Responding to Wal-Mart's RFID Mandate - ARC Advisory Group

ARC STRATEGIES 

By Steve Banker & 

Adrian Gonzalez 

DECEMBER 2003 

Responding to Wal-Mart’s RFID Mandate 

Executive Overview .................................................................... 3 

Understanding Wal-Mart’s Requirements........................................ 4 

The Manufacturer’s Dilemma........................................................ 5 

Planning and Conducting RFID Pilot Tests....................................... 6 

Developing a Budget for RFID Pilots .............................................11 

Summary .................................................................................14 

THOUGHT LEADERS FOR MANUFACTURING & SUPPLY CHAIN

ARC Strategies • December 2003 

What is your current activity with RFID? 

9.5% 

7.4% 

34.7% 

48.4% 

No activity 

Researching 

Piloting 

In production 

Source: 

Survey of 95 logistics executives at Global 1000 companies conducted by 

ARC Advisory Group and Richmond Events in May 2003. 

Almost 50 Percent of Companies Had No RFID Activity in May 2003 

(Before Wal-Mart’s Announcement) 

When do you expect to begin testing RFID? 

1.3% 

11.8% 

23.7% 

25.0% 

Next 12 mos. 

1-2 years 

3-5 years 

5+ years 

Never 

Source: 

38.2% 

Survey of 76 logistics executives at Global 1000 companies conducted by 

ARC Advisory Group and Richmond Events in May 2003 

Almost 40% of Respondents Didn’t Expect to Begin Testing RFID 

Until at Least 2006 

2 • Copyright © ARC Advisory Group • ARCweb.com


Executive Overview 

Wal-Mart has mandated that by January 2005 its top 100 suppliers must 

apply passive RFID tags to cases and pallets shipped to specific distribution 

centers. Any Wal-Mart mandate has power because of its massive size - 

Wal-Mart is the largest retailer in the world ($244 billion in 

RFID is a Global event: sales in the last fiscal year, $41 billion from abroad). They are 

For example, both Marks and the largest seller of many categories of consumer goods - from 

Spenser in the UK and Tesco 

CDs, to prescription glasses, to over the counter pharmaceuticals, 

and many other areas. Virtually all manufacturers of 

in Germany, have also 

conducted very interesting 

consumer goods will eventually be impacted by this, particularly 

because Wal-Mart’s moves in RFID are being copied by 

pilots run of RFID. 

the Department of Defense and will soon be copied by other large retailers. 

As a result, a technology that was really one of the lowest rated interest areas 

in ARC surveys before the Wal-Mart mandate, has suddenly bubbled to 

the top. 

For most manufacturers, complying with this mandate will reduce profit 

margins, at least in the short term. But considering Wal-Mart’s overall contribution 

to revenues and profitability, non-compliance is generally not an 

option. Therefore, manufacturers must determine the most economic way 

to comply with this edict. Designing and conducting 

Manufacturers must determine 

pilot tests is a critical part of this process. 

the most economic way to comply 

with Wal-Mart’s edict. Designing 

The information in this report is meant to assist companies 

in outlining RFID pilot tests and creating associated 

and conducting pilot tests is a 

critical part of this process. 

budgets. The following topics are discussed: 

• Overview Wal-Mart’s requirements (as disclosed to date); 

• Where and when to conduct pilot tests; 

• “Rules of thumb” for budget-related costs. 

This research was initiated in response to requests by members of ARC’s 

Logistics Executive Council (LEC). It complements other RFID reports produced 

by ARC and ARC will be conducting additional research on RFID 

throughout 2004. Stay tuned! 

Copyright © ARC Advisory Group • ARCweb.com • 3


Understanding Wal-Mart’s Requirements 

Suppliers will be required by January 2005 to ship RFID-tagged pallets and 

cases, with Electronic Product Codes (EPC), to three Wal-Mart distribution 

centers in Texas that support 150 different stores, including Sam's Club, 

Sam's Market, and regular Wal-Mart outlets. 

