Wal-Mart's Move to Use RFID


Wal-Mart is very IT savvy. I guess they never read Nicholas Carr. They are also quite bold in their IT moves for a company so large. For example, I wrote earlier about Wal-Mart's move to force trading partners to use Internet-based EDI. The most recent CIO Insight carries and article about Wal-Mart's big experiment with RFID. If you're not familiar with it, RFID is radio frequency identification. RFID tags can be produced cheaply and embedded in packages allowing them to be identified from a distance. Wal-Mart isn't deploying them on consumer packaging--yet--but they're requiring their top 100 suppliers to have them on cases and pallets shipped to Wal-Mart stores and distribution centers by January 2005. Wal-Mart represents 10-40% of some of these supplier's business, so they will comply even though the cost will be borne solely by them.

Wal-Mart had also planned to have RFID devices on consumer packaging from Gillette in a pilot, but cancelled that this summer. Some thought the cancel of the consumer trial meant that Wal-Mart was backing off its plans to use them on cases and pallets, but that's not true. They plan to move beyond the top 100 and require RFID of all suppliers by 2006. That move alone could drop prices of RFID gear and make RFID into a viable technology for many other industries and retailers. The article describes Wal-Mart's history in RFID:

For the past two-and-a-half years, Wal-Mart has been working with the Auto-ID Center, a nonprofit research organization based at the Massachusetts Institute of Technology, to develop and test RFID technology that will allow companies to track goods using a universal Electronic Product Code (EPC). The Auto-ID Center's long-term vision is for companies to use smart shelves to monitor how many items are on each shelf. When inventory is low, software would signal a store manager that, say, more Tide detergent or Kellogg's Corn Flakes needs to be brought from the storeroom. Readers in the storeroom would monitor inventory and alert the distribution center when more product is needed, and so on back through the supply chain. But Wal-Mart and other sponsors of the Auto-ID Center have always envisioned that it might take as long as ten years before RFID tags would become inexpensive enough to put on individual items in stores.

Many people now expect RFID use at the pallet and case level to take off rapidly because of something economists call the "network effect," which basically says that the more people use a physical network (say, the Internet) or shared service (eBay), the more valuable it becomes. That encourages even more people to use the network, creating exponential growth.

The people who ought to be worried aren't Wal-Mart's supplies, but Wal-Mart's competitors. The savings from this are huge:

Here's an estimate of what Wal-Mart might save annually when RFID technology is deployed throughout its operations.

  • $6.7 Billion: Eliminating the need to have people scan bar codes on pallets and cases in the supply chain and on items in the store reduces labor costs by 15 percent.
  • $600 Million: Even with the most efficient supply chain on earth, Wal-Mart suffers out-of-stocks. The company boosts its bottom line by using smart shelves to monitor on-shelf availability.
  • $575 Million: Knowing where products are at all times makes it harder for employees to steal goods from warehouses. Scanning products automatically reduces administrative error and vendor fraud.
  • $300 Million: Better tracking of the more than 1 billion pallets and cases that move through its distribution centers each year produces significant savings.
  • $180 Million: Improved visibility of what products are in the supply chain-in its own distribution centers and its suppliers' warehouses-lets Wal-Mart reduce its inventory and the annual cost of carrying that inventory.
  • $8.35 Billion: Total pre-tax saving is higher than the total revenue of more than half the companies on the Fortune 500.

Wal-Mart will reap not only efficiency advantages, but eventually advantages in sales as well:

Studies show that products are out of stock in the grocery and mass-merchandise sector an average of 7 percent of the time. Procter & Gamble Co. has commissioned research that reveals that out-of-stocks on some fast-moving items can be as high as 17 percent.

This means that CIOs at other retailers will have to scramble to catch up and understand and then deploy this technology. Some will take a "wait and see" approach, hoping that Wal-Mart fails and gives them some breathing room. This is risky in my book. I wouldn't want to bet against Wal-Mart succeeding in this kind of venture. They don't fail often.

At the same time, there are worries about the technology not being ready for prime time. An article in yesterday's SiliconValley.com talks about some of the concerns.

With every supplier, there are two camps, said Kara Romanow, an analyst with AMR Research, whose report estimated companies would spend $2 billion trying to meet the Wal-Mart deadline. There's the camp that believes the end vision and has really bought into the hype. Then there are the people that are charged with implementing it that are scared.

At the same time there are privacy concerns:

Some privacy advocates, who contend the technology will soon be used to track people and their personal information, are also worried that RFID is moving too fast. Katherine Albrecht, of the privacy group Caspian, said citizen and consumer advocates should have been invited to the Chicago symposium to discuss their concerns. Instead, her group now plans to protest. "It's such a once-sided conversation about the needs of businesses, with so little input from the citizens and consumers who are the major stakeholders in society." she said.

There's little privacy concern with the current plans. The privacy issues begin when there's RFID tags on consumer items. I think some lessons from The Transparent Society are in order here.