Analysis: RFID - Wal-Mart's Network Effect - ' Next Steps for Wal'

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 Wal-Mart RFID mandate means its top 100 suppliers not only have to put tags on pallets and cases, they must also install RFID readers in their manufacturing facilities, warehouses and distribution centers. They, in turn, can require their suppliers to tag shipments and so on through the supply chain. Since Wal-Mart sells auto parts, clothes, groceries, pharmaceuticals and entertainment products, the network can quickly spread to many industries. And as more suppliers adopt the technology, it will make more sense for other retailers to take advantage of RFID, which will drive down the cost of tags and readers, encouraging still more companies to jump in.

Today, RFID tags cost anywhere from 40 cents to a dollar, depending on the size of an order and the features of the tag (amount of memory, whether it is read-only or read-write and so on). This cost will be borne by Wal-Mart's suppliers. Could they refuse to comply with the retailer's demands? "You can't do that if 10 percent to 40 percent of your business is going through Wal-Mart," says Pete Abell, cofounder of the ePC Group Ltd., an independent consulting company, and the former head of AMR Research's retail practice. And Wal-Mart's Dillman has said that companies that don't comply will be fined.

Wal-Mart is unlikely to back off its requirement, because the retailer is convinced the benefits are huge. Financial analysts agree. Sanford C. Bernstein & Co., a New York investment research house, estimates that Wal-Mart could save nearly $8.4 billion per year when RFID is fully deployed throughout its supply chain and in stores.

With those kinds of benefits in sight, it's not hard to understand why the retailer is pushing ahead so aggressively. The ePC Group's Abell says that in the mid-1980s, when most grocery stores were rolling out bar code technology slowly, Wal-Mart dispatched 70 teams to install scanners in its stores as quickly as possible. And he expects the retailer to do the same with RFID for its supply chain. "They understood that the sooner you got the stores up, the sooner you got the benefits," says Abell. "I see the same thing happening now with EPC technology."

Wal-Mart has been studying the potential of RFID for more than 12 years. It has a facility in Rogers, Ark., in which it tests tags and readers from various vendors and studies how the performance of these products is affected by the environments in its distribution centers and storerooms. Wal-Mart will explain to its suppliers what they need to do to fulfill the retailer's requirements, but after that, they're on their own.

Next page: How other companies are trying to catch up.