Wal-Mart Stores has identified major stock management efficiencies using radio frequency identification (RFID) technology. Retailers and consumer packaged goods (CPG) manufacturers should continue to build RFID business cases.
On 14 October 2005, Wal-Mart announced the results of research showing that customers found items they wanted in stock more often in stores that use RFID technology with embedded electronic product codes (EPCs) than in stores that do not. Researchers at the University of Arkansas found a 16 percent drop in out-of-stock (OOS) merchandise at RFID-equipped stores due to better in-store stock management. OOS items with EPCs were replenished three times faster than comparable items using standard bar-code technology.
Gartner believes that Wal-Mart's analysis of its RFID project is the most vital work now being done in retail RFID. Interest has centered on RFID's potential to transform retail — if the technology works. Now, with Wal-Mart's systematic business-case analysis about what RFID can actually do, we believe the industry will move from fascination with RFID to justifying its intrinsic worth to the business.
Although the study appears robust, it raises some questions:
It's not clear how much OOS reduction occurred in control groups. Wal-Mart must show complete baseline data to clarify the exact impact of the reduction.
The study doesn't quantify the impact of OOS reduction. Therefore, the doubts that retailers and CPG manufacturers have always had about measuring reductions in OOS goods remain. This data sheds no new light on the financial impact of OOS reduction on the value network.
The study doesn't show whether OOS merchandise on tagged stock keeping units (SKUs) vs. nontagged SKUs in the same store was balanced with OOS levels of identical SKUs at non-RFID stores. For this reason, RFID-tagged products may be getting priority stocking because they show up on the stock clerk's pick (task) list more often. As more SKUs get RFID tags, they will no longer experience this differential.
If Wal-Mart addresses these issues, we expect manufacturer resistance to this RFID project to decrease substantially, though not to disappear completely.
Recommendations for large retailers and CPG manufacturers
Don't accelerate RFID adoption time frames based on this data. The study will advance RFID, but movement won't be dramatic and has already been built into most adoption time frames.
Acknowledge these advances but look for more details from Wal-Mart. There is no "green light" for RFID yet.
Continue building a business case for RFID, but don't focus exclusively on OOS reduction.
Analytical Source: Jeff Woods, Gartner Research
Recommended Reading and Related Research
"Why Wal-Mart Is Still Excited About RFID" — Wal-Mart is staking its corporate reputation on RFID because the potential benefits justify the risk. By Jeff Woods
"Hype Cycle for Radio Frequency Identification, 2005" — RFID will change your industry and your business, but not in the ways you've been led to believe. By Jeff Woods and others
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