By: Michael J. Liard, Senior AIDC/RFID Analyst
- Venture Development Corporation (VDC) attended the Wal-Mart RFID meeting on November 4th and 5th at the Holiday Inn in Springdale, Arkansas. Wal-Mart announced plans back in June that it will require their suppliers to place EPC transponders on pallets and cases beginning in January 2005. RFID vendors finally got what they had asked for years ago: a public commitment from Wal-Mart.
Day One of the meeting held outside Wal-Mart's headquarters in Bentonville, Arkansas was positioned as an opportunity for Wal-Mart executives to address their top 100 suppliers (plus an additional 26 who volunteered to comply with the mandate) and communicate the value proposition of RFID. Wal-Mart also gave their suppliers a chance to see RFID demonstrations and hold conversations with RFID vendors on Day Two.
Wal-Mart has tapped RFID as the technology that will help them limit out-of-stocks, allow supply chain visibility in real or "near-real" time, and reduce costs and labor. The benefit for Wal-Mart is clear: higher costs and poor inventory control in the supply chain do not help anyone, especially the largest retailer. With Wal-Mart selling over $245 billion worth of goods in fiscal year 2003, a 1% improvement in the out-of-stock issue could generate nearly $2.5 billion in very profitable sales.
However, what is the incentive for their suppliers? One of the primary benefits conveyed to Wal-Mart's supply chain partners is the additional sales revenue that suppliers can generate due to improved out-of-stock levels. Next, lower operating costs can be realized through labor reduction and improved business processes. Wal-Mart also communicated to their partners that using RFID is more than just about compliance with the mandate. Wal-Mart directly asked their suppliers to look for a return on investment within their own operations.
"Keep it simple" was the final message Linda Dillman (Wal-Mart CIO) message delivered to RFID technology vendors at the close of Day One. However, "keeping it simple" may be easier said than done. For example, read rates and accuracy levels must be achieved without slowing down existing processes. No less than 100% is acceptable according to Wal-Mart. With current RFID offerings netting read rate accuracy levels in the 98% or above range during an "excellent" test/demonstration, things may not seem so simple anymore.
VDC was pleased to be there to hear Wal-Mart's plans for rollout firsthand. According to Wal-Mart's presentation to technology vendors, the major milestones for RFID deployment include:
- 2004: Expand current distribution center pilot in Texas to include 12 additional products from Wal-Mart suppliers. 4,500 pallets and cases have been successfully read. Pharmaceutical tracking pilot in March. Core RFID strategy refinement throughout the year.
- 2005: Regional implementation and continued domestic (US) expansion throughout year. Initial distribution centers include: a Regional Distribution Center (RDC) in Sanger, TX; a Global Distribution Center (GDC) in Cleburn, TX; and a SAM's Club Distribution Center in Desoto, TX. These centers serve roughly 150 Wal-Mart and Sam's Club stores. No state-by-state or regional rollout plans were announced.
- 2006: Complete rollout for all suppliers by the end of year.
Highlights of Wal-Mart's RFID system requirements are as follows:
- Transponders: Durable, temporary or permanent read-only 96-bit Class 0 (factory programmed), Class 0+ (read-write version of Class 0), or Class 1 version 1 (write once-read many) EPC-compliant transponders (supplier's choice dependent on number of turns). Existing 64-bit EPC are not compliant with the mandate. Wal-Mart noted they are driving toward Class 1 Version 2 whenever the specifications and compliant products are available.
- Antennas: 1 antenna required on each side of dock door/portal; 1 antenna above dock door; 1 antenna on each side or underneath a conveyor moving up to 600 ft/sec for case tagging (cases have to be read 100% of the time at 540 ft/sec).
- Readers: Should be agile (largely due to eventual migration to Class 1 version 2 EPC transponders that allow for one common protocol); be Power over Ethernet-based; have flexible output options and RF environment awareness; include security; and have the ability to disable unused features such as Web servers. More details on reader deployment are expected in the weeks and months ahead.
In VDC's opinion Wal-Mart's approach is sensible, starting in a direct fashion with EPC. There are no read-write requirements. No added security is necessary. All that is required is a 96-bit EPC-compliant system. On the surface, compliance appears straightforward, but industry players may disagree.
