The countdown is on for major suppliers to Wal-Mart and the Department of Defense. Beginning Jan. 1, they must begin complying with the first stage of radio frequency identification (RFID) mandates that require the limited use of electronic tags on cases and pallets. A few months later, similar mandates from Target and Albertson's will kick in and other retailers, with varying speed, are expected inexorably to join the parade.

A few suppliers avidly are embracing the concept of an RFID-enabled supply chain and are well prepared for this launch; others are moving forward reluctantly with lots of complaints about the added cost and lack of return; and still others seem to be caught in analysis paralysis - or, perhaps, denial - and have yet to take the first steps toward compliance. For this latter group, time is running out.

"We see quite a few companies that just are not putting out the money or energy to get this initiative going," says Mike Dempsey, industry strategy leader at RedPrairie, an execution software provider based in Waukesha, Wis. "With only six months remaining before they have to start shipping, I'm afraid there is going to be a huge demand in the market at a very late stage."

Aside from a "head-in-the-sand" mentality, experts say a number of factors contribute to this inertia: a poor understanding of the technology, confusion over various tag and equipment choices as well as their reliability, and a reluctance to invest before all the standards are in place.

"These are all valid concerns," says Lyle Ginsburg, managing partner for technology innovation with Accenture, New York. "But the truth is that they will be resolved - everybody knows it's just a matter of time. The thing is, you have to get started. RFID is the future, and the only way to get there is through today."

There certainly is no indication that the RFID train is slowing down. "We are not hearing any undercurrents from the vendor community close to Wal-Mart that this isn't going to happen," says Dempsey.

Executives from both Wal-Mart and the Department of Defense affirmed at the June RFID2004 conference in Washington, D.C., that their plans are on track for a Jan. 1 implementation.

Simon Langford, director of global RFID at Wal-Mart, stressed that the Jan. 1 mandate is far from a big bang, however. Despite news reports to the contrary, "We didn't say all cases and pallets on Jan. 1," he asserted. "We didn't say we would be live in all stores, Sam's Clubs or DCs on Jan. 1. And we didn't say that we would not work with suppliers who have issues meeting the Jan. 1 deadline."

A very small number of suppliers, he added, have communicated to Wal-Mart that Jan. 1 will be difficult because of "other internal projects going on at the same time - such as a WMS implementation." For these suppliers, he said, the company will negotiate an alternative compliance date. "This is all about setting achievable goals and collaborating to make them happen," he said.

The Wal-Mart Jan. 1 mandate applies only to the company's top 100 suppliers, though 37 additional suppliers have volunteered to also adhere to the requirements. And it applies only to goods being shipped to three distribution centers in the Dallas area. These DCs serve 150 stores covering all formats - Wal-Mart stores and supercenters, Sam's Clubs and Neighborhood Markets.

Not all cases and pallets will be tagged, at least in the beginning. A Wal-Mart spokesman said that after meeting individually with participating suppliers, "it appears that, in aggregate, approximately 65 percent of the cases and pallets destined for Dallas will be tagged" beginning Jan. 1.

And in this first phase, Wal-Mart doesn't expect to be able to accurately read every case-tag in a pallet, but it does expect 100 percent readability of pallets and of cases on conveyors.

Langford said the company very much sees RFID as a phased project. "Last year was about breaking down barriers to adoption and this year will be about building momentum," he said. "In years 2005 and 2006 we will focus on roll-out and continued expansion." Plans already are in place to expand to seven additional DCs in October 2004 for the top 100 suppliers. And in late June Wal-Mart briefed its second 200 suppliers on their implementation schedule.

Emphasizing that "we cannot do this alone," Langford said that Wal-Mart is committed to working with suppliers, technology providers and its competitors to share information and learnings on RFID. In one example of that cooperation, he announced that Target and Albertson's also will focus their first-stage implementation in the Dallas area. Since these companies share many suppliers with Wal-Mart, this decision should be welcome news to the supplier community.

The Department of Defense will phase in its RFID requirements by using its contract system. Alan Estevez, assistant deputy undersecretary of defense for supply-chain integration, said at the Washington conference that, beginning this fall, new and renewing contracts with suppliers will require that cases and pallets shipped to DOD receiving points after Jan. 1 have passive RFID tags. In addition, DOD has a high-value class of products that it tracks at an item level which already require a Unique Identifier (UID). Each box containing a single UID item also must be tagged. This system will support a "nesting" strategy that ties into DOD's existing use of active RFID tags on large containers. Estevez explained that UID packaging tags will be associated with passive carton tags, which will be associated with passive pallet tags and eventually with active container tags.

Both DOD and Wal-Mart have launched serious pilots, or "operational implementations" in the case of DOD, to test equipment and procedures. "We don't use the term 'pilot,' because within DOD a pilot is something that can be stopped," Estevez said. "RFID will not be stopped."