All SKUs shipped to Wal-Mart must 

be tagged, but…. 

% of SKUs 

% of 

Shipments 

…only three DCs will initially be able 

to receive tagged product; the 

uncertainty in ramp-up schedule 

makes planning very difficult. 

0% 20% 40% 60% 80% 100% 

The Uncertainty Surrounding the RFID Ramp Complicates Planning 

Wal-Mart will expand the number of distribution centers capable of receiving 

RFID-tagged product throughout 2005, but the ramp-up schedule is 

unknown. The company’s plans to implement RFID outside the United 

States is also vague. 

Wal-Mart continues to work closely with EPCglobal, a standards-setting 

organization focused on passive RFID and related technologies. 

Additional Requirements 

• Continued support of barcodes. Encoder/printers exist that can embed 

an RFID tag within a barcode label. Zebra is currently the only 

major hardware provider with this type of solution, but competitive of- 



ferings from other suppliers are on the horizon. Get your orders in 

early - demand is outpacing supply. 

• Advanced Ship Notices (ASNs) must include EPC. Wal-Mart is currently 

modifying its ASN specification to make this possible. 

• Class 1/Version 2 tags will become the long-term standard. Class 

1/Version 2 standards should be finalized sometime next year. In the 

near term, Class 0 and Class 1/Version 1 EPC tags will be supported. 

Class 0 tags are programmed at the factory; suppliers then need to 

match the right tag to the 

right product before shipping. 

24-80 Specified 

Wal-Mart advises 

suppliers to buy “agile” 

64 Specified 

readers that can be upgraded 

via software to read new tag 

protocols. This is an endorsement 

of readers by 

EPC Tag Specifications 

ThingMagic and AWID. 

Class/Version MHz Type of Tag Bits Status 

Class 0 900-928 Factory 

Programmable 

Class 0+ 900-928 Read/Write 24-80 Unspecified 

Class 1, v. 1 13.56 Write Once - 

Read Many 

Class 1, v. 2 860-930 Read/Write 64 Unspecified 

• Suppliers must scan RFID tags after they're applied to ensure they 

work. Wal-Mart expects suppliers to place one antenna on each side of 

a gateway or dock door and one antenna above. For case tagging and 

conveyors moving up to 600 feet per second, it expects one antenna on 

each side of the conveyor (or one antenna underneath and one above). 

Cases must be 100 percent readable for conveyors moving at 540 feet 

per second. EPCglobal is working on creating certification centers to allow 

suppliers to prove that all SKUs can be read, but the details on this 

are not fully hashed out. Computer supplier, Sun, is scheduled to have 

an RFID testing center open by the end of December in Dallas, Texas 

and another in Scotland in February of 2004. 

The Manufacturer’s Dilemma 

Wal-Mart has made it clear that it will not accept any price increases from 

suppliers related to RFID deployment, even though most (if not all) of the 

near-term benefits will be derived by the retailer. Achieving payback in 

less than three years will be very difficult for most manufacturers, particularly 

those with domestic supply chains. 



The Retail Supply Chain and RFID 

Transportation 

Retail 

DC 

Transportation 

Store 

Backroom 

Store 

Shelves 

Active RFID is 

used to track 

shipments from 

overseas, to 

prove that 

shipments are 

secure, and to 

speed customs 

clearance 

Passive RFID is 

used to automate 

receiving & shipping; 

Barcodes for 

Putaway & Picking 

GPS or Wireless is 

used for 

tracking inventory 

in motion, active 

RFID can be used 

for tracking trailers 

in large yards 

Passive RFID is used to 

receive at the store 

and to find inventory in 

the store back room, the 

use of “smart” shelves is 

a few years off for most 

retailers 

ROI Is More Compelling for Retailers 

Manufacturers with global supply chains, however, have a better chance of 

realizing benefits, but the implementation scope is more complex. Companies 

that import from Asia, for example, can track their goods from origin 

to destination using Supply Chain Event Management (SCEM) software 

coupled with active RFID tags on ocean containers, Global Positioning Systems 

(GPS) on ships and trucks, and passive RFID tags on pallets and cases. 

