Sam’s Club and RFID: In Pursuit of Item-Level Tagging

Sam’s Club, which is the membership warehouse retail arm of Wal-Mart, sent a letter to all of its suppliers last month “rolling back” its ambitious plans to achieve Radio-Frequency Identification (RFID) tagging of all pallets, cases and sellable units by 2010. The announcement is reminiscent of its parent company, the world’s largest retailer, attempting a similar initiative. In November 2003, Wal-Mart asked its top 100 suppliers to be ready to mark deliveries (boxes and pallets) with RFID tags by January 2005, which it unfortunately failed to achieve except with a few suppliers. (Wailgum 2008) The article, “Sam’s Club Letter Outlines Changes to RFID Requirements,” which appeared in the January 26, 2009 issue of RFID Update, discusses Sam’s Club initiative in light of its latest announcement. Also consulting other articles regarding the RFID initiatives of Sam’s Club and Wal-Mart, as well as other RFID ancillary materials, it will become clear why Sam’s Club is looking for supplier adoption of RFID technique, what benefits it looks to realize and disadvantages it hopes to minimize.

The letter sent to suppliers does not provide a specific date but says Sam’s Club will rollout pallet-level labeling sometime in 2010. If Sam’s club is successful, it is believed that this initiative would realize millions of dollars in savings that were tied up in inventories and the inherent inefficiencies in the supply chain. However, case-level tagging was made optional because Sam’s Club believes sellable-unit tagging provides more benefit. The company also said that it believed suppliers would need 12 to 18 months to prepare for sellable-unit tagging. Therefore it did not publish a deadline at this time, and said that a new timetable would “be communicated to suppliers in the future.” (Burnell 2009)

The ubiquitous Universal Product Code (UPC) barcode currently is on all products made for individual sale in retail stores. UPC barcodes require a short visual line of sight, which means each item must be scanned individually. Item-level tagging refers to replacing the UPC barcode with its RFID cousin, the Electronic Product Code (EPC). RFID is a small electronic chip that is implanted in a tag. This chip stores data, such as a product serial code identifier. The EPC is a standard that a consortium of RFID providers has agreed to follow for retail product. This EPC tag can be attached to all sorts of things, such as shipping containers, pallets, cases, and individual merchandise. (Office of Consumer Affairs 2007) There are issues with EPC, specifically related to cost. Tags currently cost around 15 to 25 cents. This is no big deal when dealing with durable goods or a high-priced retail items like a television, which retails for hundreds of dollars or more. However, when you are talking about a 50-cent can of soup, the tag eats up the entire profit margin. Also, if the item you are tagging contains metal or liquid (or both like a can of soup), then tag costs are even higher as the current technology would require a battery assisted tag. (Gao RFID 2008)

Wal-Mart is focused on completely revolutionizing its 700-store Sam’s Club supply-chain using RFID technology all the way down to the sellable-unit level, something it has failed to do within the larger retail chain so far. Refocusing RFID efforts on Sam’s Club makes sense as it has fewer stores and a smaller supply chain. “Sam’s Club has far fewer suppliers than Wal-Mart stores, and customers buy products by the case, the pallet, or individual packages that are larger…(which) makes the cost of RFID tags, at about 20 cents a piece, more digestible for Sam’s Club suppliers.” (Weier 2008)

Tagging at the sellable-unit level, rather than on pallets or cases is the “Holy Grail of supply-chain management.” (D’Agostino 2006) It means that Sam’s Club will be able to track individual inventory items from arrival at a distribution center, to the store, movement within the store, and finally to the point of sale. In other words, item-level tagging means doing a store inventory in a matter of minutes rather than hours or days, which saves several thousands of dollars on labor costs. Lost or misplaced inventory items can be located quickly. Security can be improved. Finally, increased customer service and thus increased sales can be realized. Currently, it takes a lot of training and employee expertise to find a product for a customer. Instead of spending several minutes trying to locate a product for a customer or giving them approximate directions, EPC allows an employee with an RFID reader to locate a product instantly, even if it was misplaced. (D’Agostino 2006).

To this end, Sam’s Club announced that it would be expanding forklift-mounted RFID reader testing to all retail locations and make available all data is available to suppliers through its the Retail Link website. (Weier 2008) This allows suppliers to follow their products throughout Wal-Mart/Sam’s Club supply chain. For example, using Retail Link, a supplier like Daisy Brand can track “by lot number, how quickly pallets of product make it to stores and when they’re unpacked…(if there is a) promotion on sour cream, certain information can ensure that the promotion is taking place as planned.” (Weier 2008)

More importantly, Sam’s Club announced that it was developing RFID-enabled point-of-sale (POS) systems. (Burnell 2009). This last innovation will mean that store cashiers will be a thing of the past as RFID POS would mean that a customer’s entire shopping cart would be scanned at once. (Office of Consumer Affairs 2007) This would allow Sam’s Club to realize savings by reducing a large portion of its front-end POS workforce, allowing it to focus on building staff for stocking and customer service.