DOD is today using passive RFID tags at its San Joaquin, Calif., depot on shipments of ready-to-eat meals. At its Norfolk, Va., ocean terminal it tags pallets as they are unloaded from trucks. When these pallets are re-loaded onto ocean containers they are run through a portal to capture the data. "This saves labor and prevents us from loading pallets onto the wrong container," Estevez said. DOD also will soon begin tagging material coming out of its depot at Susquehanna, Pa., going to Norfolk and to the marine supply unit at Camp LeJeune, N.C. "So far, we think the technology is working very well," he said.

Wal-Mart launched a major pilot on April 30. Eight leading suppliers began delivering tagged cases and pallets of 21 products to a distribution center at Sanger, Texas - one of the three DCs selected for first-phase implementation. The eight manufacturers are Gillette, Hewlett-Packard, Johnson & Johnson, Kimberly-Clark, Kraft Foods, Nestle Purina, Procter & Gamble and Unilever.

RFID readers installed at the DC's dock doors automatically receive shipments as they arrive. Cases are removed from pallets and processed as usual through the distribution center. At seven pilot stores in the Dallas/Fort Worth metroplex, RFID readers at dock doors replicate this process by automatically confirming that a particular shipment has arrived in the store's back room. Individual products can then be stocked as needed. A few shelf items where a case represents a single item - specifically, HP printers - will be tagged, but there will be no readers on the store floor. These boxes will be clearly marked with an electronic product code (ePC) symbol.

When questioned at the RFID conference about read rates achieved thus far during the pilot, Langford declined to give any specific numbers. He said only that the company continues to be confident about meeting its goals.

Both Langford and Estevez cited their consumer focus as the reason for pushing forward with RFID supply-chain applications. "RFID is about strengthening our armed forces and giving them what they need when they need it," Estevez said. He noted that turnaround time for DOD's very highest priority items today averages 16 days. "That would be Chapter 7 in the private sector," he said. "We have to get better."

Soldiers who are getting shot at are not very good with paperwork, he added, and in hostile situations, it is very easy to lose control of inventory. "When we put RFID tags on boxes, a soldier just unloads them," he said. "Check-in and receipt are automatic and we know where the stuff is."

"At Wal-Mart we are focused on driving costs down for the customer," Langford said. "To do the best job possible we have got to become the most efficient deliverer of merchandise." RFID will help improve stock-outs significantly, he added, which will be a win for the retailer and the supplier.

Supplier Support
Some suppliers agree. Gillette is one of the Big Eight suppliers participating in the Wal-Mart pilot and has been involved in a number of pilots and field trials with RFID over the past few years. "We still remain extremely confident about the potential of the electronic product code," says Gillette spokesman Paul Fox. "Our belief and passion for RFID and the role that it potentially could play in bringing greater efficiency to the supply chain has not wavered."

Fox notes that it has successfully tested some difficult products, including shaving cream in metal cans. This is tough because it involves both metal and liquid - two factors known to cause problems for radio frequency signals. "We have had very satisfied with our results," he said. Gillette uses Provia warehouse management systems and has been able to feed RFID information into the Provia system.

It is not only the military that loses control of inventory. Fox says that in any high-volume supply-chain product all too frequently gets miscoded, miscounted or misplaced and fails to make it to the shelf. "The retailer thinks he is out of stock when in fact he has four cases in the back room," Fox says. "The net net is that consumers are faced with higher priced goods because of the inefficiency in the supply chain. And on top of that, they often go find blank pegs in the store instead of the products they expect."

Another reason product goes missing is theft. Since Gillette's razors and batteries are easily stolen and sellable on the street this is an area of particular importance to the company. "Theft can occur at any point in the supply chain and the only way to stop it is to know where it is occurring," says Fox. "RFID will allow us to pinpoint that."

Cumulatively these losses amount to billions of dollars a year, he says. "Imagine being able to reinvest that in new products or in lower prices, better shop formats, new stores - it is a huge drain."

Even some smaller suppliers are advocates of RFID. Beaver Street Fisheries, Jacksonville, Fla., is one of 37 smaller Wal-Mart suppliers that have volunteered to comply with the mandates from day one. Howard Stockdale is CIO of the company. "We are a mom and pop shop and we operate with a lot of mom and pop style management practices, but we embraced RFID because we think it is going to be the price of staying in the game," he said at the RFID2004 conference. Because it supplies frozen food to Wal-Mart, Beaver Street has issues around the ability of tags to withstand very low temperatures and still function consistently. To solve this problem it formed a partnership with the University of Florida's packaging sciences department, which is building a large RFID lab. "The technology is getting there," Stockdale said, "and I believe return on investment for suppliers is really just around the corner."

