The secret to taming supply chains may be computer chips no bigger than a grain of sand. Radio frequency identification (RFID) tags identify a product, as a bar code does. But the mini-chips can transmit the information they carry by radio signal, eliminating the need for manual scanning and ultimately making it easier to access information about the product.
The potential for the tags was underscored in June when Wal-Mart Stores Inc. said that it would require its top 100 suppliers to start using them by 2005. "Wethink that by using it at the pallet and case level, we can streamline and improve inventory count, [achieve] faster shipping and receiving and improve quality inspections at the [distribution center]," said Tom Williams, a spokesman for Wal-Mart. Wal-Mart said that its big suppliers must start tagging the pallets they deliver to its distribution centers by January 2005 and the cases on those pallets by January 2006.
RFID tags will become "a standard part of most large companies' supply chains," predicts Christopher Boone, an analyst and program manager for retailer research at IDC in Framingham, Mass. But because manufacturers and retailers will have to make big investments to adopt the new technology, "it's not really going to take off in any sizable way until Wal-Mart forces the issue," Boone adds–as the big-box retailer obviously is doing.
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To use RFID tags, companies are required to buy the tags, the scanners that read them and software to manage the data linked to the identifying number on the tag. Once Wal-Mart forces its business partners to make those investments, they will try to employ the tags in other parts of their businesses, resulting in wider usage, Boone says.
Ultimately, RFID tags are expected to revamp the way companies run their supply chain. A warehouse equipped with scanners and tagged cases of products can assess its inventories very quickly, and the same is true at the store level. With that information available much more readily, RFID tags should let companies "reduce their inventories and yet react to changes in the supply/demand curve," Boone says. Cutting the amount of working capital they have tied up in inventories should improve corporate profit margins, he adds.
Even though RFID technology has been around since the 1940s, the tags were too costly to be used in broad-based applications until recently. Analysts say that if increased use pushes the price still lower, companies could eventually put RFID tags on each individual item they manufacture. The Electronic Product Code (EPC) on the tags contains 96 characters, long enough to make it possible to identify every single item separately.
Before Wal-Mart's announcement, the most prominent U.S. user of RFID tags was The Gillette Co., which said in January that it was starting large-scale testing of the tags and could buy up to 500 million over the next few years. Gillette said that it hoped the tags would cut its "losses resulting from out-of-stock, stolen or lost products," as well as increasing the efficiency of its operations. Gillette plans to put the tags on razors in some stores and will also test "smart shelf" technology that keeps track of how many products remain on the shelf.
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