A pioneer in low-cost practices widely copied by competitors, Wal-Mart has pushed its

suppliers to use exotic radio-activated tags to chop labor and inventory costs anew. But tests

using the tags aren't showing any savings, and suppliers forced to invest in the relatively

expensive technology are grumbling.

Wal-Mart once hoped to have up to 12 of its roughly 120 distribution centers using the Radio

Frequency Identification, or RFID, technology by January 2006. But so far it has installed the

technology at just five, plus 1,000 stores. Wal-Mart expects to add a further 400 stores this

year.

The world's largest retailer needs another breakthrough in its logistics operations, the main

driver of its pricing advantage. While its costs are still the industry's lowest, rivals such as

Target Corp. and CVS Corp. are catching up. Wal-Mart's operating costs have risen sharply in

recent years, blunting its edge. Expenses rose to an estimated 18.4% of sales in 2006, nearly

two percentage points higher than in 2001. In contrast, expenses at Target and CVS rose less

than one percentage point each from 2001 to 2005, to 21.8% and 19.7%, respectively.

Wal-Mart declined to make an executive available to comment on its RFID efforts. In response

to questions about whether it was saving money with the technology, spokesman Kevin

Gardner replied that the tags had improved product availability on store shelves and store

managers worked more efficiently in replenishing inventories. "We look for our RFID expansion

to build on these results," Mr. Gardner wrote in an email.

Manufacturers and retailers have long wanted an efficient way to track individual items from

production to sale, and RFID seemed ideal for the task. RFID was to replace the 25-year-old

bar-code technology printed on labels for everything from tubes of toothpaste to diamond

rings. The bar codes help track inventory and can match a product to a price, but they lack the

electronic tags' ability to store more detailed information -- such as the serial number of a

product, the location of the factory that made it, and when it was made and when it was sold.

While the tagging of individual products is still years away, Wal-Mart began setting deadlines in

2003 for its suppliers to start using RFID tags on larger shipments. Since then, it has required

its largest 600 suppliers to affix the smart tags to cases and pallets sent to Texas and

Oklahoma, which have been the company's key test bed. An additional 700 suppliers soon will

be added to the mandate.

When the technology works as envisioned, product data are transmitted from the computer

chip inside the tag to electronic readers through radio waves. Products can be scanned

remotely and in bulk quantities, while bar codes are more labor intensive because they must

be scanned manually, one at a time. The tags are made by Intermec Technologies Corp. and

Motorola Corp.'s Symbol Technologies, among others, using chips from suppliers such as

Texas Instruments Inc., Impinj Inc., and STMicroelectronics NV.

Wal-Mart is pushing the RFID technology on the idea it will increase efficiency and eventually

save everyone money -- manufacturers as well as Wal-Mart. Yet as Wal-Mart searches for an

answer to its rising costs, suppliers are saying RFID isn't it.

The current generation of RFID tags cost about 15 cents apiece while bar codes cost a fraction

of a cent. Beyond the tags, suppliers have had to bear the cost of buying hardware -- readers,

transponders, antennas -- and computer software to track and analyze the data. The suppliers

have had to pay for additional programming to integrate that software with their current

inventory and manufacturing applications. On top of that, suppliers say that instead of saving

labor, RFID tagging actually takes more: While bar codes are printed on cases at the factory,

because most manufacturers have yet to adopt RFID, those tags have to be put on by hand at

the warehouse.

Suppliers are being careful not to publicly criticize a company that buys $260 billion worth of

products annually, but they say they don't expect any return on their RFID investments for

years, if at all. Some say Wal-Mart hasn't achieved any savings, itself. Other retailers, including

Target, Best Buy Co., and Albertson's, and the U.S. Department of Defense are also pursuing

RFID projects and facing similar hurdles to finding cost savings.

The lack of any discernible return on investment has manufacturers pulling back. Last summer,

VF Corp., the maker of Wrangler jeans and Nautica sportswear, curbed internal development

efforts, concluding a payback wasn't on the horizon. "We'll let others drive the technology,"

says Martin Schneider, VF's recently named global chief information officer.

Another early supporter, Navin Chandaria, chief executive of LePage's 2000 Inc., began tagging

a line of fireplace products in 2004 and committed $2 million to outfit factories that served

Wal-Mart. The project languished when Wal-Mart never expanded the program significantly

beyond its original test facilities, says Mr. Chandaria. "We expected them to say, 'Guys we're

moving forward.' But everything just fell between the cracks." Last year, he sold the product

line to another company.

A Wal-Mart supplier, who doesn't want his company identified, laments the lack of any clear

savings despite investments of $200,000 and up a year. "It's a big black box with nothing out

there for a return [on investment]. A lot of people, if given a true choice, would not be in it,"

he says of the mandate.

Raymond Blanchard, co-founder of TrueDemand Software Inc., a Los Gatos, Calif., company

(www.tdemand.com) whose products analyze RFID data to help retailers improve delivery

efficiency, says suppliers have told him they would have preferred to move more slowly in

adopting the technology, using it only occasionally to identify opportunities for savings. "It

doesn't make sense to tag everything," he says.

John Fontanella, a vice president at AMR Research Inc., a Boston firm that studies supply

chains, counsels most businesses to wait for the development of off-the-shelf software that will

make RFID easier and more profitable to use. "The [RFID] payoff is reducing human labor and

replacing it with technology. For most companies, there are no software applications that can

even approach the problem like that," he says.

To some Wal-Mart suppliers, achieving a return on their investment comes second to keeping

the retailer happy. Executives at Beaver Street Fisheries Inc., Blyth Inc.'s Blyth Wholesale

Group and Thomasville Furniture Industries Inc., say they don't expect to recoup their RFID

investments for several years. But each hopes the effort puts it in good stead with an important

customer. "Do you want to risk the business by not being in the game?" asks Howard

Stockdale, Beaver Street Fisheries' chief information officer.

Wal-Mart's slower-than-planned rollout has some RFID advocates revising their view of the

technology's prospects.

More problems have come into play in recent years, including the high cost of retrofitting

warehouses and stores with electronic readers, and consumer concerns that once the tags are

on each item on a store's shelves -- from tubes of toothpaste to personal computers -- that

they could be used to track individual buyers. Wal-Mart says it has already endorsed industry-

backed guidelines for notifying consumers the tags are in use.

David Donnan, a manufacturing consultant and former president of radio-frequency-device

maker Checkpoint Systems Inc., says the technology faces a Catch-22. To get the cost-per-tag

down to an affordable level, every retail product would have to be tagged. But there is

currently no financial justification for a manufacturer to tag every product, he says.

As a result, the enthusiastic announcements two years ago of new RFID pilot programs have

become a wall of disappointed silence. Retailers are expected to move more cautiously in

expanding their use of the technology. "They're not going to say, 'Stop' " to suppliers, says Mr.

Donnan, "they'll say, 'Go slower.' "