not so fast

There's nothing like a mandate from Wal-Mart to get the business world buzzing. The retail giant shook up the supply chain community in June when it announced it would require its top 100 suppliers to begin using radio-frequency identification (RFID) tags to identify cases and pallets by Jan. 1, 2005. The buzz started up instantly, with some predicting that with Wal-Mart's backing, the RFID tag would someday replace the bar code.

Wal-Mart is not the only company pursuing RFID. Global consumer goods manufacturers like Gillette and Procter & Gamble, and major retailers like Benetton and The Gap have been running RFID tests of their own. But many are convinced that the endorsement from Wal-Mart—a company that employs more people than Ford, General Motors, Exxon Mobil and GE combined—all but guarantees the mainstreaming of RFID.

But that may be premature. RFID's backers have some major hurdles to clear. Though there's no denying Wal-Mart's clout, recent history shows that buying clout is not always enough to force change. During the dot-com boom, entire industries established online trading exchanges and announced that their supply chain partners would henceforth be expected to transact all business through these exchanges. Similarly, large buying organizations attempted to coerce suppliers to conduct business with them electronically or be dropped from their rosters. Though some of those trading exchanges got off the ground and some of those companies got their suppliers on board electronically, most did not. Upstream supply chain players, especially small ones, simply would not—or could not—spend the time and money needed to comply with these mandates. Eventually, buyers had to accept that small suppliers sometimes have unique value and shouldn't be blacklisted simply because they can't meet the technological demands.

Standards represent another hurdle. Whether national or international, standards are essential for wide adoption of new technologies. Early RFID pilots by Gillette and Benetton were stalled by the lack of international standards. Still, Auto ID, a joint venture of the Uniform Code Council and EAN International (an international standards-setting organization), is developing standards for global RFID use, and my bet is that the standards issue will be resolved.

The cost of the RFID chip appears to be a more formidable hurdle. Most estimates place the current manufacturing cost at 50 cents per chip; analysts estimate the per-chip cost must come down to 10 or even 5 cents before RFID technology can be widely adopted. Although economies of scale and chip manufacturing advances will undoubtedly reduce manufacturing costs, there's no guarantee that chip producers can hit this target by Wal-Mart's deadline. Still, semiconductor manufacturers have a long history of drastically reducing manufacturing costs, and my bet is that RFID chip costs will drop to a level where broad use is economically viable.

In the end, I believe the biggest hurdle for RFID will not be a lack of technology standards or high chip manufacturing costs. A much more real threat to RFID's adoption will be resistance among the general public. Since Wal-Mart's June announcement, privacy advocates have raised the alarm, warning that tagging products will enable corporations to peer into all aspects of peoples' private lives. In fact earlier this year, Benetton backed off from plans to test the tags in its clothes wh en privacy groups threatened to lead a boycott against it.

Manufacturers and retailers ignore the threat of these groups at their peril. The first national television news story showing picketers protesting RFID use outside a Wal-Mart store could easily kill RFID use for the near future. What's needed here is education, lots of it, and quickly. We'll explore this topic in more detail in next month's column.