Will Wal-Mart Shift Its Approach?

By Mark Roberti

What happened in 2007 could have a big impact on what occurs this year and in 2009.

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Over the past 18 months, Wal-Mart has adjusted its approach to deploying radio frequency identification systems based on Electronic Product Code standards. Initially it asked suppliers to tag cases and pallets, and left it up to each supplier to determine which stock-keeping units (SKUs) to tag. As Wal-Mart and its suppliers got information back from the RFID systems, they realized that it also made sense to tag promotional items and fast-moving goods that were out of stock often. Wal-Mart sent letters to suppliers asking them to tag promotional items. As Carolyn Walton, Wal-Mart’s VP of information technology, said at the EPC Connection 2007 conference and exhibition, Wal-Mart is focused on deploying RFID in a way that drives business process improvements and business benefits.

Now Wal-Mart might have identified another way RFID could improve business benefits. At EPC Connection, Walton revealed that Wal-Mart had initiated a category trial in which every supplier of air fresheners was asked to tag all its cases bound for stores involved in the study. That would enable the retailer to determine if RFID could provide a sales lift across an entire category, benefiting all suppliers. Wal-Mart chose air fresheners because they are a relatively low-value item, and if there are benefits in tagging all low-value items in a category, there would clearly be more benefit in tagging high-value items.

The University of Arkansas’s RFID Research Center is conducting an independent analysis of the trial results, which will be released this spring. Bill Hardgrave, director of the RFID Research Center, says the trial is significant because tagging all products in a category allows Wal-Mart to better isolate and measure the impact of RFID. “Sales for the entire category can be examined because all items are tagged,” Hardgrave says. “When only tagging a few items in a category, it is extremely difficult to determine the precise effect of RFID on sales, since many other factors—such as a consumer’s preference for a particular product, or willingness to switch to a different product—must be explicitly considered. Also, tagging the entire category allows us to focus on the effect of RFID on inventory accuracy.”

Inventory accuracy is extremely important, yet across all retailers and retail settings, Hardgrave says, inventory accuracy is only about 35 percent; that is, what retailers think they have in stock is wrong 65 percent of the time. Thus, retailers are making decisions—ordering, forecasting, replenishing—based on a number that is wrong more often than it is right.

“If a retailer can improve inventory accuracy, then several benefits can be realized, such as less variability in ordering, forecasting and replenishment,” says Hardgrave. “And less inventory can be held while maintaining the same service levels. This will also tend to reduce the ‘bullwhip effect,’ whereby the further upstream in the supply chain imprecise demand signals go, the greater the error—which, for suppliers, means greater amounts of inventory they must hold to accommodate the large variability in demand. Reducing inventory and a more consistent indication of demand is a huge win for suppliers and retailers—and, ultimately, consumers.”

Walton indicated that the initial results of the study were encouraging, but it is too early to say whether the study will indicate that tagging an entire category delivers significant benefits. If it does, the retailer could adjust its course and start asking suppliers to tag all SKUs in specific categories, most likely beginning with higher-value products. Such a move could speed up the pace of adoption by encouraging those suppliers who have done the minimum to comply with tagging requirements to begin to tag more SKUs. Suppliers might be encouraged to go along with the category tagging approach because Wal-Mart would have evidence to indicate that it would result in increased sales for all products in the category.

The big question then becomes: Will sales rise enough to offset the cost of RFID-tagging? If so, adoption rates could speed up significantly in the second half of 2008.