Having greater visibility into “real time” events can lead 

The impact of RFID on business to reductions in inventory, less product obsolescence, and 

processes and supply chain 

other benefits that ultimately justify the investment in 

configurations remains to be 

RFID and other wireless technologies. Savi Technology 

seen, and it will be years before 

and Descartes Systems Group are leading solution providers 

in this area, but vendors like Manugistics and SAP 

case studies and best practices 

emerge. 

are also active. 

Nonetheless, the goal today for most Wal-Mart suppliers is to determine 

the most cost-effective way to comply with the retailer’s mandate. Designing 

and conducting pilot tests is a critical part of this process. 

Planning and Conducting RFID Pilot 

Tests 

It’s important for companies to remember that using passive RFID technology 

and EPC for supply chain management purposes is still relatively new. 

The impact of this technology on business processes and supply chain configurations 

remains to be seen, and it will be years before case studies and 

best practices emerge. 

At this stage of the game, learning about the technology and conducting 

pilot tests should be the primary focus. The information gathered from 



these tests can be used to develop Return on Investment (ROI) models and 

it can help answer key questions such as: 

• When should the tags be applied, as part of the packaging process or at 

the distribution center before shipping? 

• Should the tagging process be done internally or handled by external 

partners such as co-packers or third party logistics providers (3PLs)? 

• What impact would changes in ramp-up schedule have on these decisions? 

As with all initiatives of this nature, assembling a cross-functional team is 

very important. Team members must include high-level managers that 

understand manufacturing and fulfillment process flows. Internal experts 

on RFID (if they exist) should also be included, along with representatives 

from IT, finance, material handling, and industrial engineering (for 

time/motion studies). 

Timing Your RFID Investments 

The conventional advice is that companies should start investing and piloting 

RFID as soon as possible. In some respects, this is good advice. There 

is likely to be a shortage of consultants with strong capabilities in EPC 

RFID. However, there are three good reasons to wait until at least the middle 

of 2004 to begin active tests. 

• Early implementers will be the guinea pigs. EPC RFID consulting expertise 

does not exist. The early adopters will effectively serve as the 

training ground for consultants. Therefore, companies that wait will 

have access to more experienced consultants and obtain insight into the 

successes and failures of the early adopters. 

• Despite the availability of agile readers, companies that invest early 

may have to replace RFID hardware down the road. The specification 

standards for Class 1/Version 2 tags have not been finalized. RFID 

providers like Matrics, Alien Technologies, AWOD, and Thing Magic 

have the early lead when it comes to EPC RFID. However, the longer a 

company waits before investing in hardware, the more finalized the 

standards become and the more choices they’ll have in suppliers, as established 

companies like Symbol, Intermec, Texas Instruments, and 

Siemens introduce their own solutions. 



• The volume ramp-up is not yet understood. Wal-Mart has not disclosed 

how quickly it plans to roll out RFID across its entire distribution 

network. It’s also unclear what the other major retailers plan to do. 

Since the overall ramp-up schedule will have an impact on where to do 

the tagging, the longer companies wait, the clearer the ramp-up rate 

will become. 

For suppliers of both Wal-Mart and the Department of 

For suppliers of both Wal-Mart 

Defense (DOD), the latter may help subsidize the investment 

in RFID. The DoD will not finalize its RFID 

and the Department of Defense 

(DOD), the latter may help 

requirements until July 2004, but it appears that they will 

subsidize the investment in RFID. 

follow Wal-Mart’s lead and support Class 1/Version 2 

tags, as well as the yet-to-be developed Class 2 standards. 

The DoD has ten classes of suppliers. Many Wal-Mart suppliers fall into 

Class VI (personal demand items) and Class 1/Version 2 tags will likely 

suffice for this category. While Wal-Mart will not tolerate price increases 

stemming from RFID, the DoD cannot do the same. The DoD has preexisting 

contracts in place, many of them multi-year deals, and so it will have to 

pay higher prices for tagged items. 

