Mike O'Shea was vacationing in Orlando when his cell phone rang around 7 p.m. A case of Kimberly-Clark Corp.'s Scott paper towels tagged with a radio-frequency identification label had just passed under a scanner in Wal-Mart Stores Inc.'s Sanger, Texas, distribution center. O'Shea and his wife toasted the moment with mango daiquiries. The celebration by Kimberly-Clark's director of RFID strategies and technology was about more than the first success in Wal-Mart's live RFID trial, now about 4 weeks old. It marked the end of a 12-month process that changed how businesses think about RFID.

It was at last year's Retail Systems conference in Chicago that Wal-Mart CIO Linda Dillman seized the industry's attention by announcing the goal of having the retailer's top 100 suppliers deliver cases and pallets with RFID tags by January 2005. Last week, Wal-Mart was back at the Retail Systems conference, promising to get 200 more suppliers into the RFID effort this summer and to keep the pressure on suppliers, tech companies, and even rivals to make RFID a reality. "This joint work has ensured that many months, and even years, have been taken out of the traditional development cycle for a project like RFID," Wal-Mart stores division CEO Mike Duke said.

Wal-Mart's initiative kick-started--and in some ways redirected--progress on a supply-chain technology that had been of interest to researchers at a handful of technology vendors, academic labs, and a few large businesses. Now executives are changing strategic to-do lists, big-name vendors such as Hewlett-Packard and SAP are pitching products and services, an organization was created solely to accelerate RFID standards, and tagged boxes are shipping in real-world trials.

Kimberly-Clark, whose brands include Kleenex, Huggies, and Depend, shifted its RFID focus in response to Wal-Mart. The paper-goods company last year was investigating the use of the technology, which uses small computer chips embedded in labels to more efficiently transmit the kind of information held on a bar code, in its warehouses. "When we started evaluating RFID and looking at applications, we felt there was value for us to pursue this within our four walls," O'Shea says. "Wal-Mart's announcement has accelerated the pace of how we're implementing RFID outside of our four walls."

The Department of Defense, Target, and Albertsons issued similar mandates following Wal-Mart's. Other industries, such as auto, health care, and pharmaceuticals, could shoot past retail and consumer goods. Last week, Exavera Technologies Inc. introduced a system combining wireless networking and RFID-based bracelets that could hold patient information. The pharmaceutical industry will move faster than others to adopt RFID, predicts James Hintlian, head of consulting firm Accenture's health and life-sciences supply-chain practice, because more-accurate tracking could help combat a huge counterfeit problem. As much as 7% of U.S. prescription drugs are counterfeit.

Despite such promise, RFID is still a leap of financial faith. "A number of manufacturers are saying to us, 'Are we the only ones who can't find a business case for this?'" says Jeff Woods, a principal analyst at research firm Gartner. Making the business case for RFID, such as identifying operations that could be more efficient with its use, is proving difficult, particularly in distribution centers that already leverage state-of-the-art bar-code systems and well-ordered processes. "People are asking what an RFID-centric picking process should look like and how it will save them money, but it's a really difficult thing because bar coding is so good," Woods says.

Avery Dennison Corp., an office-products manufacturer, is one of 37 suppliers--beyond the top 100--that volunteered to hit Wal-Mart's January RFID deadline, though it won't begin pilot tests until after the back-to-school rush. The company has been exploring RFID since 2000 and will spend more than $12 million this year on it. Still, the technology won't improve its supply-chain processes in the short term. "It's not something financially justified today, but that was true in the beginning with bar codes, too," says Stan Drobac, VP of RFID applications.

There's a standards struggle, too. Kimberly-Clark, Target, Wal-Mart, and many other well-known companies have been pressing for several years for standards on what data is included on an RFID chip and how readers and tags communicate, initially as members of the Auto-ID Center and now by participating in EPCglobal Inc., a joint venture between EAN International and the Uniform Code Council. A single RFID standard has yet to emerge, and a fragmented approach could sink the effort. "We're going to do this one way," Target CIO Paul Singer said at the retail conference. "I really believe that's critical for making this happen." Technical hurdles also have cropped up. Unlike active RFID tags, which have been around for some time and are more often used to track high-value goods, passive tags, required by Wal-Mart, Defense, and others, don't come with their own batteries, and materials such as metal or liquid can block their ability to draw enough power from an RFID reader to emit signals. Then there's cost--the 5-cent tag remains a long way off, with prices today ranging from around 35 cents a tag for volume orders to as much as 70 cents, analysts say.

No major consumer-goods manufacturer can afford to say no to Wal-Mart. Yet analysts and IT execs say Wal-Mart hasn't forced RFID through without regard for cost or disruption to its suppliers. "Wal-Mart has a mandate, but they're looking to all of their suppliers to be smart about implementation," says Ian Robertson, director of IT in the Americas for gummaker Wrigley Co. "They don't want it to cost too much for us because they know that would ultimately come back to them." Wrigley, which has until January 2006 to start tagging its cases and pallets bound for Wal-Mart since it's not a top-100 supplier, plans to start an RFID pilot toward the end of this year.

Wal-Mart initially told its top 100 suppliers that it expected all their cases and pallets bound for the Texas distribution center to be tagged by January; now it's saying, on average, 65% will be tagged. Wal-Mart also accommodated suppliers that needed more time, Duke said. "There are a couple cases where we worked with suppliers that had other business strategies they thought they needed to address first," he said.

Wal-Mart is nearly a month into its live test with Gillette, Hewlett-Packard, Johnson & Johnson, Kimberly-Clark, Kraft Foods, Nestlé, Purina PetCare, Procter & Gamble, and Unilever. The test involves just 21 of more than 100,000 products carried in a typical Wal-Mart Supercenter and is limited to seven Wal-Mart stores in the Dallas/Fort Worth area. It includes an elegantly simple process for recording when products move from back room to store shelves: Readers scan empty boxes before they're thrown into trash bins, sending a signal that the products formerly in the boxes have moved to the shelves and a case will need replacing.

Ultimately, RFID's success will require much more than just meeting big businesses' mandates. Kimberly-Clark, while keeping attention on retailers' directives, continues to evaluate how RFID can benefit its operations. The company hasn't issued any mandates of its own, but it's considering tagging raw materials--or having its suppliers do that--so materials can be replenished on an as-needed basis. Says O'Shea, "There are advantages to RFID that can be realized through the entire value chain."

-- With Chris Murphy and Rick Whiting

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