering information about cases of goods to see that information pop onto his handheld automatically from a distance -- and speedily decide what to do with those products.
In software, the opportunity could be big as well. On Jan. 12, SAP released a new product that stores information gathered from reading bar codes, RFID, and other automated ID technologies in a database by association. A certain carton could be associated with the shelf it sits on to help give grocery stores a better grip on inventories. Another piece of software, due out in April, will let a supplier use such data to notify a store that a shelf needs to be replenished soon. It will cost an average company $50,000 to
$100,000 per location in software alone to implement RFID, estimates SAP Vice-President Ralph Schneider.
As retailers and their suppliers get inundated with data, they may well need more analytical software to make sense of it, says Schneider -- though Wal-Mart's Dillman plays down the idea that its suppliers will have to buy much extra gear to meet the retailer's requirements.
MEETING DEMAND.
In the near term, consultants may well get much of the new business from RFID, since integrating these systems with existing ones will take some work. After the technology takes hold, retailers will start tagging individual items, predicts Judy Dobson, managing partner at tech manufacturer and consultant NCR.
Of course, the implementation of RFID will be gradual. Wal-Mart will kick off its January rollout in three distribution centers in Dallas -- plus the stores they supply. And Christopher Boone, program manager at tech consultancy IDC, doesn't expect a significant rise in RFID spending until 2005.
For it to expand beyond forced adoptions such as Wal-Mart's, suppliers will have to realize savings or increased efficiencies from its use. Today, its benefits aren't always obvious, says Jørn Tolstrup Rohde, CEO of snacks manufacturer KiMs, which has been pilot-testing Microsoft's RFID software in a factory in Denmark since last fall. Yet, "we like to please our customers," he sighs -- and RFID is what retailers increasingly demand of their suppliers.
Like it or not, this and similar technologies are probably here to stay. The only questions are: How can suppliers use them to best advantage? And what volume of sales will that mean for tech companies?
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