Cover Story: Wal-Mart's Faltering RFID Initiative

 
 
By Mel Duvall  |  Posted 2007-10-03
 
 
 

Despite some big strategic changes, the retail giant insists it's not retreating on its investment.

Story Guide:

Also in This Feature:

  • Base Technologies: Wal-Mart's Applications, Products, and Suppliers

  • Player Roster: Who's Who in Wal-Mart's RFID Initiative
  • Baseline Comparisons: Wal-Mart's Faltering Results

QUESTION: Will the shift in direction by Wal-Mart be a setback for the RFID market as a whole? Tell us what you think at mailto:editors@baselinemag.com

Next Page: Falling Short of Expectations

The news from Wal-Mart chief executive Lee Scott in August was not what the radio frequency identification (RFID) sector wanted to hear. The retail giant's second-quarter sales, while up 8.8 percent, had once again fallen short of expectations. Worse, because of a need to lower prices, the company was reducing its forecast for year-end earnings from continuing operations by 10 cents per share.

The tepid earnings report came at a time when the RFID industry was desperately hoping for a clear signal from Wal- Mart that the technology could produce benefits. It had been four years since the nation's largest retailer embarked on an ambitious program to implement RFID technology throughout its operations, and so far there was seemingly little to show for it.

By placing RFID tags with embedded circuits and radio antennas on pallets, cases and even individual packages, Wal- Mart was supposed to be able to wring out inefficiencies in its massive logistics operations and slash out-of-stock incidents, thus boosting same-store sales.

Instead, Wal-Mart turned in a string of disappointing quarters, cost savings failed to materialize, and inventory levels rose rather than fell. Inventory was up 4.8 % against a 6.5% growth in sales in the second quarter and an even worse 9% against a first-quarter 5.6% rise in sales. Those results fell far short of a corporate goal of keeping inventory growth to half that of sales, according to Eduardo Castro-Wright, head of Wal-Mart Stores USA.

Similarly, operating costs continued to climb, particularly in comparison with major rivals Target and Costco. General and administrative expenses rose to 18.4% of sales in 2006, compared with 17.9% in 2005.

The lack of any obvious concrete gains has raised questions as to whether Wal-Mart should delay or freeze its RFID plans. For now, however, Wal-Mart says it will stay the course. At an RFID conference in May, CIO Rollin Ford insisted the technology is producing solid results in the company's supply chain operations, including a 30% improvement in out-of-stock rates at stores where RFID has been deployed. "I read we're slowing down on RFID," Ford said at the conference. "I can tell you nothing could be further from the truth." Wal-Mart will RFID-enable another 400 stores this year, according to Ford.

Despite some support for the technology from consumers and key suppliers such as Procter & Gamble, Kimberly-Clark and Unilever, Wal-Mart is in the midst of dramatically reshaping its RFID strategy. By January 2006 the company hoped to have as many as 12 of its roughly 130 distribution centers fully outfitted with RFID. That effort stalled at just five distribution centers. Instead, the company is now focusing on implementing RFID in stores fed by those five distribution centers so it can gain a bigger window into its supply chain.

Suppliers have also been slow to jump on board. Four years after Wal-Mart announced its RFID plans, only about 600 of Wal-Mart's 60,000-odd nationwide suppliers have gotten involved in the project. Without widespread adoption, the cost of RFID tags, readers and supporting systems remains a barrier.

"We haven't lost faith in the potential of the technology," says Simon Langford, head of Wal-Mart's RFID initiative. "But we have had to change our strategy to provide more benefits to our suppliers."