Others are less sure about the return. Denton Clark, senior supply-chain manager at Lockheed Martin, a major DOD supplier, said during a panel discussion that the numbers for full implementation "are staggering. The January deadline is not the big issue," he said. "The real expense comes after Jan. 1 when you start rolling this out."

Lockheed Martin has embraced RFID from the top down as a catalyst for change and another tool to use, he said. "We also understand that it is the cost of doing business. Corporations have to suck it up and do it if they want to do business with DOD. That's just the way it is."

Like most suppliers, Lockheed Martin expects to meet the first phase of implementation with a "slap and ship" solution. At the same time, it is planning for the day when it will have to roll out and integrate the data into its operations.

This latter step is the key to future success, experts say. "You need to be looking at the capabilities of the technology," said Estevez. "Step back and think about what it can do for you internally, and start thinking about how you can require RFID of your suppliers."

Vendor Solutions
Vendors are rushing to help companies do both, though the push from customers right now is mainly on complying with the least cost. "The most prevalent thing we see is that companies want this to be as cheap as cheap can come," says Jim Stollberg, vice president and general manager at Irista, a supply-chain execution provider based in Milwaukee. "Even the more aggressive organizations do not want to spend a lot of money in this first phase." As a result, he says solutions are not developing around automation but, instead, "are based on throwing labor at the problem."

In the simplest scenario, a pallet of products requiring tagging goes through a separate line after being picked. Pallets are manually decomposed, labels printed and applied and then the pallets manually re-composed. "This is very labor intensive but can be accomplished pretty inexpensively," says Stollberg.

A step up from this process is semi-automated slap and ship. "We are seeing more and more demand for this type solution," says Dempsey. In this system, pallets are manually broken down and cases put on a conveyor-driven inline labeling system. Then the pallets are re-composed.

Readers also have to be installed to make certain that the tag is working and can be read, even if the data is not being used at this point. Many software providers have partnered with hardware providers for this service. Atlanta-based Manhattan Associates' RFID-in-a-box, for example, is an umbrella solution that encompasses all software, hardware and professional services as well as tags. It has partnered with Alien, Matrics and Tyco for the tags and readers. "Typically, we implement the RFID project for our customers from start to finish," says Greg Gilbert, director of RFID solutions. "We manage the procurement and installation of hardware, perform the testing to ensure that the hardware performs as expected in the physical environment, then do the software integration."

Even a simple slap-and-ship solution is not quite as simple as it sounds. There are a lot of physics involved with RFID that have to be resolved, such as type and format of the tag, orientation of the antenna and the placement of the label on a box, case or pallet for optimal readability. "This is not a situation where you simply buy tags and slap them on," says Dempsey. "You have to test the products and understand the vagaries."

That is where RFID labs come in. There are many testing labs around the country and more are popping up every day. Sun Microsystems, Palo Alto, Calif., recently opened a large testing center at Dallas that is designed to simulate conditions at a Wal-Mart DC, including the use of fast-moving conveyors. The center is equipped with Provia software and a variety of readers and mobile equipment. "RFID is not a digital world where you can write programs that behave in a certain expected way," says Shahram Moradpour, senior director of marketing development at Sun. "It is all about electromagnetic waves. There is a lot of noise from environmental conditions and all kind of things that can really cause problems. So the lab is a place where suppliers can come in and do all of the necessary testing without having to buy the infrastructure and readers and additional stuff required and without having to set space aside in their own warehouse." Of course, there is a fee for this service.

Choose a Dirty Lab
Having lots of noise in a lab is important, noted Mike O'Shea, director of corporate Auto ID strategy at Kimberly Clark, during a panel discussion at the Washington conference. Kimberly Clark built its own lab and the first effort was "way too sterile," he said. "In the real world there is a lot of electromagnetic energy from machines, lights, and so on. So when you choose a lab, make sure that it is dirty."

Lab tests reveal some of the quirky aspects of RFID. Beaver Street Fisheries found repeatedly that cases of grouper are harder to read than cases of snapper, for example. Hewlett-Packard was concerned about read rates on ink cartridges that include liquid and metal. Changing the orientation of the way they were packed in the box eliminated early problems. And Kimberly Clark found that the best place to put a tag is not necessarily on the outside of a box. The best location may well be on the interior, which puts more air between tags, said O'Shea. "It all depends on the product."

The good news, these suppliers agree, is that a work around can usually be found and the technology is rapidly improving. Langford said that the "agile" or multi-frequency, multi-protocol readers Wal-Mart uses cost half of what they did a year ago "and the read rates are significantly better. We are starting to see some real breakthroughs."

