Radio frequency identification cost of doing business with Sam's Club

Will Wal-Mart's mandate requiring Sam's Clubs to use RFID finally transform technology? Read and listen to one analyst's view.

Wal-Mart Stores Inc. hopped back on its radio frequency identification (RFID) soapbox last month, mandating that as of Jan. 31 suppliers for its Sam's Club warehouse stores must put radio tags on their pallets or pony up $2 per pallet. The Bentonville, Ark.-based retailer also set aggressive timetables for affixing radio identification tags to cases and items.

Vertical Views: Retail
Subject: Wal-Mart Stores Inc.

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"Everyone knew it was coming," said John Fontanella, vice president, research, at AMR Research Inc. in Boston. Wal-Mart has touted radio frequency identification since 2005 and started talking to Sam's Clubs' suppliers about RFID last fall.

The fact that the buck stops first at the Texas distribution center for Sam's Club, rather than at Wal-Mart stores, took some by surprise, but Fontanella said the supply chain management strategy makes sense. About 60% of suppliers for the 700-store Sam's Club chain also do business with the much larger constellation of Wal-Mart stores.

"It wouldn't surprise me in the least to see Wal-Mart using Sam's as a proxy to further drive compliance to its RFID initiatives and very quickly applying the same kind of fees and penalties to its Wal-Mart suppliers," Fontanella said.

Wal-Mart suppliers no doubt will chalk up the order to the cost of doing business with a behemoth.

But industry observers like Fontanella, who have followed the hype and the horror stories surrounding RFID technology for years, said the mandate from the world's largest retailer could accomplish something more. Due to the volume of goods required to have radio frequency identification tags, companies might finally be forced to tease out the value proposition in identification automation.

"RFID is tricky," Fontanella said. "The use cases for RFID are not as obvious as some proponents would have you believe."

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John FontanellaWal-Mart has mandated that its Sam's Club suppliers apply radio tags to pallets or pay a fine. AMR Research vice president John Fontanella talks about some implications for CIOs.

There is the obvious issue of who pays for the RFID tag and when it is applied. Indeed, many companies see the tags as needless replacements for bar codes, and treat the chip-enabled transponders as labels to be "slapped on" at the shipping dock.

"In many cases, the bar code works just fine," Fontanella said. "The use cases for RFID aren't as obvious as people would have you believe."

For RFID to be anything more than the cost of doing business with Wal-Mart, companies will have to be much more innovative about the way they use the technology.

"RFID requires a change in the way people work. It takes the human element out of a process. And to automate a process requires a fairly significant amount of re-engineering," Fontanella said.

A good example is how most companies check pallets for accuracy, making sure they have the right cases and the right products on them.

"Today there are quality inspectors who go around and physically count a pallet. They reconcile it to the order and make sure what is supposed to be shipped is shipped," Fontanella said.

RFID in the future should be able to scan that pallet once and be able to reconcile it electronically, with 100% accuracy. "What's the best a human being can do? Ninety-six percent or 97% accuracy. A human being just can't get past that."

In the meantime, companies required to conform to the Sam's Club mandate should, at minimum, probably rethink how and when they affix the RFID tags. Many companies still apply the RFID tags at shipping docks.

But the "slap and ship" approach to radio frequency identification tags is very expensive for large volumes of goods. "That method just doesn't scale," Fontanella said.

Now might be the right time for Wal-Mart suppliers and their partners to do the hard work of re-engineering the process and apply the tags on the production line, when the case is being filled with product, rather than paying through the nose when it's time to ship.

Let us know what you think about the story; email: Linda Tucci, Senior News Writer

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