To no one's surprise some of Wal-Mart's suppliers are wary of committing to RFID. This is largely due to the lack of RFID education and the complexity and costs associated with RFID systems. Challenges and questions surrounding system performance, data synchronization, consumer privacy, integration with legacy systems, non-compliance repercussions, and more remain at the forefront of supply partner minds. After witnessing the events in Springdale, Arkansas, VDC could classify the top suppliers' reactions to RFID into three distinct categories:
1. Those suppliers who are experiencing "compliance denial," stalling adoption, or wishing RFID would go away - representing nearly a quarter of the suppliers
2. Those suppliers who embrace the benefits of RFID but are exercising caution moving forward with RFID compliance - another quarter of the suppliers
3. Those suppliers actively volunteering to be first implementers/adopters of RFID - roughly half of the suppliers
Many of the suppliers are just beginning their formal RFID education, others are ready to commit and move forward as soon as possible, and a select few have already tested the technology. Wal-Mart executives admitted that their suppliers were "a little scared," viewing RFID compliance as a bigger challenge than Y2K compliance. However, one industry pundit commented, "Give it some time, they (Wal-Mart's suppliers) will adjust and ultimately comply. It is all so new so fast."
Without question, the vast majority of Wal-Mart's suppliers appear ready to embrace RFID and begin working toward compliance. Given the size and influence of some of Wal-Mart's top suppliers who are ready to commit to RFID, this speaks significant volumes about the potential impact the Wal-Mart mandate may have on the RFID industry in terms of revenue, transponder and reader shipments, and overall market development.
Walking the show floor on Day Two, no vendor stood above the rest. The RFID playing field is truly wide open for all market players to make a profit. It was evident that the roughly 40 technology vendors touting their wares and wooing customers felt optimistic about their futures in the RFID market. They are ready to make preemptive strikes against the competition, prepared to secure customers, and positioning to lock up market share.
At the end of the day, Wal-Mart's leadership was in full agreement with VDC when they openly admitted to RFID technology vendors that "the first to market wins" (and wins big). The market is off and running. RFID vendors must develop effective strategies in the immediate future to meet the specific requirements of Wal-Mart and their suppliers.
VDC expects Wal-Mart's top 126 suppliers to spend a significant amount of money on RFID systems (especially infrastructure) through 2005 in order to meet Wal-Mart's deadline. Which vendors will succeed and overtake greater market share depends on the near-term actions of the technology vendors themselves and, more importantly, the 126 Wal-Mart suppliers that attended the meeting.
Undeniably, Wal-Mart's edict may be the single most important milestones for RFID to date. However, the timing begs the question: Is RFID technology prepared for Wal-Mart and vice-versa? Here are some key issues to consider:
- RFID technology's poor performance around water and metal are still unresolved - with consumer goods products such as shampoo, canned food, and electronics passing through supply chains, reading all transponders accurately may prove challenging.
- Class 1 Version 2 being talked about before specifications have even been created or publicly tested - although Wal-Mart contends they will rapidly move to Class 1 Version 2 EPC transponders once products are available, the process of writing the technical specifications through to product developments/releases may take up to two years, slowing the migration path.
- ISO and EPC standards remain separate - although this issue is being addressed, current ISO 18000 and EPC standards are not compatible and need to come as close as possible for either to succeed in its mission.
- Infrastructure costs (software, service, wireless networks, etc.) for an RFID system implementation are significant - current estimates hover in the several millions of dollars (and in some cases, tens of millions) range per supplier. Never mind transponder costs, it is the price of infrastructure that causes the greatest sticker shock among end users.
- Unique supply chain environments among Wal-Mart suppliers - there is no cookie-cutter RFID system available. A great deal of customization is needed from supplier partner to supplier partner, thereby adding complexity and costs to an implementation.
Given what VDC witnessed and heard over the course of the two days, we feel more confident in the future growth of RFID. However, whether or not the 2005/2006 deadlines are achieved remains in question. Wal-Mart, supplier, and technology vendor actions over the next six months will solidify this perspective. Regardless, Wal-Mart's suppliers now have their marching orders and things have been officially set in motion.
For more information, please contact: Michael J. Liard, AIDC/RFID Group at [email protected]
