Although radio frequency identification (RFID) has been around for decades, it mostly sat on the technological bench until retail giant Wal-Mart Stores Inc. began to mandate that its key suppliers would adopt and implement these chips on every pallet shipped to Wal-Mart's Dallas, Texas-based distribution centers (DCs), with the eventual goal of having RFID deployed in every Wal-Mart DC and retail store. While many suppliers have complied to date with Wal-Mart's dictates, that compliance has been half-hearted at best, leading the retailer to take a more forceful approach to its arm-twisting. Beginning with a Sam's Club DC in the Dallas area, every supplier who fails to tag their shipments with RFID devices will be fined $2 per pallet beginning this October.
"Everyone recognizes that it's the future of how products are going to move through the supply chain," suggested John Simley, spokesperson for Wal-Mart, to a reporter for the Dallas Morning News, "and not just at Wal-Mart, but everywhere."
The recalcitrance by consumer goods manufacturers to adopt RFID stems largely from the perception that it's mostly Wal-Mart who stands to gain from the suppliers' large-scale investment in the technology. The tags basically are designed to help locate stuff, with the obvious benefits being improved visibility into available backroom stock. Reducing out-of-stocks and keeping the shelves replenished is the be-all and end-all of retail; theoretically, there should be a trickle-down effect that results in increased sales for the manufacturers as well, but those sales are somewhat muted by the significant costs of purchasing as well as affixing the tags on every shipment to Wal-Mart or any of the other large retail chains with an RFID mandate.
In a bid to demonstrate the tangible worth of RFID, Wal-Mart is sponsoring a research effort at the University of Arkansas to demonstrate the positive effects the technology has on improving inventory accuracy. Preliminary analysis at the university's RFID Research Center indicates that an automated, RFID-enabled inventory system in test stores improved accuracy by 13%.
"Inventory accuracy, which determines important processes such as ordering and replenishment, is often poor, with inaccuracy rates sometimes as high as 65%," points out Bill Hardgrave, director of the RFID Research Center. In contrast, the 13% improvement at the test stores indicates that RFID "can significantly reduce unnecessary inventory." The value of such reductions for major retailers and their suppliers can be measured, he claims, "in millions of dollars."
|With RFID technology in place at its distribution centers, Wal-Mart believes it can significantly reduce unnecessary inventory in its backrooms.|
Emphasizing the importance of more accurate inventory management techniques, Hardgrave points out that the net result of inventory inaccuracy is an estimated 10% reduction in profit.
To date, Wal-Mart's suppliers have been required to apply RFID tags to cases and pallets, but that could change in the future; early results from the RFID Research Center's efforts indicate that tagging individual items could potentially eliminate some of the root causes of inventory inaccuracy. One recent study from RNCOS predicts that the market for item-level tagging will grow by 55% over the next 10 years. The costs for suppliers to tag every item shipped to a Wal-Mart DC would, of course, increase significantly.