From Bar Codes to RFID: Is the GIass HaIf FuII or HaIf Empty,

the WaI- Mart Story?

Pradeep GopaIakrishna, Ph.D.*, Ram Subramanian, Ph.D.
$
* Professor of Harket|ng
Lub|n 8choo| of us|ness
Pace Un|vers|ty
New York, N.Y. 10038
E-ma||: pgopa|akr|shnapace.edu
$ Professor of Hanagement
8e|dman 8choo| of us|ness
Crand Va||ey 8tate Un|vers|ty
Crand Rap|ds, H|
E-ma||: subramargvsu.edu
Abstract:Wal-Mart, the world's largest retailer and firm, is a company shaped by its supply chain. Guided by
founder Sam Walton's passion for customer satisfaction and, "every day low prices," Wal-Mart continues to
practice effective supply chain management, making it a leader in the markets it serves. This requires
simultaneous improvements in both customer service levels and the internal operating efficiencies of the
companies in the supply chain. This purpose of this paper is to evaluate Wal-Mart's readiness, as it
implements radio frequency identification technology (RFD), a ground-breaking technology, into its day-to-
day supply chain operations. Wal-Mart's core competencies are grounded in its quick-response system,
enabling it to minimize inventory levels in the supply chain. Wal-Mart introduced the concept of expanding
around distribution centers, electronic data interchange, the big-box store format and everyday low prices
(EDLP). The central premise of this article is to identify the strengths and weaknesses of RFD, in light of
Wal-Mart's cost leadership strategy. RFD systems include three major components, i.e., tags, readers, and
software.
Given Wal-Mart's business model of cutting costs and improving supply chain efficiencies has become a
template for retailers everywhere, whether the implementation of this new technology will forever change the
retailing landscape remains to be seen.
1.0 INTRODUCTION
Wal-Mart is not just the world's largest retailer; it's also the world's largest company--bigger than Exxon
Mobil, General Motors, and General Electric. The scale can be hard to absorb, given Wal-Mart sold $244.5
billion worth of goods in 2003. t sells in three months what number-two retailer in the United States, Home
Depot sells in a year. And in its own category of general merchandise and groceries, Wal-Mart no longer has
any real rivals. t does more business than Target, Sears, Kmart, J.C. Penney, Safeway, and Kroger
combined. "Clearly," says Edward Fox, head of Southern Methodist University's J.C. Penney Center for
Retailing Excellence, "Wal-Mart is more powerful than any retailer has ever been." t is, in fact, so big and so
furtively powerful as to have become an entirely different order of corporate being. Wal-Mart celebrated the
biggest sale day ever in the history of retailing by amassing $1.43 billion after Thanksgiving day in 2002.
Fortune's most admired company in 2003 has become the envy of corporate America and the rest of the
world. Wal-Mart's four retail divisions -- Wal- Mart Super centers (1,471), discount stores (1,477),
neighborhood markets (64) and SAM'S CLUB (538) warehouses -- offer a wide variety of quality
merchandise to consumers around the world. Wal-Mart operates in 9 countries around the world and is
looking to expand into others soon. So, how do they do it?
Wal-Mart is a company shaped by its supply chain and the efficiency of its supply chain has made it a leader
in the markets it serves. Guided by founder Sam Walton's passion for customer satisfaction and, "every day
low prices," Wal-Mart continues to practice effective supply chain management. This requires simultaneous
improvements in both customer service levels and the internal operating efficiencies of the companies in the
supply chain. The purpose of this paper is to evaluate Wal-Mart's readiness, as it implements radio
frequency identification technology (RFD), a ground-breaking technology, into their day-to-day supply chain
operations. The central premise of this article is identifying the pros and cons of RFD in light of Wal-Mart's
cost leadership strategy. n the next few sections of the paper, we present the following. n section 1, three
theoretical perspectives are presented and the paper is grounded in the resource-based view approach.
Next, a brief overview of Wal-Mart, followed by a description of supply chain management principles is
presented. Finally, RFD and the associated merits and drawbacks of it are presented.
