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JANUARY 31, 2005

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COMMENTARY
By Sarah Lacy

RFID: Plenty of Mixed Signals
Despite Wal-Mart's push for radio-frequency identification, skeptical suppliers are still foolishly slow to embrace the new technology


Eighteen months ago, Wal-Mart (WMT ) decreed that its top 100 suppliers place radio-frequency identification tags on certain shipments by Jan. 1, 2005. RFID boosters applauded the move as the impetus the retail world and its suppliers needed -- a mandate for RFID laid down by the only company big enough to get away with it.


In the minds of many, RFID is the most important technological development for retailers since the bar code. Manufacturers can apply the small, 25-cent tags containing a chip, antenna, and lots of product information to a anything from a DVD player to a case of several hundred rolls of toilet paper. Then, strategically positioned machines in a warehouse or store read the RFID signals, continually scanning and collecting information. It's a more efficient way to track inventory, possibly even to prevent theft.

With the Wal-Mart deadline come and gone, it's fair to say most of its suppliers have lived up to the letter of the mandate, if not the spirit. While they have technically met Wal-Mart's order to tag specified bulk shipments sent to three Texas warehouses, they haven't exactly rallied to the RFID banner.

SHOPLIFTERS, BEWARE.  So while Wal-Mart may be satisfied, few other outfits have made the investments necessary to turn RIFD's potential to their benefit. Instead of buying thousands of readers and the software necessary to use all that RFID data, many Wal-Mart suppliers have simply tagged the minimum required shipments and hoped for the best --"slap-and-ship" is what the industry calls it.

It's a shame, because the potential savings for retailers and their suppliers are tremendous. The cost of labor necessary to take inventory -- manually writing down deliveries as they come through the warehouse doors -- can be reduced by as much as 65% by RFID. And the need to physically count boxes can be virtually eliminated, according to the tech consulting firm Accenture (ACN ).

If used properly, RFID can help sales, too. A reader could alert store managers if, say, a DVD player is on the wrong retail shelf. And tagging every product can curb both shoplifting and theft en route to the warehouse.

But turning this vision into reality takes time, trial and error, and, most important, billions of dollars. Wal-Mart spokespeople did not return repeated calls for comment. But the fact that this behemoth, which has a long history of forcing its suppliers to embrace cutting-edge technologies, has met resistance in its efforts to drag them into the realm of RFID speaks volumes about how difficult this is going to be for other retailers. "Even the big [suppliers] are very afraid of Wal-Mart," says Kara Romanow research director of AMR Research.

"LEARNING BY DOING."  To their credit, 37 companies that weren't on Wal-Mart's "must do RFID" list have jumped on board anyway. And others have adopted the program, with the hope that RFID fans are right. Take Kimberly-Clark (KMB ), the $15 billion maker of brands like Kleenex, Pull Ups, and Kotex. For now, 400 of Kimberly Clark's products are tagged either by the case or pallet -- sizes that can range from hundreds of paper towel rolls to thousands of feminine-hygiene products.

Kimberly-Clark also has built a 5,000-square-foot working replica of a warehouse in Wisconsin to test software, readers, and tags before settling on a technology supplier. "We are learning by doing," says Mike O'Shea, director of corporate RFID strategies at Kimberly-Clark, whose execs declined to say how much they spent on the project.

But for all that work, Kimberly-Clark has seen little benefit so far. And it probably won't until it redoes business processes from the ground up to take advantage of RFID -- a daunting task, admits O'Shea. "The business case is there, but not all of the tools to make it happen," he says. "I can understand where [reluctant] companies are coming from. It's not like turning on a light switch."

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