RFID Could Cost Average Wal-Mart Vendor $9 Million

Bill Hardgrave is worried about Velveeta.t

The processed cheese is one of several products that can block signals from radio-frequency identification tags, and aluminum foil wrapping only exacerbates the problem.

“These things have trouble reading through thick substances,” said Hard-grave, executive director of the Information Technology Research Center in the University of Arkansas’ Sam M. Walton College of Business. “It’s hard to read if you’ve got 50 cases of this.”

Hardgrave has been working with Wal-Mart Stores Inc. of Bentonville on the technology of implementing an RFID tag program.

The answer, Hardgrave said, is to put an RFID tag on each fork-lift-sized pallet going to a distribution center in addition to each case that is stacked on the pallet. That way, the RFID readers can read the pallet tag and don’t have problems picking up radio frequencies traveling through things like liquid detergent and bricks of cheese.

That’s what Wal-Mart plans to do later this month when it launches its RFID pilot program at three Dallas area distribution centers.

“Wal-Mart is leading the way on this,” said Hardgrave, who also holds the UA’s Edwin and Karlee Bradberry Chair in Information Systems. “They have an outstanding group of people working on this who would be recognized as the world’s foremost experts.”

RFID technology uses microchips and two-inch long antennas to wirelessly transmit product serial numbers to a scanner. Hardgrave said the chips can transmit signals 20-30 feet away.

The RFID technology is being heralded as an eventual successor to bar-code inventory tracking systems, which require each package in a store to be scanned at the check-out counter. With RFID tags, in theory at least, an entire shopping cart could be scanned instantly as it is wheeled past a machine that reads the radio signals. A list of the items and corresponding prices would print out immediately. The shopper could pay for the items and leave the store without ever removing the products from the cart.

RFID tags could eventually cut distribution costs for manufacturers and improve profits for retailers.

$9 Million Cost

A report by Forrester Research Inc. of Cambridge, Mass., said it will cost the average Wal-Mart vendor about $9 million to implement the company’s mandated RFID program and maintain it for the first year.

Wal-Mart said its 100 largest suppliers must use the RFID tags on cases and pallets going to the three Dallas area distribution centers by January 2005. Wal-Mart said the rest of its vendors must implement an RFID program for Dallas area warehouse operations by January 2006.

Forrester said suppliers won’t see a financial savings from the technology for several years, and Wal-Mart has said it won’t let vendors raise wholesale prices to cover the equipment and added labor costs of RFID implementation.

But Hardgrave disagrees with the Forrester study.

“That’s backwards,” he said. “It’s going to save more money than it’s going to cost. It will squeeze cost out of the supply chain … I’ve seen other studies. Return on investment is much less than a year with lost product or spoiled product or product sitting on a dock where nobody knows where it is. For a decent-sized company, the return is going to be pretty quick.”

Forrester quoted a Computerworld magazine article saying low-end RFID kits cost as little as $750, which includes reader, tag and software.

The Forrester report, released on March 30 and titled “RFID At What Cost?” predicts only 25 percent of Wal-Mart’s top 100 suppliers will meet the Bentonville company’s Jan. 1 deadline. Copies of the report are for sale through the company’s Web site, www.forrester.com, for $899 each.

“There is no business case for most suppliers in the short term,” Christine Overby, a senior analyst with Forrester, said in a press release. “The technology is not ready, and there is a lack of deep expertise in the industry to help suppliers implement RFID.”

Hardgrave said it may be five to 10 years before RFID tags are used on individual product packages to monitor product flow into and out of stores, but the technology can help warehouse and distribution efforts now.

37 Volunteers

In addition to the 100 companies Wal-Mart asked to participate in the pilot program, another 37 have volunteered to participate, said Gus Whitcomb, a Wal-Mart spokesman.

“We’ve actually had 37 companies that weren’t mandated to meet that come forward and say they were going to meet that,” Whitcomb said. “So that’s the best rebuttal of the Forrester report I can think of.”

Wal-Mart has about 23,500 domestic suppliers, Whitcomb said. That would make the 37 volunteers seem like a minuscule portion — less than two-tenths of 1 percent.