2.0 TheoreticaI Background
Supply chain management, a popular theme in both academic and practitioner circles, has in the past been
grounded in three theoretical perspectives: (1) the transaction cost approach, (2) the network perspective,
and (3) the resource-based view [1]. While, in the past, supply chain management has been equated with
the logistics concept, recent definitions have encompassed a holistic view of the supply chain focusing upon
the management of relationships. According to Cooper, Lambert and Pagh (1997), "supply chain
management is the integration of business processes from end user through original suppliers that provides
products, services and information that add value for customers. t is the intent of the authors' to first
present an overview of the three theoretical perspectives, and later to ground the paper in one of the three
theories. The transaction cost theory is grounded entirely on economic issues [2]. The theory is limited by a
dyadic perspective between a firm and its transactions with surrounding firms. Hence, the theory lacks
practical implications, given its normative outlook and static perspective. The network theory looks at firms
linked together by activity chains, examining the performance of firms, looking into how efficiently they
cooperate with their direct and indirect partners. Given, the dynamic and changing inter-organizational
relations, the network theory emphasizes the importance of relationship building across the partners in the
long run. The central tenet of the resource-based view theory is based on: resources, capabilities and
strategic assets of a company. Wal-Mart, known as "the Iogistics company of the 21
st
century, prides itself
on its competence developed via a complex interaction of physical and human resources, including
resources and capabilities developed in relations with interacting companies. Wal-Mart core competencies
or strategic assets are grounded on its quick-response system, enabling it to minimize inventory levels in the
supply chain. As firms including, Wal-Mart focus their attention on their core competencies, developing
relations with suppliers and partners that are both complex and difficult to imitate, the resource-based view
provides a better description of the partnerships.
3.0 WaI-Mart Company Background
3.1 WaI-Mart at a GIance
Wal-Mart Stores, nc. is the world's largest retailer, with $244.5 billion in sales in the fiscal year ending Jan.
31, 2003. The company employs more than 1.3 million associates worldwide through more than 3,200
facilities in the United States and more than 1,100 units in Mexico, Puerto Rico, Canada, Argentina, Brazil,
China, Korea, Germany and the United Kingdom. More than 100 million customers per week visit Wal-Mart
stores worldwide [3] Guided by founder Sam Walton's passion for customer satisfaction and "Every Day
Low Prices," Wal-Mart's four retail divisions -- Wal- Mart Supercenters, Discount Stores, Neighborhood
Markets and SAM'S CLUB warehouses -- offer a wide variety of quality merchandise to consumers around
the world.
4.0 WaI-Mart and SuppIy Chain
4.1 What is SuppIy Chain?
The term "supply chain management arose in the late 1980s and came into widespread use in the 1990s.
Prior to that time, businesses used terms such as "logistics and "operations management instead. Some
definitions of a supply chain are offered below:
"A supply chain is the alignment of firms that bring products or services to market [4] . "A supply chain
consists of all stages involved, directly or indirectly, in fulfilling a customer request. The supply chain not only
includes the manufacturer and suppliers, but also transporters, warehouses, retailers, and customers
themselves. f this is what a supply chain is then we can define supply chain management as the things we
do to influence the behavior of the supply chain and get the results we want. An academic definition of
supply chain is the following: "the systemic, strategic coordination of the traditional business functions and
the tactics across these business functions within a particular company and across businesses within the
supply chain, for the purposes of improving the long-term performance of the individual companies and the
supply chain as a whole [5]. n other words, we can say that supply chain management is the coordination
of production, inventory, location, and transportation among the participants in a supply chain to achieve the
best mix of responsiveness and efficiency for the market being served.
Effective supply chain management requires simultaneous improvements in both customer service levels
and the internal operating efficiencies of the companies in the supply chain. Customer service at its most
basic level means consistently high order fill rates, high on-time delivery rates, and a very low rate of
products returned by customers, for whatever reasons. nternal efficiency for organizations in a supply chain
means that these organizations get an attractive rate of return on their investments in inventory and other
assets and that they find ways to lower their operating and sales expenses [6].
