Not since the Y2K scare five years ago has the turn of the calendar year been the object of such intense speculation. But this time around, no one was hunkered down in a basement with a stash of canned spaghetti and bottled water waiting for planes to fall from the sky. In fact, those awaiting 2005's arrival displayed more curiosity than trepidation. And rather than prophets of doom, the curious were mostly consultants, manufacturers, retailers and RFID vendors with a single question on their minds: What would happen when 52 Wal-Mart suppliers officially began shipping pallets and cases tagged with tiny RFID chips to the mega-retailer's DCs?
Now, 60 days out, the verdict on Wal-Mart's bold experiment seems to be so far, so good. At this point, Wal-Mart appears to be solidly on track with its RFID initiative, which called for its 100 largest suppliers to begin using so-called smart tags to identify incoming pallets and cases. True, the retailer didn't have all 100 of its top suppliers on board on Jan. 1, but that was never the goal to begin with. All along,Wal-Mart had asked its top 100 suppliers to meet not a Jan. 1 deadline, but a January deadline, giving them the luxury of a 31-day window to get their cargo in chip-shape. And sure enough, by the end of January, 108 suppliers were shipping products carrying RFID tags to Wal-Mart, while another 29 expected to be on board by March 1. (Those who counted a total of 137 companies are correct. Aside from the mega-retailer's top 100 suppliers, 37 companies volunteered to participate.)
"There were no surprises in January and that's precisely what Wal-Mart wanted," says Kara Romanow, a research analyst at AMR Research, who tracks many of the consumer product goods (CPG) companies subject to Wal- Mart's mandate. But compliance, of course, is only a small part of the story.What about the retailer's larger goals, like cost savings and a reduction in stock-outs? "It's still too early to tell whether Wal-Mart will meet its goals," Romanow answers. "We really don't know if [RFID] will impact [stock-outs] yet. But this is not a failure either, just by the fact that there are so many technology companies out there investing to make RFID a more mature technology. Wal-Mart has absolutely moved both the technology and the CPG industry forward."
Working out the kinks
As for the Bentonville Behemoth's own assessment, preliminary indications are that Wal-Mart's management is pleased with what it sees so far. "Things are going well and we are pleased with the progress," said Simon Langford, the retailer's director of global RFID strategy, via e-mail. Langford reported that as of Jan. 27, 92 suppliers had shipped RFID-tagged merchandise to Wal-Mart DCs in Texas. So far, Wal-Mart has received more than 7,000 tagged pallets and 210,000 tagged cases, and has recorded 1.5 million electronic product code (EPC) reads.
That's not to say there haven't been some hiccups. But Langford remains optimistic that the kinks can be worked out. "As the tagged cases start to work through the supply chain, we will start to see improvements," Langford said. "We will be measuring these improvements ongoing as we roll our changes [out] to all [RFID-equipped] sites."
Of course, that's not to suggest that all of those suppliers are tagging 100 percent of their Wal-Mart-bound products. Wal-Mart has reported that on average, participants are tagging 65 percent of their stock-keeping units (SKUs). But some observers believe that figure is a bit misleading. Some smaller suppliers may be tagging a majority (or even all) of their stock-keeping units, they say, but most companies are tagging between two and 10 products. And it's important to keep in mind that "10 SKUs" may represent one product in 10 different sizes or colors.
"What you have to realize," says Romanow, "is that most of those top suppliers are only tagging a handful of products. So the 65 percent number doesn't [adjust] for the smaller suppliers who only have three or four products and who are tagging all of them, and it doesn't account for only the handful of products from the big guys."
The road ahead
Now that the first round of RFID implementations is over, all indications are that Wal-Mart intends to stay the course. For one thing, Wal- Mart is pressing ahead with the installation of RFID-reading equipment in more distribution centers and stores. In preparation for the January rollout, Langford reports, Wal-Mart outfitted 104 retail stores with RFID equipment, deployed 14,000 pieces of hardware and ran 230 miles of cable. Now, it's barreling ahead with an expansion program. The retailer expects to have six distribution centers and 250 stores equipped with RFID readers by June, and 12 DCs and 600 stores by October.
In addition, the retailer is forging ahead with plans to bring more suppliers on board.Wal-Mart has put its next 200 biggest suppliers on notice that they'll be expected to begin tagging pallets and cases of selected products by January 2006. By the end of 2006, the retailer expects its entire supplier base (up to 20,000 suppliers) to be "engaged in RFID in some form or fashion." Langford has not revealed when Wal-Mart might start to roll out RFID internationally.
As for the 100 top suppliers, they're not off the hook yet. Wal-Mart has asked them to tag more products. But even without Wal-Mart's latest request, they'd still be facing a new set of challenges. In late December, the standards body EPCglobal ratified the Generation 2 standard for RFID tags. With the Gen 2 technology expected to become available in the second half of the year, many of the top 100 suppliers have resigned themselves to writing off their initial investments and starting over with the newer technology.
That Gen 2 rollout has thrown a wrench into the plans of others as well. Initially, industry analysts had predicted that compliance would be easier for the 200 suppliers in the second wave (which includes companies like E.&J. Gallo Winery), assuming that they could ride the coattails of the first wave of suppliers. But now, it looks like the advent of Gen 2 technology will make much of that early experience irrelevant.
Still, at least they're not starting from scratch. "For those next 200 suppliers, there are some small advantages in … that we have some standards out there now and that there is some knowledge about readers and antenna placement that they can leverage during their pilot," says Gene Alvarez, vice president at Stamford, Conn.-based Meta Group.
Has that assurance provided any consolation for the suppliers preparing for Round 2? "I've had two reactions from my clients," Alvarez says. "One wants to get on this as quickly as possible because if they can beat a competitor, maybe they gain preferred supplier status with Wal-Mart. The other client doesn't have a great deal of money to invest and wants to do the bare minimum, waiting things out until [it] can implement RFID properly. I think we'll see more people in that category."
Wal-Mart isn't the only retailer riding the RFID wave. Metro Group, the world's third largest retailer, has also been busy deploying RFID. In fact, Metro has a bit more RFID experience under its belt at this point than its Arkansas-based counterpart does: Metro's RFID mandate carried a November 2004 deadline.
Unlike the notoriously tight-lipped Wal-Mart, which hasn't spoken much publicly about its experience, the Düsseldorf, Germany-based Metro has been publicly touting the cost savings and operations improvements it's realized from RFID. For one thing, the company says it has found that RFID-tagged shipments can be unloaded and checked in faster than their tagless counterparts, averaging just 15 to 20 minutes per truck. For another, it reports that RFID has helped it identify and eliminate weak spots in its handling processes.
According to the retailer, Metro has integrated RFID into existing operations so that RFID-tagged pallets and cases can be detected and recorded at the shipping pOréal. Tag IDs are then transmitted over a local area network (LAN) to a local server. The tag number, which functions as a serial shipping container code (SSCC), is then compared with electronic data interchange (EDI) data from the retailer's merchandise managing system on a central server. At that point, shipments can be either cleared or flagged if there is a discrepancy between the shipment and the EDI documentation or if the scanner experiences problems reading the RFID tag.
So what's next for Metro's RFID initiative? Gerd Wolfram, director of IT strategy, buying and development services for MGI Metro Group Information Technology, a Metro subsidiary that supplies the company with IT services, says that by the end of 2005, Metro expects to have 100 companies in its supply chain sending it RFID-tagged shipments. Next year, Metro expects to receive tagged shipments from its top 300 suppliers, which provide the retailer with merchandise that accounts for 60 to 80 percent of its total revenue.
EXHIBIT 1: Market forecast for industrial robots - revenuesInteract Analysis
