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Suppliers Meet Mandate Frugally

A report by consulting firm Incucomm says that Wal-Mart's suppliers are spending less than expected on RFID compliance, and small systems integrators are grabbing market share.
By Mary Catherine O'Connor
Jan 03, 2005The 137 companies complying with the Wal-Mart radio frequency identification (RFID) mandate, which went into effect Saturday, are spending markedly less on RFID-related products and services than what many industry analysts and other experts predicted, according to a study from strategic consulting and early-stage technology investment company Incucomm. According to the firm's research, thus far Wal-Mart's 100 top suppliers and 37 other suppliers have spent an average of $500,000 each to comply with the mandate to put RFID tags on cases and pallets of goods shipped to three Wal-Mart distribution centers in north Texas. The average spending is far less than the widely cited analyst estimates of $1 million to more than $500 million.

The study also reveals notably less resistance among Wal-Mart's top 100 suppliers to the retailer's mandate. It estimated that only 4 or 5 of Wal-Mart's top 100 suppliers are ignoring the mandate and making no effort to comply, which is lower than the rate commonly predicted by analysts.

Steve Roemerman
To gather data for the report (entitled Wal-Mart's RFID Deployment—How is it Going?), Incucomm interviewed, from mid-November to just before Christmas, members of Wal-Mart RFID-compliance teams, some of whom also had authority to make purchasing decisions, within the IT or logistics/operations departments of consumer packaged goods (CPG) companies. Incucomm also interviewed some of the systems integrators that provided these companies with contracted RFID-related services. In total, roughly 200 interviews were conducted. Incucomm also used research gathered for a report it released in October, RFID—EPC Changes Everything (see Report Weighs Impact of RFID), that predicted retailers will drive EPC adoption to 20 billion tags by 2008. This earlier research included interviews with analysts and chief executives at CPG firms.

Steve Roemerman, CEO of Incucomm, which is based in Dallas, says nearly half of the firms studied are taking a do-it-yourself (DIY) approach to compliance, in which an in-house group develops a minimal compliance solution to the mandate without contracting any outside help. The report identified three main causes for the DIY approach.

The first is that many of the top 100 suppliers had either designated very small RFID spending budgets for 2004 or were not able to get sizable RFID budgets for 2004 approved after Wal-Mart announced in June 2003 (see Wal-Mart Draws Line in the Sand) that it would require its top 100 suppliers to start tagging pallets and cases of select items in January 2005. Roemerman notes that a number of those suppliers had doubted that Wal-Mart would actually enforce the mandate, but those doubts faded after a June 2004 meeting at which Wal-Mart CIO Linda Dillman spelled out details of the mandate and discussed plans to implement the mandate to the next 200 biggest Wal-Mart suppliers (see Wal-Mart Details EPC Rollout Plan).

Second, many companies took a low-cost, minimal approach to deployment, using in-house resources and not contracting a systems integrator. The objectives behind this, says Roemerman, were to keep costs down but also to beef up internal knowledge of the technology to determine which deployment areas—such as tagging, dealing with interference, managing data—the company would most need outside help with. Many of these firms plan on contracting a systems integrator this year, according to the report. The third factor sited in the report was a lack of planning and familiarity with systems integrators who could serve both RFID and logistics needs. "Some of these [Wal-Mart suppliers] simply did not know how to contract help; they did not know to which firms they should send requests for proposals," says Roemerman.

The study found 24 percent of the 137 Wal-Mart suppliers are taking a slap-and-ship approach, in which suppliers use an outside firm to develop a method of placing RFID tags on pallets and cases of items that fall under the mandate and writing the data to those tags that is needed to meet Wal-Mart's requirements, but with little or no IT systems integration. Twenty percent have contracted an external system integration team, and 2 percent developed a systems integration team primarily made up of in-house staff. Four percent are just starting to send RFPs, and 3 percent of the 137 suppliers are ignoring the mandate, according to the report.

Systems integrators with big names and advertising budgets are not necessarily winning the most clients among the 137 suppliers. The report shows Dallas-based Xterprise, in which Incucomm has an equity stake, and San Francisco-based R4 Global Solutions, faring well against big firms such as IBM, HP, Accenture and SAP. It says Xterprise and R4 together have about 40 percent of the systems integration contracts awarded (25 percent and 14 percent, respectively), which is more than all of the major firms have won, combined.

Wal-Mart wants its top 100 suppliers to tag all cases of goods for select products and also tag all pallets used to ship those cases. The pallet tags must be applied so that the tags can be successfully read 100 percent of the time as the pallets move through dock doors. In addition, Wal-Mart wants the tags on cases successfully read 100 percent of the time when those individual cases are moving on a high-speed conveyor. The report claims that most companies that contracted systems integrators are achieving these goals for reading pallet and case tags 100 percent of the time, while some of the companies taking a DIY approach are not meeting the goals. But the report also states that some of the companies that contracted systems integrators are not meeting the goals, while some of the "best-in-class DIY teams" are getting pallet and case reads 100 percent of the time.

The 20-page report will be available for download for a $295 fee from the Incucomm's Web site, www.incucomm.com, starting Jan. 7.

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