There is a basic pattern to the practice of supply chain management. Each supply chain has its own unique
set of market demands and operating challenges and yet the issues remain essentially the same in every
case. Companies in any supply chain must make decisions individually and collectively regarding their
actions in five areas:
a. Production What products does the market want? How much of which products should be produced
and by when? This activity includes the creation of master reduction schedules that take into account plant
capacities, workload balancing, quality control,
and equipment maintenance.
b. Inventory What inventory should be stocked at each stage in a supply chain? How much inventory
should be held as raw materials, semi-finished, or finished goods? The primary purpose of inventory is to act
as a buffer against uncertainty in the supply
chain. However, holding inventory can be expensive, so what are the optimal inventory levels and reorder
points?
c. Location Where should facilities for production and inventory storage be located? Where are the most
cost efficient locations for production and for storage of inventory? Should existing facilities be used or new
ones built? Once these decisions are made they determine the possible paths available for product to flow
through for delivery to the final consumer.
d. Transportation How should inventory be moved from one supply chain location to another? Air freight
and truck delivery are generally fast and reliable but they are expensive. Shipping by sea or rail is much less
expensive but usually involves longer transit times and more uncertainty. This uncertainty must be
compensated for by stocking higher levels of inventory. When is it better to use which mode of
transportation?
e. Information nformation is the basis upon which to make decisions regarding the
other four supply chain drivers. t is the connection between all of the activities and operations in a supply
chain. To the extent that this connection is a strong one, (i.e., the data is accurate, timely, and complete),
the companies in a supply chain will each be able to make good decisions for their own operations. This will
also tend to maximize the profitability of the supply chain as a whole. That is the way that stock markets or
other free markets work and supply chains have many of the same dynamics as markets.
Information is used for two purposes in a supply chain:
a. Coordinating daily activities related to the functioning of the other four supply chain drivers: production;
inventory; location; and transportation. The companies in a supply chain use available data on product
supply and demand to decide on weekly production
schedules, inventory levels, transportation routes, and stocking locations.
b. Forecasting and planning to anticipate and meet future demands. Available information is used to make
tactical forecasts to guide the setting of monthly and quarterly production schedules and timetables.
nformation is also used for strategic forecasts to guide decisions about whether to build new facilities, enter
a new market, or exit an existing market.
Within an individual company the trade-off between responsiveness and efficiency involves weighing the
benefits that good information can provide against the cost of acquiring that information. Abundant, accurate
information can enable very efficient operating decisions and better forecasts but the cost of building and
installing systems to deliver this information can be very high. Within the supply chain as a whole, the
responsiveness versus efficiency trade-off that companies make is one of deciding how much information to
share with the other companies and how much information
The structure and operations of Wal-Mart have been defined by the need to lower its costs and increase its
productivity, so that it could pass these savings on to its customers in the form of lower prices. The
techniques that Wal-Mart pioneered are now being widely adopted by its competitors and by other
companies serving entirely different markets. Wal-Mart introduced concepts that are now industry standards,
which are:
a. The strategy of expanding around distribution centers (DCs)
b. Using electronic data interchange (ED) with suppliers
c. The "big box store format
d. "Everyday low prices [7]
The strategy of expanding around DCs is central to the way Wal-Mart enters a new geographical market.
The company looks for areas that can support a group of new stores, not just a single new store. t then
builds a new DC at a central location in the area and opens its first store at the same time. The DC is the
supply chain bridgehead into the new territory. t supports the opening of more new stores in the area at a
very low additional cost. Those savings are passed along to the customers.
The use of EDI with suppliers provides the company two substantial benefits. First of all this cuts the
transaction costs associated with the ordering of products and the paying of invoices. Ordering products and
paying invoices are, for the most part, well defined and routine processes that can be made very productive
and efficient through ED. The second benefit is that these electronic links with suppliers allow Wal-Mart a
high degree of control and coordination in the scheduling and receiving of product deliveries. This helps to
ensure a steady flow of the right products at the right time, delivered to the right DCs, by all Wal-Mart
suppliers.
The big box store format allows Wal-Mart to, in effect, combine a store and a warehouse in a single facility
and get great operating efficiencies from doing so. The big box is big enough to hold large amounts of
inventory like a warehouse. And since this inventory is being held at the same location where the customer
buys it, there is no delay or cost that would otherwise be associated with moving products from warehouse
to store. Again, these savings are passed along to the customer.
Everyday Iow prices are a way of doing two things. The first thing is to tell its price-conscious customers
that they will always get the best price. They need not look elsewhere or wait for special sales. The effect of
this message to customers helps Wal-Mart do the second thing, which is to accurately forecast product
sales. By eliminating special sales and assuring customers of low prices. Wal-Mart smoothes out demand
swings making demand more steady and predictable. This way stores are more likely to have what
customers want when they want it.