Wal-Mart's change of plan demonstrates the need for retailers and suppliers alike to tread carefully with RFID. As retailers such as Best Buy have observed, widespread adoption is still years, not months, away. At the same time, some of the greatest benefits may not be in applications first thought to be ripe for the technology, such as automating distribution centers. Instead, retailers are finding early gains closer to the sales floor, where they are using RFID to track consumer buying patterns and ensure products are on shelves in time for promotions. Next page: The RFID Promise

The RFID Promise

When Wal-Mart announced its RFID strategy in 2003, it was just one of many retailers that had become enamored of the technology. The concept seemed so simple few questioned its merits or Wal-Mart's ability to strong-arm suppliers into compliance. By placing RFID tags on cases and pallets shipped from manufacturers to Wal-Mart distribution centers, companies would be able to keep close tabs on their shipments. In turn, that would allow Wal-Mart and its suppliers to streamline their supply chains and ultimately ensure shelves were always fully stocked.

RFID tags represented the next big step forward from bar codes, the ubiquitous stripes on the sides of packages that provide basic product and pricing information. The simplest tags, passive RFID tags, require no internal power supply. Incoming radio frequency signals from RFID readers can transmit a minute electrical current, enough to power the integrated circuit in the tag and transmit a response. The key benefit is that the bar code on a case or pallet no longer needs to be swiped to identify the contents; the tag just needs to come within range of a reader—usually up to a few meters. In addition, RFID tags can transmit far more information about a product, including price, serial number and even when and where it was made.

Many industry analysts predicted spending on RFID tags, readers, and associated hardware and software would create a bonanza for the computing industry. The reality, at least to date, has not been so spectacular. Meanwhile, other retailers such as Best Buy, Target, and Albertson's that initially planned aggressive RFID strategies have since scaled back plans or are moving more cautiously toward implementation. Best Buy, for example, is choosing to conduct more pilots in areas such as compact disc sales and cameras, while Albertson's' pilot was halted following its acquisition by SuperValu. Target, which also instituted a program in 2004 requiring top suppliers to apply RFID tags to cases and pallets, did not respond to calls from Baseline for an update on its program. However, at least one industry analyst, Lora Cecere of AMR Research, has reported that Target has delayed its RFID implementation.

One fallout is that some of the hoped-for decline in RFID technology costs failed to materialize. Tags, in particular, remain at 10 cents to 15 cents—a price retailers find too steep for investments in item-level tagging. As a result, companies say it will take longer for them to cost-justify rolling out or expanding their RFID efforts.

Cecere says AMR Research had predicted RFID would achieve widespread adoption by 2008. Now her firm predicts the industry will probably need another five years of conducting pilots to determine how best to deploy the technology. "There was a lot of hype when Wal-Mart unveiled its plans," she says. "Now that the dust has settled, it's clear that Wal-Mart has not been able to produce on its original value proposition."

The high cost of tags and readers is a continuing factor, as is readability of RFID tags on certain products such as those containing metal, liquids or frozen foods. But Cecere says the overriding factor for the slower-thanexpected adoption rate is that Wal-Mart hasn't proven the value proposition through improved logistics, fewer out-of-stock incidents or better intelligence on consumer buying patterns—at least, not enough to convince suppliers to come on board without being pushed. "Until [Wal-Mart] can do that, I think the rest of the industry is going to stand back and watch," she says.

Next page: Making its Case

Making its Case

If that does finally happen, success stories will have to start flowing from Wal-Mart's initial rollout in stores fed by its five RFID-enabled distribution centers in Texas and Oklahoma.

Hanna's Candle Co. is one of the companies serving as a proving ground for the technology. Despite its quaint name, the privately held company is a big business. From its 660,000- square-foot manufacturing plant in Fayetteville, Ark., about 30 miles from Wal-Mart headquarters in Bentonville, it pours out more than 20 million candles a year to Wal-Mart and other retailers around the country under its own brand names and private labels.

James Gleghorn, supply chain manager for Hanna's, says the company is getting a payback from its investment in RFID, particularly when it comes to preventing out-of-stock incidents. However, he acknowledges it is taking time and a lot of trial and error to determine how best to deploy the technology. The biggest lesson Wal-Mart and its suppliers have learned to date is that benefits gained from just RFID-enabling the company's giant distribution centers are not that great.

