The Strategic Implications Of Wal-Mart's Rfid Mandate

The Strategic Implications Of Wal-Mart's Rfid Mandate

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Over the last few years the cost declines of Radio Frequency Identification (RFID) technology, combined with improvements in sensitivity, range and durability, have enabled widespread RFID use in the logistical planning and operation of supply chain processes in the manufacturing, distribution and retail industries, and helped move its adoption into services such as security and access control, tracking, and monitoring/management.An RFID tag consists of a microchip and an antenna, often in the form of a tiny ribbon that can in turn be packaged into many forms, such as a label, or imbedded in between the cardboard layers in a carton.On the microchip is stored information about the product that the tag is affixed to, which can then be "read" when the tag passes within proximity of an RFID "reader," with that information being relayed back to a computer system that updates the location status of the associated product.This enables great efficiencies and cost reductions with respect to inventory management and control in a physical product environment, and enables innovative applications in locating and tracking people and assets in a services environment.

Up until recently, though, the adoption of such technology has been somewhat scatter-shot; some companies use it, some don't; within any given company that does, it may be used for some types of supply chain operations but not others; or is used only with some types of customers - its adoption has been a relatively immature "hit-or-miss."

This environment changed dramatically last June when Wal-Mart Stores announced that it would require its top 100 suppliers to put RFID tags on shipping crates and pallets by January 1st 2005, and earlier this month announced that it will expand its RFID efforts to its next 200 largest suppliers by January 1st, 2006. Each tag would store an Electronic Product Code (EPC) which is a bar code successor that would be used to track products as they enter Wal-Mart's distribution centers and then in turn are shipped to individual stores. As the world's largest company in terms of revenue, Wal-Mart in one decision changed the strategic foundation of many companies.This article discusses the strategic implications of this mandate for business, not just Wal-Mart's direct suppliers but also many other types of companies that will be affected (whether they know it yet or not), including GIS providers.

There are four main dimensions of strategic impact from this mandate.

Volume and Cost.The economics of RFID manufacture will radically change based on the mandate.

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Volumes of RFID tags will surge; the volume of shipments from its top 100 suppliers is estimated at 1 Billion tags per year.With such volumes, a major player guaranteeing a large and growing market and setting standards for manufacturers and others to follow, costs for tags (and RFID readers) will fall, and fall dramatically.Current average cost per RFID tag ranges roughly between 25 to 50 cents.While the costs per tag have fallen considerably over the last few years, the mandate and associated ripples are likely to quickly drive costs down towards the five cent per tag range, with the "nirvana" of one cent per tag visible within five to ten years.This cost reduction will have enormous implications in terms of expansion of RFID into new applications and markets (more on this later).

(Upstream) Supply Chain Extensions. As the largest 300 direct suppliers transform (and for many it is a transformation) to RFID, the demand to track products prior to their arrival in Wal-Mart's distribution centers will grow.This includes tracking products once they leave a supplier's shipping dock to the time they arrive at Wal-Mart's distribution docks, then even further "upstream" into the manufacturing and distribution processes of the supplier themselves.

Tracking products in transit will involve the combination and coordination of RFID and GPS technologies, a potential boon for GIS providers to integrate manufacturing/distribution center mapping with broader geographic fleet management tracking and routing-type mapping.The idea is to enable an end-to-end visibility of shipments, as well as provide a single vendor secure chain-of-custody, in addition to the trucking fleet management benefits.As a crate moves out of the shipping area past the "final" RFID reader into a truck, it would continue to be tracked via GPS monitoring of the location of the truck, until it finally reaches a Wal-Mart distribution center where it would be "read" into Wal-Mart's inventory management system (and internal distribution center mapping), and the supplier being informed of a successfully received shipment, in turn triggering billing and other accounting activities.

Requiring Wal-Mart suppliers to use RFID in its end product packaging will also have the likely impact of accelerating the use of RFID into the supplier's own supply chain, and eventually in turn the supplier's own vendor supply chains.This kind of "ripple" effect will thus greatly multiply the numbers of companies affected and the demand for RFID tags, further enabling lower costs per tag.

Innovation.As the cost per tag decreases, smaller and smaller companies will be able to afford incorporating RFID into their operations.In addition, it will enable new kinds of innovative applications and applicability to new markets.Examples include industries that are only just beginning to emerge, such as Security and Access Control (human and high value asset monitoring and tracking, building/facility access control, membership card/prepaid car/registration/employee ID card management and counterfeiting protection, computer system access and usage control and component management, medical supply/specimen protection, branded goods replication prevention, library and rental goods management, baggage handling, stolen item recovery), as well as widespread adoption of RFID-enabled capabilities that so far have been limited to the largest companies, such as transportation/trucking (e.g.fleet management in/out tracking, mass transit ticketing, service station credit transactions, highway toll tags).And when these new/expanded RFID applications are combined with GPS, the potential (and the potential for GIS providers) becomes even greater.

(Downstream) Supply Chain Extension. The above discussion talked mainly about business-to-business relationships and transactions, and in the case of Wal-Mart, using RFID tags at the crate and pallet level.There is great potential in also applying RFID to the individual product units purchased by Wal-Mart's customers, be it DVD players, clothing, or boxes of Kleenex, for the purposes of managing inventory within the store shopping floor itself.As the cost of RFID tags drops closer to the one cent per tag mark, the temptation for Wal-Mart and others to apply the tags to individual items will grow.The allure of knowing how, when and from what shelf or end-cap goods were purchased and the spatial relationships to other purchases will drive demand for a new generation of merchandising strategies, not to mention the prospect of driving shoplifting and employee theft down to near zero.The demand for these kinds of systems in turn will drive demand for new forms of GIS mapping.However, standing in the way is consumer fear of having their privacy violated.

Already there have been virulent reactions to RFID tags embedded in individual items.In 2003 a threatened boycott caused Benetton to retreat from its plan to embed tags in its clothing. Survey after survey indicates privacy as being the number one inhibitor to the widespread adoption of location-based services (LBS) such as services that can track the location of a cell phone, and RFID is no different. And don't think consumers haven't noticed Wal-Mart's mandate, even at the crate/pallet level - already several bulletin boards and websites have sprung up to talk about the impact on consumer privacy, and the postings are overwhelmingly negative.Much of this is due to lack of consumer education; consumers don't realize that once a product goes out the store it can't be tracked.Until this lack of education is addressed, it is unlikely that retailers, even Wal-Mart, will be able to use RFID on a large scale within the stores themselves, except perhaps for high ticket items like electronics where consumers have already been acclimated to a higher degree of security, such as locking up video games or requiring DVDs to be "swiped" during the checkout process to prevent triggering an alarm as they walk out the door.

Summary
Wal-Mart's RFID mandate has enormous strategic implications, not just for their direct suppliers, but the suppliers own operations and vendors in turn.The ripple effect of the mandate will cause RFID costs to drop in general, opening the door for RFID applicability to smaller companies and industries that to this point haven't been able to cost justify using RFID.It will also enable new applications such as RFID-enabled personal safety and security.These kinds of applications in turn become particularly attractive when combined with GPS technologies to enable comprehensive tracking whether in a building or on the road.Once costs drop enough, and if privacy concerns are able to be overcome, using RFID at the individual consumer product level will open the door to a new generation of retail efficiencies.And a key enabler of all of these applications will be GIS.
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