thinking inside the DC box

Back in the late '90s, as the rest of the business world dithered about Y2K, logistics managers by and large remained firmly planted on the sidelines. Unconvinced that a crisis loomed, most chose the "wait and see" approach. In the end, that was probably the best course.

A year and a half ago, the jungle drums started up again—this time about the technology known as radio-frequency identification, or RFID. The Beast of Bentonville had dropped a bombshell: If vendors hoped to continue doing business with Wal-Mart, they'd need to start identifying incoming pallets and cases with RFID tags. Most suppliers would have until January 2006 to comply with the RFID mandate, but the retailer's top 100 suppliers found themselves staring down the barrel of a January 2005 deadline.

This time, adopting a "wait and see" approach could prove dangerous. Unlike Y2K, RFID-Day will not prove the anticlimactic conclusion to years of hype. Wal-Mart, which stands to save more than $8 billion annually with RFID, isn't likely to back off. And others, such as the Department of Defense and Target, have already issued RFID mandates of their own. More are certain to follow.

And why not? Retailers have everything to gain and nothing to lose. The burden of RFID compliance falls squarely on the suppliers' shoulders. So will the cost and the inconvenience.

That inconvenience promises to be considerable. Millions of containers march through the manufacturing and shipping process each day with virtually no human intervention. But now, someone somewhere will have to stick tags on the shipping cases. Manufacturers must decide how and where to do it. But first, they face a bigger question—should they try to tag all of their products, or just the 30 percent or so (by HK Systems' estimate) destined for the Wal-Marts and Targets of the world?

We're convinced that in the short run at least, the solution is to apply tags during the distribution process—that is, at the distribution center. Someday, when the RFID chip becomes as ubiquitous as the bar code, the economies will shift—it will eventually become cheaper to apply tags at the point of manufacture. But for now, pushing the responsibility downstream to the DC will let suppliers tag only what they need to at a cost they can control.

There's a precedent for this. Back in the 1980s when it opened its Sam's Club stores,Wal-Mart delivered a similar decree, demanding that suppliers start providing it with shrink- or stretch-wrapped products in unique, non-standard packages—say, three tubes of toothpaste or two boxes of cookies. Most manufacturers didn't have to think twice: It would be far cheaper to handle the unique packing requirements at the distribution center level, leaving their production lines undisturbed. Logistics service providers caught wind of the opportunity and hastened to promote their custom packing services; and today, this valueadded service remains an important part of their business.

There's no reason why that won't work with RFID. In fact, the more foresighted logistics service providers have already moved in. Ozburn-Hessey Logistics, for example, has set up an RFID Compliance Center at its Dallas facility, where it will be able to apply RFID tags to pallets and cases (including those destined for three nearby Wal-Mart distribution facilities).

Getting up to speed with RFID won't be quick or easy. Some DCs will be forced to add space or rework their warehouse layouts; others will have to enhance their warehouse management systems and retrain employees. Nonetheless, the cost and inconvenience will pale in comparison to the cost of retooling a manufacturing operation.Whether you use a company facility or a third-party logistics service provider, for now, this is one job that's probably best done inside the DC box.