Taken individually, these four concepts are each useful but their real power comes from being used
together. They combine to form a supply chain that drives a self-reinforcing business process. Each concept
builds on the strengths of the others to create a powerful business model for a company that has grown to
become a dominant player in its markets.
The goal of supply chain management is to increase sales of goods and services to the final, end use
customer while at the same time reducing both inventory and operating expenses. The business model of
vertical integration that came out of the industrial economy has given way to "virtual integration of
companies in a supply chain. Each company now focuses on its core competencies and partners with other
companies that have complementary capabilities for the design and delivery of products to market.
Companies must focus on improvements in their core competencies in order to keep up with the fast pace of
market and technological change in today's economy.
To succeed in the competitive markets that make up today's economy, companies must learn to align their
supply chains with the demands of the markets they serve. Supply chain performance is now a distinct
competitive advantage for companies who excel in this area. One of the largest companies in North America
is a testament to the power of effective supply chain management. Wal-Mart has grown steadily over the last
20 years and much, if not most, of its success is directly related to its evolving capabilities to continually
improve its supply chain.
5.0 WaI-Mart and RFID
n June 2003, Wal-Mart announced that it would require its top 100 suppliers to comply and affix a new
technology known as radio frequency identification, or RFD tags on shipping crates and pallets by January
2005, a move that's likely to spur widespread adoption of the technology because of Wal-Mart's market
clout. t is accepted wisdom that Wal-Mart makes the companies it does business with more efficient and
focused, leaner and faster. Wal-Mart itself is known for continuous improvement in its ability to handle,
move, and track merchandise. t expects the same of its suppliers. But the ability to operate at peak
efficiency only gets you in the door at Wal-Mart. The public image Wal-Mart projects may be as cheery as its
yellow smiley-face mascot, but there is nothing genial about the process by which Wal-Mart gets its
suppliers to provide tires and contact lenses, guns and underarm deodorant at every day low prices. Wal-
Mart is legendary for forcing its suppliers to redesign everything from their packaging to their computer
systems. t is also legendary for quite straightforwardly telling them what it will pay for their goods.
The Wal-Mart squeeze means vendors have to be as relentless and as microscopic as Wal-Mart is at
managing their own costs. They need, in fact, to turn themselves into shadow versions of Wal -Mart itself.
"Wal-Mart won't necessarily say you have to reconfigure your distribution system," says Carey. "But
companies recognize they are not going to maintain margins with growth in their Wal-Mart business without
doing it." There is no question that Wal-Mart's relentless drive to squeeze out costs has benefited
consumers. The giant retailer is at least partly responsible for the low rate of U.S. inflation, and a McKinsey
& Co. study concluded that about 12% of the economy's productivity gains in the second half of the 1990s
could be traced to Wal-Mart alone [8].
Global retailers such as Tesco and Marks and Spencer have thus far conducted advanced trials with RFD
technology. The pilots have proven successful and it is now time for Wal-Mart and other global retailers to
conduct their own pilots and scale the pilots to meet the high volume requirements. Some skeptics argue
that RFD technology will co-exist along with the existing bar code infrastructure for the next 20 years.
Regardless, the widespread adoption of RFD technology hinges upon how well the technology scales and
the improvements in productivity and financial benefits to be accrued in the long-term. Given Wal-Mart's
business model of cutting costs and improving supply chain efficiencies RFD systems include three major
components, i.e., tags, readers, and software. The technology has been in place since World War ,
however only recently retailers worldwide have shown interest in adopting this technology for supply chain
efficiencies. The technology allows machines to share information wirelessly. Tags can be smaller than a
grain of rice or as large as a brick. RFD tags are either passive (no battery) or active (self-powered by a
battery). Data transmission speed and range depend on the frequency used, antenna size, power output,
and interference. Tags can be read-only, read-write, or a combination, in which some data (such as a serial
number) is permanently stored, while other memory is left available for later encoding or to be updated
during usage. The readers are placed at strategic locations to capture the signal transmitted by the tags.
The software aggregates the data collected from the tags, and sends it to the appropriate system or
databases.
