GuestView: Wal-Mart Was Wrong To Initially Just Tag Pallets

Franz Dill spent 30 years in various technology management roles at Procter & Gamble, the world's largest consumer goods manufacturer. He retired from P&G and joined the consulting world in 2007. This is a StorefrontBacktalk GuestView column.

When Wal-Mart this week confirmed its limited launch of item-level RFID tags, it shouldn't have been news to many in retail. That's what Wal-Mart has said it wanted to do for literally 10 years. The question shouldn't be "Why is Wal-Mart doing this?" as much as "What's different this time? Why is this finally happening now?"

It's not a technology issue. It's a mindset issue, in two ways. First, Wal-Mart's "let's start at the pallet level and learn RFID there" approach was an understandable albeit wrong move, given the retailer's data and analytical needs and goals. Second, the need for the kind of data that only item-level can deliver is now much more apparent and, perhaps more importantly, understood better at the management level.

The way to start is small, using item-level RFID–but only on select items–and then using RFID everywhere else in the supply chain. So how did Wal-Mart go so wrong for so long?

The company's initial pallet move was done primarily for one reason: It was easy. But it was a mistake to start at the pallet level, because Wal-Mart couldn't measure the actual benefits it needed to understand. Meaningful measurement occurs out on the shelf, when the consumer makes a choice.

The pallet/case approach was also a mistake in the broad view. It had value for testing but not for the ultimate understanding of "What am I attempting to achieve? Which things are most valuable for me to do?" To expect to get information about things like out-of-stocks and what's on a display from pallet tagging is unlikely. And yet, I do think Wal-Mart expected to get out-of-stock information directly through its pallet-level tagging efforts.

To understand Wal-Mart's approach, it's important to remember RFID's history. Back in 2000, when I managed the retail innovation center at Procter & Gamble, we positioned RFID tags to soon replace barcodes for retail item-level identification. Indeed, I gave presentations to many hundreds of innovation center visitors saying the switch from barcodes to RFID would occur in 3 to 5 years. So why didn't it happen at that time, when several large companies were willing to spend lots of money to push the tags?

Early indications suggested there would be benefits from making the entire extent of the supply chain more transparent to those who paid for it: retailers, manufacturers and, ultimately, consumers. But imagine how complex it would be to tag something and have it be readily scan-able in the entire supply chain: at the checkout, in the consumer's shopping cart and by the shelves themselves to verify inventory. The tags would also be used at retailers' doors to check if an item had been paid for. In addition, the largest players would benefit first and most. Clearly, the complexity of these changes would add cost.

And yet costs would be saved through transparency within the supply chain, in improved store stocking and even in the homes of consumers, where they could remotely check their personal inventory of goods. And with the emergence of devices like smartphones, consumers would be readily able to participate in this improvement in retail..Suffice it to say, the use of RFID did not evolve in that way; nor did it happen that quickly. The required infrastructure changes within retail were too expensive. The cost of individual tags, though much publicized, was not the controlling factor. Manufacturers would have had to add the tags to many different types of packages, and these packages could interfere with remote reading. Plus, readers would have had to be replaced at checkouts and in portals, backrooms and backdoors.

There were also warnings that consumer privacy would be compromised. Although most tags could only be read at short distances by standard devices, it has been shown that modified devices could be used to read tags at much greater distances. Removable tear-off tags were developed, but at a greater cost to the manufacturer.

Even as this greater complexity versus cost savings was debated, a small number of manufacturers quietly started to add RFID tags to selected items. This tagging was typically done with higher cost items, where tags could easily be integrated within packaging. And in some cases, laws required the close tracking of pharmaceuticals. Considerable experience was gained in understanding integration methods, cost of the infrastructure needed and reading accuracy.

But in many more cases, item-level tagging was replaced by efforts to tag cases and pallets. Retailers–including Wal-Mart and Metro–strongly pushed these moves and manufacturers–including Procter & Gamble and Colgate–participated in a major way.

And that is how Wal-Mart got into the situation it's in today.

What should Wal-Mart have done instead? The best way to start RFID tagging–as Wal-Mart is now doing–is with specific categories that have natural complexities. Apparel, for instance, is an obvious choice. Clothing has a complex inventory structure; it is also seasonal and relatively difficult to inventory.

Display execution compliance and diminishment of out-of-stocks also need to be measured if an RFID deployment is to have substantial value. Many RFID attempts are examples of trying to measure the behavior of a very large and complex system, but one in which too many changes are made all at once. Any attempts should focus on two key aspects: Choosing categories that are likely to be of substantial value, and considering the effect of operational execution within those categories.

Another crucial difference now is money. In the early tests, manufacturers had to absorb a large portion of the costs. The new item-level tests, however, include more marketing funds from Wal-Mart to support the complexity of the execution required to perform the needed tests. As a result, more manufacturers will be able to participate, which will in turn provide a better experimental base and extend that base to midsize companies.

So Wal-Mart's choice to open with a limited selection of clothes and underwear makes perfect sense. As I mentioned, clothing has a complex inventory structure, is seasonal and is relatively difficult to inventory. So the inclusion of tags read by store employees with handheld readers–and even by readers on shelves–could simplify and make inventory more transparent. This inventory data could then be aggregated chain-wide to do predictive analysis of sales by region and time, to improve ordering and even to design processes. In addition, business intelligence could be linked to multiple sensors within the supply chain, resulting in a smarter and more inexpensive system overall.

Wal-Mart will not be reading these clothing tags at checkout, so there will be no connection to personally identifiable information, which alleviates the privacy concern to some degree. Still, there will likely be some contention that any tags connected to an article of clothing could be remotely read and might lead to some loss of privacy.

After a very long RFID trail–which Wal-Mart was a huge player in paving–Wal-Mart has now started on the right track.