As it turns out, Wal-Mart's distribution centers are extremely well run, says Simon Ellis, head of the RFID program for Unilever USA, which supplies Wal-Mart with such products as Dove soap and All detergent. There are simply not a lot of pallets sitting around in corners waiting to be discovered. "RFID tells us the pallets are in the [distribution center], but so what," Ellis says. "There isn't a lot you can do with that information."

Ellis says the real gains will come from knowing when pallets arrive in a store and, in turn, knowing whether they have moved to a store's shelves or are just sitting in a back room. Gleghorn, too, isn't losing a lot of sleep over whether Hanna's pallets are languishing in Wal-Mart's distribution centers. "I used to work in one and know how well they're run," he says. But he does worry about whether his products have moved from the back rooms of individual stores to display cases at the right time, and he says RFID tagging is finally giving him a window into that black hole. Gleghorn points to a row of pallets stacked on shelves five high in the company's warehouse. The RFID-tagged pallets, destined for a fall promotion at Wal-Mart stores, are filled with display cases that will sit at the end of aisles. Companies pay retailers a premium for prime end-cap space, and Gleghorn says what he really wants to know is, Did the display cases arrive on the sales floor in time for the scheduled promotion?

"If it's the end of the first week of a three-week promotion, and sales are not what we expected, then I'm going to want to dig deeper to find out why," Gleghorn says. If the RFID-lifecycle report shows that display cases are still sitting in the back rooms of some Wal-Mart stores, for instance, a field sales rep can be sent to move the display cases onto the floor.

Gleghorn says there have already been several promotions where this has happened, but rather than send in a field sales rep, he was able to simply call and ask the store manager to check into the situation. The company has also been experimenting with handheld devices, such as a unit supplied by Symbol Technologies that would allow a field rep to go into a storage room and locate an individual case through its RFID tag. Like a locating beacon, the handheld can narrow a search down to a few feet.

Other Wal-Mart suppliers have been experimenting with similar initiatives to gain more ROI from their RFID investments. T3Ci, a Sunnyvale, Calif., provider of software systems that help companies analyze data retrieved from RFID tags, is working with several large Wal-Mart suppliers, including Procter & Gamble, Kraft and Colgate-Palmolive, to track and analyze promotions at the shelf level. CEO Jonathan Golovin says the company retrieved and analyzed its one-billionth tag earlier this year, a milestone it took about three years to reach. Now, Golovin thinks the company will read one billion tags every three to four months. OATSystems of Waltham, Mass., has similarly been working with such suppliers as Kimberly-Clark on using RFID to analyze the effectiveness of promotional displays.

This exemplifies both the power and the problem with Wal-Mart's RFID initiative. Suppliers are keen to get that window onto the sales floor through RFID, but until late 2006, Wal-Mart had only installed RFID systems in about 600 of its 4,000 Wal-Marts, Supercenters and Sam's Clubs in the U.S. Even Hanna's, an aggressive partner in Wal-Mart's RFID initiative, only applies RFID tags to products shipping to Wal-Mart's Sanger, Texas, distribution center, northwest of Dallas.

Stores supplied by that distribution center were the first to be outfitted with RFID. Gleghorn says that as other Wal-Mart distribution centers RFID-enable their supply chain, Hanna's will extend its RFID tagging to those centers. "The fact is, we're just not getting the benefits unless we can see the complete picture," he says.

Next page: Sales Floor ROI

Sales Floor ROI

Wal-Mart's change in strategy to focus more on creating a complete window into its supply chain, from manufacturing facilities to sales floors, is backed by early return on investment studies, says Bill Hardgrave, director of the RFID Research Center at the Sam M. Walton College of Business, University of Arkansas. The center operates a lab at Hanna's warehouse where businesses can bring their products— shoes, razors, apparel—and test how to best tag products. In addition to RFID tag printers, readers and software from various vendors, the lab has a conveyor loop equipped with readers for testing cases, a fork lift with an RFID reader that can record where products are being stored in a warehouse, and loading bays with RFID readers on each side of the door.