Wal-Mart’s top 100 suppliers are not on the DoD’s top 500 list; hence, they 

don’t need to comply with the DoD’s mandate until January 2006 (a year 

later than Wal-Mart’s deadline). But if these companies comply with the 

DoD mandate early, they can amortize the cost of their RFID investments 

across a larger volume. Also, the DoD will be subsidizing the effort by paying 

higher prices. Similar logic applies if other retailers issue their own 

RFID edicts that require standardization on Class 1/Version 2 tags. 

Where and When to Tag 

Companies have two basic options with regards to when to apply the tags: 

• As part of the packaging process, most likely in a highly-automated 

manner; 

• As part of the fulfillment process, most likely in a manual manner. 

Since many companies outsource their packaging and fulfillment operations 

to co-packers and 3PLs, they will need to work closely with these 

partners to plan and execute RFID tests. 



Making the transition from 

the DC to the plant depends 

on several factors, including 

number of SKUs, percent of 

shipping volume, and 

number of customers that 

require RFID tags. 

Plant 

Where to 

Tag? 

DC 

The decision also 

requires a firm 

understanding of the 

costs associated 

with each option, as 

well as the impact 

on processes. 

Low 

? 

Volume 

High 

If a service provider is doing Wal-Mart compliance work for several customers, 

outsourcing may be a more cost-effective option in the long run. 

However, manufacturers must still develop a clear understanding of the 

cost implications of the different options, especially costs associated with 

process changes. 

At low volumes, tagging at the distribution center is probably the best option. 

But when volumes reach a certain critical level, automating the 

tagging process and incorporating it as part of the packaging operation may 

be justified. Part of the challenge is determining the critical volume threshold 

for this scenario, thus the importance of having a firm understanding of 

costs and process implications, and the importance of conducting pilots 

both at the factory and the distribution center. 

Considerations and Strategies for the DC Pilot 

• A company’s WMS will be used to route SKUs that need RFID tags to 

special tag application and verification scanning locations. While this 

could be done at receiving, most companies will choose to do this after 

picking. 

• Some SKUs (with metal or liquid content) may have to use nonstandard 

tags and will need to be routed to different RFID encoding stations. 



• Instead of outfitting every dock door with readers, a single gateway 

with readers can be constructed. Pallets are driven through the gateway 

before they’re taken to their designated door. Fewer readers are 

required with this configuration. 

• Costs depend on whether it is an older WMS, legacy solution, or a 

modern WMS. Modern WMS solutions support the work flows described 

above. 

• Older WMS and legacy solutions do not support the workflows described 

above and thus may require customization (est. $50,000). 

• WMS solutions often use RF devices. Older RF systems that operate in 

the 900 Mhz range may need to be replaced because they will cause 

reader interference. 

• The key drawback of doing this in the DC is wasted labor. Cases are 

palletized at the factory, then depalletized at the DC to enable tagging, 

then repalletized. 

• The key benefit is that warehouse personnel are use to Value Added 

Service processes, factory personnel are not. 

Considerations and Strategies for the Factory Pilot 

• Case tags are applied at high speed, in line, on a factory production line 

conveyor. The barcode/encoder must be told which items require 

which tags (bar code, barcode + RFID, or more expensive bar code 

RFID tags with larger antennas). 

• The tag/bar code applicator should be able to apply tags to different 

size and shaped packages and apply the tag on a specific location on the 

case/carton to insure that it can be read reliably. 

• When tags are applied at the DC, the actual ship to locations are 

known. Because of manufacturing lead times, tags may have to be applied 

in the factory before it is known exactly how many of a certain 

SKU will need RFID tags. Err on the high side! Apply more tags than 

are needed, perhaps 10 to 20 percent more than are forecast. 