6.0 Advantages of RFID: Depends on whom you ask?
n the long-term, RFD tags are seen as a successor to bar codes in the retail industry. RFD tags are
expected to supplant bar codes for a variety of reasons. They carry more information about the product than
UPC labels, and can be scanned rapidly. t is believed that precise tracking of supplies can cut the amount
of inventory the stores need by 5 percent, and the labor costs of managing inventory in warehouses would
fall by 7.5 percent for retailers everywhere. The primary concern of retailers today is fear of running out of
items. RFD tags help alleviate this problem for retailers [9]. Unlike bar code-based tracking systems, an
RFD system can read the information on a tag without requiring line of sight and it can enable the storage
and relay of more item-level data associated with a specific product's life cycle. t can provide item-level
inventory visibility in real time with higher accuracy. That means RFD systems can be largely automated,
reducing the need for manual scanning. Organizations throughout the industry are working to develop
national and international RFD standards for various RFD applications, even as market adoption advances.
This combination of effort standards operation and market adoption can be expected to result in RFD
systems that are both interoperable and affordable [10].
Retailers such as Wal-Mart see the RFD technology as a glass half-full, while the manufacturers see the
RFD glass half-empty. As alluded to here, the retailers see enormous benefits of RFD at the distribution
center and store-level, but manufacturers are the channel players who need to "bell the cat, i.e., put tags on
the individual products'; and ensure that their truckers are RFD-enabled too. Therefore to take advantage of
savings throughout, Wal-Mart needs to minimize disconnects along the supply chain. Wal-Mart, and other
retailers, it is expected will see a reduction of out-of-stock items resulting in an annual benefit of approx.
$700,000 for every $1 billion in annual sales. Thus, RFD allows manufacturers and retailers to complement
existing systems while gathering more information throughout a supply chain. Systems with the power to
update the information that moves with an individual product provide complete supply chain visibility without
the prohibitive labor costs and error rates a similar manual system would entail. RFD also can act like a
security guard at a gateway. As goods are moved from dock to truck to store, RFD can conduct automatic
inventories and compare the goods with the manifest. Goods flow becomes more complete, stock outs are
reduced, overages are curtailed and accounting discrepancies are removed [11].
Wal-Mart, one of the early pioneers of the concept of "cross-docking to physically distribute goods from
vendors to warehouses and from warehouses to stores, streamlined the distribution process of goods
ensuring that almost 85 percent of the products flowed through the cross-docking system, supported by Wal-
Mart's hub-and-spoke network of distribution centers surrounded by stores that are not more than a day's
drive away. Now, RFD tracking systems are finding their way into cross-docking and warehousing
applications first. But as they stretch further throughout a retail supply chain, they will require close
cooperation between suppliers and retailers. For this to happen, however, the cost of the system must drop
to the point that its cost can be justified by the savings a company will reap from improved inventory
management. Once that is the case, large global retailers will begin to demand that suppliers provide RFD-
tagged packaging at the case level. That likely will happen first at the inventory control and pallet tracking
level, followed next by high-ticket item goods such as electronics, then by other product groups as total
system costs come down [12].
7.0 RFID and its Future
t is accepted wisdom that Wal-Mart makes the companies it does business with more efficient and focused,
leaner and faster. Wal-Mart itself is known for continuous improvement in its ability to handle, move, and
track merchandise. t expects the same of its suppliers. But the ability to operate at peak efficiency only gets
you in the door at Wal-Mart. The public image Wal-Mart projects may be as cheery as its yellow smiley-face
mascot, but there is nothing genial about the process by which Wal-Mart gets its suppliers to provide tires
and contact lenses, guns and underarm deodorant at every day low prices.
Wal-Mart is legendary for forcing its suppliers to redesign everything from their packaging to their computer
systems. t is also legendary for quite straightforwardly telling them what it will pay for their goods [13]
Global retailers such as Tesco and Marks and Spencer have thus far conducted advanced trials with RFD
technology. The pilots have proven successful and it is now time for Wal-Mart and other global retailers to
conduct their own pilots and scale the pilots to meet the high volume requirements. Some skeptics argue
that RFD technology will co-exist along with the existing bar code infrastructure for the next 20 years.
Regardless, the widespread adoption of RFD technology hinges upon how well the technology scales and
the improvements in productivity and financial benefits to be accrued in the long-term. Given Wal-Mart's
business model of cutting costs and improving supply chain efficiencies has become a template for retailers
everywhere, the implementation of this new technology will forever change the retailing landscape.
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