But Hardgrave said the fact that any companies have volunteered to participate is a very good sign.

Matt Waller, an associate professor of logistics at the UA’s Walton College, said RFID promises to cut down on inventory mistakes and labor costs.

“Obviously, there’s a labor reduction,” he said. “Right now, with a bar-code reader, you have to scan each item. With RFID, you can scan everything [together] when it comes in the door. There will probably be fewer inventory mistakes.”

Some consumer privacy groups have raised concerns that the tags might allow stores to monitor customers all the way home. In May, several RFID chip manufacturers pledged to incorporate a “kill switch” into their chips. Hardgrave said the system software would disable the chips before customers leave the store.

Pilot Projects

Several technology trade publications reported that Wal-Mart shelved a plan last fall to do a “smart-shelf pilot project” in the Boston area. That program would have used RFID tags to record data transmitted from individual packages of Gillette products.

Hardgrave said razors have been a focus of RFID pilot programs because they are fairly expensive for their size and are frequent targets for shoplifters. Gillette makes several razors, with the $8 Venus for women and the $9 Turbo Mach 3 for men being the most expensive.

When asked about that project, Whitcomb responded via e-mail saying, “We never did a test with Gillette.” He didn’t say whether plans for such a program had been canceled and didn’t respond to follow-up questions about it via e-mail.

“We did a smart-shelf field trial with Procter & Gamble in Oklahoma,” Whitcomb said. “That test provided us with important information on replenishment improvements and confirmed that our RFID focus on cases and pallets was the right approach.”

With RFID tags costing about 40 cents each right now, tagging individual packages would be expensive. Instead, Wal-Mart is easing into RFID by using it to track pallets and boxes. That should help the company’s warehouse and distribution operations while using fewer chips and making implementation easier for vendors.

“The Dallas/Fort Worth area trial begins this month,” Whitcomb said. “First up will be associate training and equipment testing. Then suppliers will begin flowing product. The trial itself will be in the Dallas/Fort Worth area through 2005.”

Randy Kirk, senior director of engineering for Global Concepts Inc. of Fayetteville, said Wal-Mart vendors are beginning the pilot program with only one product line instead of all their products.

Vendors who are only concerned with meeting the mandate and are not looking at the long-term benefits will have more problems with Wal-Mart’s RFID project, Kirk said.

“The smarter vendors are going in and saying, ‘How can I get a return on my investment?'” said Kirk, who is consulting with two Wal-Mart vendors on RFID implementation.

“I know that they’ve got a ways to go before they’re to the point that you can count on things working right,” Waller said of Wal-Mart’s pilot program. “But … assuming they get it to work right, yes, I think it is the wave of the future.”

Forrester said it is essential for businesses to begin RFID implementation at the manufacturer instead of the distribution center, which is one step closer to a retailer in the supply chain. “Source tagging” cases at the manufacturer is too disruptive for most companies to implement, Forrester said.

Hardgrave said Class 1, Version 2, chips are programmable by the manufacturer or the store where the items will be sold.

“Because source tagging requires significant process re-engineering and budgets that top $100 million in some cases, RFID early adopters like Gillette are the only companies that will attempt this approach in the next 12 months,” Forrester said in the report. “In the short term, a ‘slap-and-ship’ approach, in which suppliers tag cases and pallets in the distribution center, is the most realistic scenario for a majority of suppliers.”

The Forrester report said Wal-Mart should narrow the scope of its RFID mandate, possibly by exempting merchandise such as Velveeta and heavy liquids because RFID readers have trouble penetrating those materials to read the tags. The report also called on Wal-Mart to “use its influence to help create a buying consortium” that would give suppliers the collective power to cut tag costs.

The U.S. Department of Defense, Target Corp. and Metro AG of Germany are also asking suppliers to begin using RFID tags in the near future.

Wal-Mart won’t say which vendors will begin using RFID tags this year, but large suppliers who are furthest along with their RFID include Procter & Gamble, Gillette, Kimberly Clark, SE Johnson, Nestlé, Purina and Unilever. Those companies are likely participants in this month’s pilot project.