Forty years ago, when Sam Walton was still an enterprising young merchant in northwest Arkansas, he’d buy products directly from manufacturers. Then he’d personally deliver the stuff to garages, where he stored the merchandise until it was placed on store shelves.
Things have changed since then. Walton has passed away. And inventory control at the company he started—Wal-Mart Stores Inc.—has grown slightly more complex. The Bentonville, Ark.-based business now operates 4,300 stores globally and maintains a fleet of 7,000 tractors and 35,000 trailers. It owns and operates 108 distribution centers in the United States alone—many of them more than a million square feet.
Those distribution centers are at the heart of Wal-Mart’s remarkable success. By strategically placing retail outlets near distribution centers, the company can resupply its stores directly—often on a daily basis. “We follow what the stores sell, and orders are customized for the stores,” says Tom Williams, a company spokesman. “For us, tracking inventory is extremely important.”
This may explain Wal-Mart’s recent supply-chain jaw-dropper. In June, management at the world’s most powerful retailer issued a stunning edict: the company wants all its suppliers to place radio frequency identification (RFID) tags on all cases and pallets shipped to Wal-Mart distribution centers by January 1, 2006. “RFIDs is a chance to move to a more advanced system…in our distribution centers,” notes Williams. “It’s somewhat akin to moving from tapping out telegraph signals to moving to the Internet.”
RFID tags are whiz-bang technology, that’s for sure. Unlike traditional bar codes, which rely on line-of-sight technology, RFID tags (think microchips with antennae) emit signals that are read by electronic readers. The readers, in turn, are integrated with a company’s enterprise applications, such as an inventory-management system. When all goes well, RFID tags provide precise information about the whereabouts of merchandise as it moves along a company’s supply chain.
Wal-Mart executives, who have given the company’s top 100 vendors a January 2005 RFID deadline, believe the tags will help supercharge Wal-Mart’s inventory management. “What we see at the base of all this information is efficiency; moving product more efficiently,” claims Williams. “That translates into lower costs.”
For Wal-Mart, anyway. According to technology consultancy AMR Research, Wal-Mart’s suppliers will have to shell out, on average, $20 million to comply with the company’s request. Half of that will go for system integration and changes to existing supply-chain software. “The tag is just the tip of the iceberg,” says one analyst. “Manufacturers may have to change their packaging lines and their finished-goods warehouses.”
Reportedly, a number of Wal-Mart’s vendors are not exactly sure what the requirement entails. Wal-Mart management has called a meeting for this month to explain its plan to its top suppliers.
Part of the explaining: convincing vendors that the tags will actually work. Research from AMR shows that early adopters of RFID technology reported failure rates as high as 20 percent, requiring additional internal-quality-control procedures.