Analysis: RFID - Wal-Mart's Network Effect - ' Behind the Scenes with '

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 questions remain about how RFID technology will be deployed, such as what information will be shared between Wal-Mart and its many suppliers, and how companies will track goods with both bar codes and RFID tags during the transition period. But Wal-Mart is moving to deploy it at the pallet and case level, even before all the answers are known, because the technology has the capability to improve efficiency, cut costs and boost sales.

Dillman's announcement caught many competitors and suppliers off guard. RFID has been used successfully in closed-loop supply chains, where a retailer, such as Britain's Marks & Spencer Group, sells everything under its own brand. But most people thought the proposed EPC standard, which won't be formally introduced until this month, was still too new and too immature to be adopted in open supply chains. At a recent trade association meeting for consumer products manufacturers, suppliers were concerned about just how much time they have to comply. "Wal-Mart plans to hold a gathering for suppliers in November, but that leaves us less than a year to do this. We won't want to deploy new technologies in November and December, because that's the big selling season," says a senior executive at one of Wal-Mart's largest suppliers, who asked not to be identified.

The importance of Wal-Mart's decision is hard to overestimate. "You can count on one hand the number of retailers big enough to force a whole industry to adopt a new technology within a constrained amount of time," John Fontanella, vice president of research at AMR Research wrote in a recent report. "Wal-Mart is biggest of them all."

Next page: What's in store for Wal-Mart's RFID efforts?