Though it may be a first for Wal-Mart, right now it seems nobody's buying what the mega-retailer's trying to sell. Wal-Mart so far has had little success persuading its suppliers that by complying with its RFID mandate, they'll see a big payback through a reduction in stockouts.
Bentonville claims that suppliers that attach radio-frequency identification (RFID) tags to their incoming cases and pallets will enjoy increased supply chain visibility, which will lead to increased sales and profits—or so the argument goes. But a new study confirms that vendors aren't buying that. "One of the paybacks Wal-Mart is touting is better on-shelf presence," says Steve Banker, service director for ARC Advisory Group's supply chain management group and author of the report, RFID Deployment Best Practices. "Most folks frankly don't believe that argument."
ARC interviewed 24 companies that are actively investing in equipment needed to transmit electronic product codes (EPCs) via radio frequency signals. Though five of those companies have voluntarily jumped into the RFID game, the other 19 reported that they had invested in the technology simply to comply with Wal-Mart's decree. Of those 19, only one expects to see a payback in less than two years. The others say a solid return on investment (ROI) is at least two years away—if not much longer.
The reasons for their pessimism vary. For example, vendors that supply Wal-Mart with commodity items or replenishment products like milk and eggs—staples that consumers typically replenish on a weekly basis—remain skeptical that added visibility will do them much good. If their product is not on Wal-Mart's shelf, they argue, consumers will simply purchase the goods elsewhere and they'll realize no net gain.
Just as you probably expected, the distribution center is the scene of most of the RFID tagging activity today. But that will likely change. In the future, tagging is expected to become part of the manufacturing process.
Other suppliers are dubious that simply eliminating stockouts will boost sales of their products enough to offset the costs they've incurred in getting RFID-ready. A company shipping 50 million cases annually to Wal-Mart will be hit with approximately $10 million in additional costs, assuming RFID tags cost 20 cents apiece. Avoiding stockouts may make customers happier, but it's unlikely to result in a gush of profits. "Consumer goods are largely low-margin goods anyway," says Banker, "so it doesn't end up being that big of a benefit."
Even the big guns—the vendors that have broken into the ranks of Wal-Mart's top 100 suppliers—believe RFID will hurt, not help, them. That is, they fear it will provide a competitive advantage to their smaller competitors. "If a company is a Top 100 vendor, the theory is they're already doing pretty good job when it comes to in-stock position," says Banker. "So RFID gets rolled out to the next 200 suppliers, and levels the playing field. In that sense, the players in the Top 100 feel it works to their disadvantage."
It's easy to see why most suppliers fear that returns on their RFID investment are still years away. But what about the single survey participant that says it expects payback in less than two years? As it turns out, that company makes a highly seasonal product, whose sales spike during inclement weather. By keeping an eye on weather forecasts, the company expects to be able to notify Wal-Mart when bad weather is approaching a given region and use RFID technology to make sure enough product is on hand at Wal-Mart's DCs and stores.
"When customers go to the store to buy this product and it's not on the shelves, there is a very good chance they won't buy it at all," says Banker. "So [this company] clearly has a case for overcoming lost sales."
However they may view their investment, suppliers have been largely swept up by the RFID tide. Many now have tagging procedures in place, and most have chosen to handle the task within the DC. In fact, 85 percent of the companies surveyed currently apply RFID tags to products within the distribution center.Although the process adds labor, it's not likely to change until the number of retailers requiring RFID tags reaches a critical mass. Experts say that could be more than two years away.
"Most people are beginning the RFID tagging process in the DC," says Banker. But as volumes increase, they're likely to shift that job back to the factory. Once that happens, he says, everybody should see a noticeable increase in efficiency. "It'll be more automated, and you won't be adding the extra labor that we are right now. Since the product will then arrive at the warehouse already tagged, in theory it should improve receiving and should speed up the shipping process."
85% – companies applying tags at the DC
15% – companies applying tags at the manufacturing plant or in packaging
SOURCE: ARC ADVISORY GROUP