In November 2005, Hardgrave and his colleagues also published the most complete study to date on the effects of RFID on out-of-stock situations. The study took place over an eightmonth period and involved 24 Wal-Mart stores in Texas. "It was a huge undertaking, not only because of the number of stores involved, but also because of the number of products that had to be inventoried," Hardgrave says.

The researchers hired a small army of personnel to go through each store and scan the inventory every day. It took 20 people about eight hours to scan the approximately 4,550 unique products stocked at a typical Wal-Mart Supercenter. All items in the stores were scanned, with the exception of "impulse" items that move too quickly to be counted accurately. During the first two months, RFID capabilities were not used, in order to measure typical out-of-stock frequencies. Then, during the next six months, RFID systems were turned on in half the stores for comparison with the other half, which served as a control group. In stores without RFID, department managers make daily rounds to determine which items require restocking. At RFID-enabled stores, Wal-Mart's inventory system compares back-room inventory, obtained by automatically reading RFID tags as pallets come in through the loading bays, with sales data from the point-of-sale system. The software then creates an "autopicklist" of products that need replenishing. The study produced dramatic results. Out-of-stock incidents decreased 26% in the stores using RFID autopicklists. On items with high turnover, the improvement was closer to 60%. Hardgrave says the latter result is particularly significant because it is much more important to ensure that, say, Gillette Mach 3 razors, of which a store might sell 15 to 30 a day, are kept in stock than a lowerturnover item like a toaster, of which a store might sell two or three a week.

The impact of those RFID-enabled picklists can't be ignored. A study published in 2003 by Daniel Corsten, a London Business School professor, and Thomas Gruen, a professor at the University of Colorado, estimated out-of-stock situations shave about 3% to 4% off the average retailer's sales revenue. In other words, a retailer with $100 billion in annual sales could increase sales by as much as $3 billion to $4 billion by eliminating out-of-stock situations. For Wal-Mart, which had $349 billion in sales in 2006, that would mean an additional $12 billion a year.

No technology is going to completely eliminate out-of-stocks, of course. Wal-Mart CIO Ford has estimated that RFID could help the retailer achieve a 30% reduction in out-of-stocks, which could generate an additional $3.6 billion in sales annually.

Getting a handle on costs is more difficult. In 2004, AMR Research estimated suppliers would need to spend $13 million to $23 million to meet Wal-Mart's requirements. But AMR later determined that suppliers had spent the bare minimum, $1 million to $3 million, which was "enough to purchase tags, readers and minimal software." But even those revised figures may be too high. Dallas-based consulting firm Incucomm surveyed 137 initial Wal-Mart suppliers and found that average spending is closer to $500,000, and median spending is about $200,000.

The positive interpretation of those findings, Hardgrave says, is that RFID isn't as expensive to implement as initially thought. The negative interpretation is that companies are not yet investing in systems such as business intelligence and analytics software that would allow them to capitalize on the data being returned by RFID tags and readers.

Still, progress is being made on the technology and standards fronts. EPCglobal, an industry-driven organization working to develop electronic product code (EPC) standards for use with RFID, has succeeded in driving a consensus in several key areas. In 2005, it established a protocol that laid the foundation for a second, more powerful generation of RFID tags, known as Gen2 tags. Earlier this year it created a general protocol for lowlevel RFID readers. And in probably its most important breakthrough, it ratified a global standard for secure real-time sharing of data from RFID systems. The EPCIS standard should simplify many processes, such as container tracking among multiple business partners, promotions management and electronic proof of delivery.

Harold Boeck, a professor at the Universite de Sherbrooke, Quebec, and a founder of Academia RFID, an RFID training and research facility, says one by one, the technology and standards hurdles are being overcome. "There are still some technology challenges, but technology has never really been the main issue," Boeck says. "The biggest challenge has always been around trying to quantify the benefits of RFID and capturing the ROI."