• Many of Wal-Mart’s top suppliers participate in Collaborative Planning 

Forecasting and Replenishment (CPFR) or VMI programs. These processes, 

in conjunction with the Sales and Operations Planning (S&OP) 



process, will supply the replenishment data used to drive the allocation 

process. These processes may need to be adjusted. Replenishment order 

data will now need to be fed to the factory’s Production 

Management system. 

• A key drawback to doing this in the factory is that the RFID tagged 

cases will need to be segregated and handled differently from the other 

cases. This is a fundamentally different process in many factories. 

• A key benefit, if tags are applied at the factory, receiving and shipping 

processes can be automated in the DCs. 

Developing a Budget for RFID Pilots 

Conducting RFID pilots requires an investment in people, hardware, software, 

and consulting services. This section provides some “rules of thumb” 

for costing these factors. A basic pilot test at a distribution center (one facility, 

one gateway with three readers, and several thousand tags) will likely 

cost in the neighborhood of $500,000 (not including internal employee costs 

devoted to this project). A pilot test at a factory can be twice as expensive, 

considering the high cost of sortation systems. 

100% 

80% 

60% 

40% 

20% 

0% 

5% 

70% 

15% 

10% 

Training 

Consulting 

Software 

Hardware 

Avg. Pilot Costs 

$500K for 

DC Pilot 

$1M for 

Factory Pilot 

Consulting Services Is Biggest Contributor to Cost 



Consulting 

There are several different categories of consultants that will be competing 

for business: 

• Supply Chain Execution (SCE) companies such as Manhattan Associates, 

RedPrairie, Provia, HighJump, ClearOrbit, and Acsis. 

• Global consulting firms like IBM, CGEY, Deloitte, and Accenture. 

• New best of breed RFID suppliers, both hardware and software, like 

Alien Technologies, AWID, GlobeRanger, and Matrics 

• Material handling suppliers like Siemens Dematic, SwissLog, HK Systems, 

and SK Daifuku. 

• ERP suppliers are beginning to devote attention to RFID as well. While 

their solutions have yet to take on any real, implemental form, suppliers 

such as SAP, Oracle, Peoplesoft, and SSA will be players within a two 

year timeframe. 

Companies should assign a single consultant to serve as the lead implementer 

so that if something goes wrong they know who to hold accountable. 

The best-of-breed RFID hardware suppliers have the best EPC RFID expertise, 

but these suppliers lack broad deployment teams and project 

management expertise. ARC believes SCE suppliers have a strong value 

proposition for DC pilots, while global consultants and high-end material 

handling firms are best suited for factory pilots. 

Different types of consulting expertise are required. Some of these must be 

done in sequence, others can be done concurrently. 

• Product Readiness – What types of RFID tags will different SKUs need? 

Where on the case or pallet should the tag be placed? 

• Site Readiness – Does your warehouse use an RF system that operates 

in the 900 Mhz range and interferes with the current EPC RFID tags? 

Where should gateways be placed so that interference does not occur 

• Application Expertise - RFID needs to be integrated with Warehouse 

Management, Production Management, ERP, and EDI solutions. How 

well do the consultants understand these applications? 



• Business Process Expertise – The ability to map “as is” and “to be” 

processes is important. Understanding how processes like CPFR or 

S&OP may need to be modified is also critical. 

• Material Handling Expertise – The ability to provide high speed 

placement of tags on fast moving conveyor belts. 

• Project Management – The ability to do systems analysis, scope definition, 

and phasing. 

• Industrial Engineering - Time and motion studies should be done before 

and after the pilots to develop a strong understanding of how RFID 

affects ongoing operational costs. The best of these consultants combine 

this work with a bottleneck analysis. Speeding activities through 

non-bottlenecked operations does not always save money. 

Hardware 

• $30,000 for readers, printers, and server. One standalone gateway with 

three readers ( $5,000); one hand-held reader with accessories ($4,000); 

one Class 1 RFID label printer/encoder and workstation ($10,000); 

maintenance contracts (about $1,000). If a company has multiple SKUs 

that require special tags (such as liquid and metal products), an additional 

encoder will be necessary. One server, about $10,000. 