It appears that Sam’s Club is trying to apply the lessons learned by its parent company’s ill-fated RFID initiative. Wal-Mart’s learned several things in its RFID failures. When Wal-Mart chose to require its top 100 suppliers to adopt EPC the technology was relatively new with standards that were still evolving. (Gilmore 2008) The technology is more mature now, with many retailers using it at the pallet level already and still yet a few have implemented sellable-item tagging. In late 2006, the Netherland’s Selexyz, which is Holland’s largest bookseller, implemented a pilot program in 2006 where one store was completely implemented with sellable-item tagging. More stores followed suit. At the end of 2009, it is projected that all 42 Selexyz stores, representing 11 million customers and $4.8 million in revenue, will have sellable-item tagging. (Lewis 2008)

Initially Wal-Mart had planned to have full compliance of its top 100 suppliers by the beginning of 2005 and its top 600 by 2007. Currently only its largest key suppliers, such as Procter & Gamble, Kimberly-Clark and Unilever, are considered fully compliant. (Duvall 2008) Understandably, Wal-Mart is in the midst of dramatically reshaping its RFID strategy. Therefore, Sam’s Club is going about their implementation in a much more open-ended way. Rather than dictate directly to suppliers as Wal-Mart did, Sam’s Club is working with its suppliers to develop many of its RFID-related initiatives through a new “Supplier Council,” which is tasked with establishing “supplier cost/benefit models for tagging at the pallet and sellable-unit levels.” (Burnell 2009)

Sam’s Club is looking to RFID to revolutionize its supply chain using RFID. Initially all palettes must be tagged, and then by sometime in 2010 or soon after, all sellable units will be tagged with EPC tags. This will allow Sam’s Club to realize huge savings on labor costs and lost and misplaced inventory. Suppliers eventually will be able to have unprecedented access to Sam’s Club supply chain, watching their products move through the pipeline in real time, which will give the supplier not only information on how its products are selling, which affects their production schedule, but also the marketing mix: how changes in price, packaging, and promotion influence sales. The only drawback to RFID, for both Sam’s Club and their suppliers is cost. Sam’s club must make huge capital investments in their supply chain infrastructure, placing readers at each loading dock of every distribution center (DC), and each loading dock of every one of its 700 stores, not to mention portable readers for its staff at both the DC and store level. Each store also will need to have RFID-enabled POS systems. There also will be a huge expense to integrate all of this RFID technology into its information systems. Suppliers to Sam’s Club will also have a lot of upfront expenses. First, they too will need to purchase RFID readers and have to integrate them into their information systems. They also will have to purchase RFID EPC tags, which will cost between 15-25 cents per unit labeled, which will directly affect the bottom line. It is hoped that the cost savings and better efficiencies and better product market data that RFID gains for the suppliers will help offset the cost of the EPC labels. If not, suppliers will either have to raise prices or learn to live on tighter margins.

References

Burnell, John. (January 26, 2009) Sam’s Club letter outlines changes to RFID requirements. RFID Update. Retrieved on January 31, 2009 from http://www.rfidupdate.com/articles/index.php?id=1734

D’Agostino, Debra. (November 11, 2006). RFID: The book on item-level tagging. CIO Insight. Retrieved on February 1, 2009 from http://www.cioinsight.com/c/a/Technology/RFID-The-Book-on-Itemlevel-Tagging/.

Duvall, Mel. (October 3, 2007). Cover Story: Wal-Mart’s faltering RFID initiative. Baseline. Retrieved on February 1, 2009 from http://www.baselinemag.com/c/a/Projects-Supply-Chain/Cover-Story-WalMarts-Faltering-RFID-Initiative/.

Gao RFID. (March 18, 2008). Gen 2 harsh environment RFID tage released. Retrieved from Articlesbase.com on http://www.articlesbase.com/press-releases-articles/gen-2-harsh-environment-rfid-tag-released-by-gao-rfid-363339.html

Gilmore, Dan. (April 17, 2008). Wal-Mart and RFID: Seems obvious now. Supply Chain Digest. Retrieved on January 31, 2009 from http://www.scdigest.com/assets/FirstThoughts/08-04-17.php?cid=1624&ctype=content.

Office of Consumer Affairs. (November 16, 2007). Radio-Frequency Identification (RFID) in the Retail Marketplace. Canadian Government. Retrieved on February 1, 2009 from http://www.ic.gc.ca/eic/site/oca-bc.nsf/eng/ca02320.html

Wailgum, Thomas. (January 18, 2008) Wal-Mart is dead serious about RFID. CIO. Retrieved on February 1, 2009 from http://www.cio.com/article/173702/Wal_Mart_Is_Dead_Serious_About_RFID.

Weier, M.H. (January 17, 2008). Wal-Mart sets deadline for Sam’s Club suppliers to use RFID. Intelligent Enterprise. Retrieved on February 1, 2009 from http://www.intelligententerprise.com/channels/business_intelligence/data_visualization/showArticle.jhtml?articleID=205900865.

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