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Wal-Mart Takes Inventory on its RFID Experiment
By Ellen Pearlman
Strategic Thinkers:
Bill Hardgrave, Simon Langford, Matthew Waller, Robert Miller
Credentials:
Hardgrave holds the Edwin and Karlee Bradberry Chair in Information Systems at the Sam M. Walton College of Business, University of Arkansas, he is also Director of the RFID Research Center and Editor-in-Chief of the International Journal of RF Technologies: Research and Applications; Langford is Director, RFID and EPC Strategies at Wal-Mart Stores; Waller is Professor of Marketing and Logistics and Garrison Endowed Chair in Supply Chain Management at the Sam M. Walton College of Business, University of Arkansas; Miller is an assistant professor in the Dauch College of Business and Economics at Ashland University.
Big Idea:
RFID makes a significant difference in reducing out-of-stock items on store shelves; significantly reducing lost sales for retailers and suppliers.
Article:
"Measuring the Impact of RFID on Out of Stocks at Wal-Mart" by Bill Hardgrave, Simon Langford, Matthew Waller, and Robert Miller published by MIS Quarterly Executive, December 2008
Four years ago, Wal-Mart mandated that its top 100 suppliers start using radio frequency identification (RFID) tags on pallets and cases they shipped to its Dallas-area stores. What started out as an experiment has blossomed into a much larger initiative: In 2005 Wal-Mart had 104 RFID-enabled stores, by October 2008 it had deployed RFID applications in more than 1,300 stores and the number is still growing. Wal-Mart's belief in this technology is based on proven results. In fact, the company commissioned a study as they rolled out this technology in order to prove the business case. They were interested in finding out if the technology would impact the number of out-of-stock products that were not on their shelves. The results of that study are now available in an article in MIS Quarterly Executive, entitled "Measuring the Impact of RFID on Out of Stocks at Wal-Mart" by Bill Hardgrave, Simon Langford, Matthew Waller, and Robert Miller.
The average out-of-stock rate in the U.S. is 8 percent. In other words, as the authors point out, "one in every 12 items on a consumer's shopping list is not on the shelf." This can translate into lost sales of about 3.4 percent for retailers and 2.6 percent for suppliers. For a $1 billion retailer that means a loss of $34 million a year in sales, and for a $1billion supplier a loss of $26 million. Put another way, if a retailer eliminates all out of stocks, it could potentially increase sales by 3.4 percent, according to the authors.
What causes out-of-stock shelves? According to an article by Daniel Corsten and Thomas Gruen in the International Journal of Retail & Distribution Management the top 5 causes are:
1. Store ordering (33%)
2. Shelf replenishment (22%)
3. Store forecasting (18%)
4. Retail HQ or manufacturer (13%)
5. Distribution center (11%)
And what does a customer do when what they want is not available? There are five basic responses, according to Corsten and Gruen:
1. Buy at another store (31%)
2. Buy a different brand substitute (22%)
3. Buy the same brand but a different product (21%)
4. Delay purchase (16%)
5. Do not purchase (11%)
Clearly, it makes sense for both retailers and suppliers to deal with their shelf replenishment problems and reduce the number of out-of-stock products on their shelves. So how did Wal-Mart put RFID to work on this problem? They went from a manual picklist of products stored in the backroom for associates to take to the sales floor to an RFID-enabled automated list. Without RFID, picklists could be created by visually inspecting the shelves for out-of-stock items and using a handheld barcode scanner to add those products to a picklist. In addition, scanning barcodes on product cases stored in the backroom could create a reverse picklist. As the authors of the MIS Quarterly Executive article point out, both these methods are "laborious and rely on the accuracy of the system to suggest availability in the backroom." But since 22 percent of out of stocks are attributed to in-store replenishment problems, clearly this manual process has not worked well enough.
By using RFID, Wal-Mart got a more accurate view of their inventory on the shelf and in the backroom. When products were sold, picklists were created based on point-of-sale data about items on the shelf and RFID-generated information about products in the backroom. The authors said, "In essence, the picklist process is changed from reactive (looking at the shelf or backroom to determine what needs to go to the shelf) to proactive (creating the list in real time based on sales).
And what did the RFID test show? Wal-Mart's test of this new process took place from February to September 2005 in 12 RFID enabled and 12 control stores. The tests reflected three scenarios: no RFID, partial RFID (picklist limited to 10 items per day, per department, per store), full RFID. Out of stocks were reduced by 16 percent from no RFID to partial RFID, by 12 percent from partial to full RFID, and by 26 percent from no RFID to full RFID. However, since control stores also showed a 5 percent reduction in out of stocks during this period, the authors concluded, "the improvement due to RFID in the test stores is approximately 21 percent." In addition to this substantial improvement, there was another benefit: workers freed from creating picklists could spend more time bringing products to shelves or helping customers.
What's next for Wal-Mart? In 2009 its Sam's Club division will begin tagging individual items. I'm sure they will be studying the value of this latest RFID initiative.
Reprinted from MIS Quarterly Executive. Excerpted from "Measuring the Impact of RFID on Out of Stocks at Wal-Mart", Copyright © 2008 by the Management Information Systems Research Center (MISRC) of the University of Minnesota; All Rights Reserved.
Also of interest:
Articles/Events:
RFID Journal, a media company covering all the news about RFID. The company also organizes several RFID events a year. Check their website to find out what's planned for 2009.
Book:
RFID Sourcebook by Sandip Lahiri, published by IBM Press, September 2005. Billed as a no-hype guide to RFID evaluation, planning and deployment.
Article:
"Wal-Mart Sends Wrong Message on RFID", CIOZone.com. Some Wal-Mart suppliers drag their heels on RFID.
Article:
"Airbus Moves Forward With Major RFID Initiative", by Mel Duvall, CIOZone.com. Airbus picks RFID for its supply-chain operation.
CIOZ Question: Have you deployed RFID at your organization? Has it met your expectations?
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