• Tags currently cost between 15 cents in an order quantities of a million 

to about 50 cents in quantities of a thousand. For certain SKUs, 

nonstandard tags will need to be used and these will be more expensive. 

Middleware 

• $15,000 to $150,000 for middleware. Price depends on whether the 

middleware is Savant middleware used to filter and connect hardware 

to application software, Trading Partner Management middleware that 

forwards EPC codes in an ASN format to trading partners, or both. 



Training 

• $15,000 to $25,000 for training and education. Following these kinds of 

projects, most project managers will tell you they wish they had spent 

more on training. 

Summary 

There is certainly a lot of hype surrounding RFID, but now that Wal-Mart 

and the DoD have issued mandates, companies can no longer ignore this 

trend. Although retailers will enjoy most of the near-term benefits, manufacturers 

have to find a way to not only comply with these mandates, but 

also derive benefits as well. 

Although retailers will enjoy most 

of the near-term benefits, Learning about the technology and conducting pilot tests 

manufacturers have to find a way 

should be the primary focus at this stage of the game. 

to not only comply with these 

The information gathered from these tests can be used to 

mandates, but also derive 

develop ROI models and answer important questions 

benefits as well. 

such as where and when to do the tagging. 

At low volumes, tagging at the DC is probably the best option. But when 

volumes reach a certain critical level, automating the tagging process and 

incorporating it as part of the packaging operation may be justified. Part of 

the challenge is determining the critical volume threshold for this scenario, 

thus the importance of having a firm understanding of costs and process 

implications, and the importance of conducting pilots both at the factory 

and the DC. 

The other challenge, particularly for Wal-Mart’s top 100 suppliers, is balancing 

the need to move quickly in order to meet the January 2005 

deadline, and the inclination to wait as long as possible in order to leverage 

developing expertise and allow some of the uncertainties to fade away. 

It will take some time for case studies and best practices to emerge. The 

more information that companies can share with regards to successes and 

pitfalls, the faster this technology will be adopted and bring benefits to all. 

ARC will continue to research this topic and serve as a medium for industry 

collaboration and knowledge transfer. 



Analyst: Steve Banker, Adrian Gonzalez 

Editor: John Moore 

Distribution: All EAS & LEC Clients 

Acronym Reference: For a complete list of industry acronyms, refer to our 

web page at www.arcweb.com/Community/terms/terms.htm 

3PL Third Party Logistics 

API Application Program Interface 

ASN Advanced Shipping Notice 

B2B Business-to-Business 

BPM Business Process Management 

CAGR Compound Annual Growth Rate 

CAS Collaborative Automation System 

CMM Collaborative Manufacturing 

Management 

CNC Computer Numeric Control 

CPG Consumer Packaged Goods 

CPAS Collaborative Process Automation 

System 

CPFR Collaborative Planning, Forecasting 

and Replenishment 

DC Distribution Center 

EDI Electronic Data Interchange 

EPC Electronic Product Code 

ERP Enterprise Resource Planning 

GPS Global Positioning Satellite 

IT Information Technology 

LAN Local Area Network 

MIS Management Information System 

MRP Materials Resource Planning 

OpX Operational Excellence 

OLE Object Linking & Embedding 

OPC OLE for Process Control 

PAS Process Automation System 

RF Radio Frequency 

RFID Radio Frequency Identification 

ROI Return on Investment 

S&OP Sales & Operational Planning 

SCE Supply Chain Execution 

SKU Stock Keeping Unit 

VMI Vendor Managed Inventory 

WMS Warehouse Management System 

Founded in 1986, ARC Advisory Group has grown to become the Thought 

Leader in Manufacturing and Supply Chain solutions. For even your most complex 

business issues, our analysts have the expert industry knowledge and 

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total cost of ownership, project time-to-benefit, and shareholder value. 

ARC Strategies is published monthly by ARC. All information in this report is 

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Responding to Wal-Mart's RFID Mandate - ARC Advisory Group

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