Tag costs continue to be an issue, though these too are coming down. Fox says Gillette is obtaining tags from Alien for "less than 10 cents per tag," though it buys huge quantities. Other lower volume manufacturers, however, report that tag makers have written contracts in which today's tag cost of 25 cents is guaranteed to be a nickel or less by the end of 2006. "As adoption gathers momentum, I think we will get to nickel tags much quicker than that," said Langford. The price will have to get down to a fraction of a penny for item-level tagging to become feasible, he said, and that is likely 10 to 15 years away.

Testing and vendor solutions also are designed to help users start thinking about the next step, which is to see how they can benefit from RFID technology and find that elusive return on investment. Most don't see this as part of stage one. "Right now, most companies are adding a step in the distribution process and applying a tag for the sole purpose of satisfying the requirement of retailers," says Jim Rice, director of the Integrated Supply Chain Management Program at the MIT Center for Transportation & Logistics. "They are adding costs without getting a business benefit."

ROI will begin to come in phase two, experts say, as companies build an RFID infrastructure that includes data management. "The key to ROI is to be able to do something with the data," says Sun's Moradpour. "And in order to do something with the data, you need to be able to interface with back-end systems."

Major ERP vendors already are including RFID capability in their offerings. Jon Chorley, senior director of Oracle's Inventory and Warehouse Management Systems, says that Oracle is supporting RFID by adding and extending capabilities through Edge Services. "This means they will be part and parcel of the application server and not a separate product," he says. The solution, he explains, is essentially a series of drivers, filters and messaging capabilities that support the variety of readers on the market and that make collected data available to applications. "With our latest version of Warehouse Management, we can take an RFID event and use a simple, standard programming interface to apply some business logic against it so that it can automatically perform a shipment or receipt," says Chorley.

SAP also has launched an RFID solution package for supply-chain management. The package is designed to enable companies to implement RFID in a four-phased approach, from "slap and ship" to full integration with back-end systems. This solution is being used by Wal-Mart supplier Purdue Pharma L.P., a privately held pharmaceutical company with headquarters in Stamford, Conn., to comply with Wal-Mart's mandates. The company says it also will help it deal with federal drug-tracking regulations.

Evidence that companies are beginning to focus on the bigger picture can be seen in the questions they ask, says Allan Melling, senior director of electronic product code solutions for Symbol Technologies, Holtsville, N.Y. "Even three or four months ago, a lot of the questions we were getting were about basic hardware and technology. We are now starting to get the 'next step' questions, which are all about scalability and manageability and service and reliability - how do I take something that works in a small environment and scale it up? The answer is that you have to have the automated management tools that will allow you to manage maybe 10,000 readers without killing yourself on service and support costs."

"The hot topic that our customers want to talk about is information engineering," says Tom Roberts, vice president of industry solutions at webMethods, a web services infrastructure company based in Fairfax, Va. "These companies are beginning to realize that their enterprise is about to be flooded with an inordinate amount of very specific data. They want to know two things: How do I get compliance and how do I get value?"

WebMethods recently introduced a "Starter Pack" to help companies begin this journey. "This is a package that gives them some ability to take information from the reader into the corporate network and then into packaged applications," says Roberts. "It helps them see what they can do."

Provia Software, Grand Rapids, Mich., also is taking steps to help companies begin to use RFID data. Wal-Mart suppliers that use Provia warehouse and visibility solutions will be able to take advantage of the RFID tracking information the retailer is making available, says Paul Crist, vice president of sales and marketing. With this information, suppliers will have a lot better idea of how long their products spend at the distribution center and in the back rooms of stores, he says. Consequently, they will be able to improve their forecasting and planning so that they can meet the retailer's service demands with less inventory. "This does not represent full ROI for suppliers, but it is a beginning," says Crist.

"We are telling customers that they need to think beyond the tag," says Dan Bodnar, director of marketing at Intermec, a wireless solutions provider based in Everett, Wash. "People get really caught up thinking about tag standards, but they should be thinking about their business process - where in your process is data read or amended or merged that might benefit from an RFID solution. Don't start with the tag, but with the process."

Looking at process can, in itself, lead to improved profitablility, says John Hill, principal at E-SYNC, a consulting firm based in Toledo, Ohio. Totally aside from its direct impact, he says, RFID is the "most exciting thing to happen to the supply chain in the last twenty years because companies are bringing in outside experts to look at their operations. An RFID project often blossoms into process improvement opportunities."

The bottom line is that a lot of the return cannot be known until RFID is out there and widely deployed, says Matt Ream, senior manager for RFID systems at Zebra Technologies, Vernon Hills, Ill., which makes thermal printers that create barcode and ePC labels. "People can't put their fingers on the hard and soft benefits until they see how well it works and begin to experience the benefits. Then there will be a domino effect."

Langford is in clear agreement. "I fully believe that this technology will revolutionize how we all do business," he said. "What we have seen so far is just the tip of the iceberg. At Wal-Mart we believe we have to keep pushing these boundaries. No matter how big you are, you can't sit back and think you have cracked the code."