PRINT THIS STORY:

CHANGE TEXT SIZE:

‘Bar code of the future’ set to transform retail business

By Michael Fickes

When Wal-Mart’s new chief information officer, Rollin Ford, took office in April, he made known his intentions to continue pushing the company’s use of radio frequency identification (RFID) technology, which had begun in 2004.

In his previous job as Wal-Mart’s executive vice president of logistics and supply chain, he saw firsthand this technology’s cost-cutting and revenue-generating possibilities, he said at a meeting at the Bentonville, Ark., headquarters.

“RFID will transform the way we do business,” Ford said. “I am privileged to be a part of this technology that is bringing positive change to Wal-Mart, the retail industry and many other sectors as well.”

Wal-Mart is not alone in embracing RFID. Others, including Albertsons, Best Buy, Circuit City and Target in the U.S., and Metro and Tesco in Europe, want to keep up with Wal-Mart’s famously efficient supply chain methods and have rolled out their own RFID tests.

Retailers and manufacturers around the world are watching these experiments closely. “I think the technology will become ubiquitous across the supply chain,” said Bill Hardgrave, a professor of information systems at the University of Arkansas, in Fayetteville. Hardgrave, who is executive director of the university’s IT Research Institute, recently completed a study on the effectiveness of Wal-Mart’s RFID initiative.

Retail real estate owners and developers might want to pay attention too, because RFID could well have an impact on retail real estate.

In the best of all retail worlds, RFID technology would track purchases for customers and retailers alike, with scanners installed on store baskets and carts tallying prices as customers pluck goods off shelves. Checkout lines would shrink as a result. At the same time, RFID readers on the shelves would monitor stock and reorder from warehouses through an inventory-management system. Eventually, the communication chain would reach the manufacturer, which would then ship more products.

Real-time knowledge of the number of items remaining on the shelves, the back room, the warehouse and the distribution center would enable retailers to cut inventory costs to a bare minimum. A 2003 study by A.T. Kearney, a Chicago-based management consulting firm, estimates that RFID technology can deliver inventory-reduction savings of about 5 percent.

As products move through the supply chain, the RFID system scans and reports movements automatically, unlike bar-code technology, which requires manual scanning with handheld devices. The Kearney study calculates that RFID could reduce labor costs by as much as 7.5 percent.

RFID can brighten business in other ways too, sources say. The Kearney report estimates that keeping shelves filled with products can boost sales by about $700,000 per $1 billion in revenue. For Wal-Mart, which reported $316 billion in sales last year, that could amount to more than $221 million.

Hardgrave says RFID return on investment may be even higher for other retailers than it is for Wal-Mart. “Wal-Mart is very good at what it does,” he said. “They’ve already made numerous cost-saving improvements to their supply chain. RFID will help them tweak the process. But other retailers haven’t found all the efficiencies that Wal-Mart has found just yet. RFID can help those retailers move from where they are today to where Wal-Mart will be tomorrow.”

Are the advertised benefits real? Last October, about 18 months after Wal-Mart launched its RFID initiative, the company reported that 460 Wal-Mart stores, 30 Sam’s Clubs, and five distribution centers were using the technology, along with 140 suppliers. The company had received some 200,000 tagged pallets and 8.5 million tagged cartons, which were then read and logged about 80 million times.

Hardgrave’s researchers conducted a 29-week study, commissioned by Wal-Mart, of many of those transactions to determine how the technology worked. The study analyzed out-of-stock merchandise at 12 Wal-Mart pilot stores equipped with the technology and 12 control stores without it. All Wal-Mart formats participated — discount stores, neighborhood markets and Supercenters.

At the RFID stores, the frequency of out-of-stock shelves dropped by 16 percent, Hardgrave says. Further, those stores replenished out-of-stock items three times faster than the control-group stores. In other words, fewer shelves ran out of stock, and those that did run out were resupplied much faster than usual. Finally, RFID stores experienced a 10 percent reduction in manual orders, in turn decreasing the need to carry excess inventory.

Wal-Mart said in a press release that the study proves conclusively that RFID increases sales.

And that’s just for starters. The study did not cover a full-fledged RFID implementation, which would tag products down to the item and shelf level. Wal-Mart and other retailers testing RFID have not tagged items on shelves yet. Current practice places RFID tags on pallets and cartons. Pallets hold cartons, and cartons hold individual items. But so far no one has tagged the items inside the cartons.

Before RFID tags can roll all the way through the supply chain, their cost must fall, and the technology must become easier to set up, Hardgrave says. Two years ago RFID tags, which include a microprocessor chip and an antenna, cost over 25 cents each. At that price, tagging every item in a store, down to the dollar merchandise, made no sense. Since then, though, the cost of the tags has fallen to just over 10 cents.

Industry observers say a 5-cent RFID tag, which would be close enough to the cost of bar-code tagging to move things to product-level RFID, is about two years away. “The biggest opportunity for payback is when tags get to item level,” Hardgrave says.

Then there is the problem of hook-up difficulties. “It has to become plug-and-play to drive wider adoption,” Hardgrave said. Experts say systems that could be removed from a box, plugged in and easily configured could arrive within a few years. This would enable shopping center owners to provide the technology to their tenants. “Receiving and exit doors are ideal for RFID readers,” Hardgrave said. “For owners, putting RFID infrastructure into the physical architecture might be important.”

And since RFID readers are compact devices, they probably would not require significant changes in building design and construction. “We have found no reason to change the way we’re building distribution centers to accommodate RFID technology,” said Leonard Sahling, first vice president of global research at ProLogis Corp., a Denver-based industrial real estate development firm whose logistics, retail and other tenants are using RFID.

Then again, retail landlords may not need to get involved with RFID, says Paul Nuzum, author of a study called RFID — Lessons Learned for the ProLogis Supply Chain Review. “Readers are small, compact and inexpensive — only about $500,” said Nuzum. “I think retailers will end up buying the readers themselves and deciding where best to put them.”

In the end, RFID will cut costs and boost profits for retailers. And what’s good for retailers is generally good for landlords.