Next page: Where Next?

Where Next?

Hardgrave says it will take more time to do that as retailers figure out how best to deploy the technology. Wal- Mart's decision to focus less on outfitting every distribution center with RFID and more on RFID-enabling complete supply chains makes sense based on early results, he says.

Other retailers are taking a similarly cautious approach to RFID while focusing on gaining store-level intelligence. Best Buy, an early RFID booster, has been pleased with the results of pilots conducted to date, says Paul Freeman, the company's RFID program director. But the company plans to conduct more pilots and is still a long way from full-scale implementation.

"In the next 18 months I think we're going to see big gains in cost and quality," he says, "but no matter what, it's realistically going to take about five years to get real business integration." By that, Freeman means it will take time to integrate RFID data with core company systems such as enterprise resource planning, supply chain management and general ledger applications.

That doesn't mean early insights won't be acted on in the meantime. Best Buy, for example, used an RFID pilot to find out if its strategy for displaying new DVD releases was working, and the results were eye-opening, Freeman says. The retailer's practice was to place 90% of new release inventory on a large feature wall, with the rest going into alphabetical DVD display cases or other areas, such as the home theatre section. When the company tracked new releases of the TV series Smallville, though, it found only 47% of sales came from the feature wall, while 32% came from the display cases. By the second week, sales from the display cases rose to almost twice those from the feature wall. "We thought we knew where our sales were coming from—it turns out we didn't," Freeman says. "That's what this can do. It has given us great data to work with."

The bottom line for RFID appears to be this: Despite it being more than three years since the first cases of RFID-tagged products rolled down the conveyors at Wal-Mart's Sanger distribution center, RFID remains in the pilot phase for most companies. Prices on tags, readers and software are coming down, but not as fast as initially predicted. And while the technology has made great strides, companies are still struggling to determine how best to apply that technology.

Mass adoption is not right around the corner, but perhaps another five to 10 years away.

For its part, Wal-Mart seems determined to press ahead and retain its lead, but not blindly. Langford, the company's RFID chief, says the company will continue to adjust its strategy if needed, but for now it believes that by completing the RFID supply chain picture, migrating the technology out from the distribution centers to stores in a hub-and-spoke fashion, it will gain more supplier adoption.

Wal-Mart CIO Ford also insists the company is commited to the technology. "The train has left the station," he says. "Imagine in the future being in a checkout line at Wal-Mart and you're out in 30 seconds. Now that's utopia—and we'll get there."

Next page: Base Technologies: Wal-Mart's Applications, Products, and Suppliers

Wal-Mart Base Case

HEADQUARTERS:
702 Southwest 8th St.,
Bentonville, AR 72716

PHONE:
(479) 273-4000

BUSINESS:
The world's largest retailer, operating 1,100 Wal-Mart stores, 1,900 Supercenters, 575 Sam's Clubs, and 100 Neighborhood Markets in the U.S. alone

CEO, PRESIDENT:
H. Lee Scott

CIO:
Rollin Ford

RFID PROGRAM CHIEF:
Simon Langford

FINANCIALS:
Earns $12.6 billion on $350 billion in sales in 2006, with a profit margin of 3.6%

CHALLENGES:
Use RFID to lower operating costs and reduce out-of-stock incidents.

BASELINE GOALS

  • Use RFID to reduce out-of-stock incidents in stores by 30%, creating an additonal $3.4 billion in sales.
  • Limit inventory growth to half of sales growth through better use of RFID systems.
  • Increase the number of RFID-enabled Wal-Mart stores, Supercenters and Sam's Clubs from 1,000 in April to 1,400 by end of 2007.
  • Boost sales through lower prices, fewer out-of-stocks and faster checkouts and regain sales momentum against rival Target.

Base Technologies

Application Product Supplier
Daily sales and RFID-generated reports Retail Link Propietary Wal-Mart System
4-petabyte data warehouse HP Neoview, Teradata Hewlett-Packard, Teradata
Product information transmitted wirelessly through RFID Wal-Mart suppliers choose own provider of Gen2 RFID tags Alien Technology, Avery Dennison, Texas Instruments, Impinj, Omron, STMicroelectronics
Reading of information from RFID tags RFID Readers Impinj, Alien Technology, Intermec, and Symbol Technologies (now a division of Motorola)
Promotions tracking and analysis T3Analytics T3Ci
Promotions tracking and analysis Real-Time Promotion Execution OATSystems

Next page: Player Roster: Who's Who in Wal-Mart's RFID Initiative

Player Roster: Who's Who in Wal-Mart's RFID Initiative

Insiders

ROLLIN FORD
CIO
Ford has had to defend Wal-Mart's RFID efforts following reports in the media earlier this year that the program was "fizzling" due to lack of supplier support and few concrete results. Ford, who took over as CIO from Linda Dillman in April 2006, has staunchly defended the program, saying it is helping the company reduce out-ofstocks, which in turn helps drive sales. Ford says there is no danger the company will halt or delay its RFID plans. "The train has left the station," he says.

LINDA DILLMAN
Executive Vice President, Risk Management
Dillman was thrust into the spotlight in 2003, when, as CIO, she announced that Wal- Mart would embark on an ambitious program to use RFID technology throughout its operations. As CIO of the world's largest retailer, she carried significant influence and used that power to force the company's largest suppliers to come on board. Dillman was shifted into another challenging role in April 2006, when she was tasked with heading up Wal-Mart's controversial health-care initiatives.

SIMON LANGFORD
Manager, RFID Strategies
Langford has day-to-day responsibilities for ensuring Wal-Mart's RFID initiatives move forward. Over the past year, Langford has had to switch gears, focusing more on implementing RFID in stores and away from trying to RFID-enable all the company's distribution centers.

H. LEE SCOTT
CEO, President
In the most recent quarter, Wal-Mart found itself in the unfamiliar position of trailing its major rival, Target, in sales growth. Scott is unhappy with that performance as well as increases to operating costs and inventory—problems RFID was meant to address. No word yet on whether he will require the RFID program to be reevaluated.

Outsiders

CHRIS ADCOCK
President, EPCglobal
EPCglobal is a not-for-profit standards organization instrumental in developing standards for RFID tags, readers and software. In particular, EPCglobal helped the industry reach consensus on the more powerful Gen2 RFID tags and earlier this year ratified a standard for low-level RFID readers.

JONATHAN GOLOVIN
CEO, T3Ci
T3Ci has been working with a number of large Wal-Mart suppliers including Procter & Gamble, Kraft and Colgate-Palmolive to implement systems that let them better track product promotions at the store level. Earlier this year, T3Ci read and analyzed its onebillionth RFID tag, a milestone for the industry.

BILL HARDGRAVE
Director, RFID Research Center, Sam M. Walton College of Business, University of Arkansas
Hardgrave has been instrumental in educating businesses in the potential of RFID technologies as well as in conducting research into the benefits. He headed an exhaustive study in 2005 that showed RFID systems could reduce out-of stock incidents in stores by an average of 26%.

JAMES GLEGHORN
Supply Chain Manager, Hanna's Candle Co.
Hanna's Candle, based in Fayetteville, AR, about a 20-minute drive south of Wal-Mart headquarters, established a working RFID lab in its plant. Hanna's and other companies use the lab to test new RFID tags, readers and software, and Gleghorn is responsible for integrating lessons learned in the lab into Hanna's operations.

Next page: Baseline Comparisons: Wal-Mart's Faltering Results

Radio Interference?
The Wal-Mart juggernaut has faltered since RFID was introduced

Looking for its next big breakthrough in getting products to stores faster and cheaper, Wal-Mart introduced its RFID initiative in 2003. The technology has not made the impact Wal-Mart expected and competitors are making up ground.