Since its first RFID pilot three years ago, Wal-Mart has learned a valuable lesson: RFID's ability to improve the supply chain is limited by business partners' willingness to participate. The giant retailer is now focusing its radio frequency identification technology efforts primarily on in-store applications, while moving much more slowly with its distribution centers.

"We initially thought we'd install [RFID] into distribution centers as we installed it in stores," acknowledged Simon Langford, Wal-Mart's manager of global RFID strategy. "Quickly we learned, along with our suppliers, that a lot of the initial benefits was at the store level."

That's because just 3% of the companies that supply Wal-Mart with consumer goods, foods, and other items slap RFID tags containing identifying information on their pallets and cases. Wal-Mart's initial hope for RFID to speed and improve the distribution process does little good unless there is a "critical mass" of suppliers using it, Langford said. If an employee unloading a trailer finds pallets of goods alternatively identified by RFID and bar codes, that's going to slow the process down. Meanwhile, using RFID for reducing out-of-stock situations in stores benefits both Wal-Mart and its participating suppliers, he noted.

The slowdown of RFID in distribution centers is a sign that Wal-Mart is having to scale back on its ambitious plans to use the technology to reinvent the retail supply chain. When Wal-Mart's top executives discussed RFID plans a few years back, it was always with the tone that most suppliers, if not all, were expected to eventually get on board. The idea was to create a first-of-its-kind, RFID-enabled supply chain and serve as a model for next-generation data collaboration.

Although Wal-Mart is still bullish on RFID and plans to add it to hundreds more stores this year, it now talks about the technology as more of a baby-steps approach. "We try to be targeted and focused for what our plans are in using this technology," said Carolyn Walton, Wal-Mart's VP of IT.

Two years ago, Wal-Mart had RFID in three distribution centers and planned to increase that number to 12 by the end of 2005. In that time it's only added two distribution centers, while it's increased its use of RFID from 100 to 1,000 stores. Out of more than 20,000 suppliers, only about 600 are using the technology.

According to a report released last week by RFID research firm IDTechX, while RFID is doing well in several industries, that doesn't include retail and the military, where "a severely uneconomic price level has been established by suppliers the tags, readers, and chips, and they still do not work reliably on obscured cases in a pallet load, where wet, metallic, and glass items are involved" -- most of what is sold in a supermarket, said the report.

One area of return on investment for both Wal-Mart and its suppliers is reducing out of stocks. Most Wal-Mart stores with RFID have readers located at the entrances to warehouses from loading docks, at entrances from warehouses to the sales floors, and at trash compactors where boxes are destroyed. A store's computer system generates lists for employees on what needs to be restocked based on information it collects from the readers, and suppliers can link into Wal-Mart's inventory system via the Web to check supply levels. Wal-Mart also is starting to roll out handheld RFID readers in stores, which speeds up the process of finding items in the warehouse. Wal-Mart has no plans to use RFID at the shelf level. However, the pharmaceutical industry appears to be moving forward with RFID to meet a Food and Drug Administration mandate to reduce drug counterfeiting through better item identification, which could result in its use in Wal-Mart pharmacies.

The next big focus for Wal-Mart is "collaborative process changes," or working with suppliers to adjust to any changes in typical operations, such as pushing a product as part of a promotion. If a television commercial advertising a promotion is set to air April 1, Wal-Mart needs to ensure that it's got those promotional products out on the sales floor. "If promotions aren't out on the sales floor, it will impact sales not only for ourselves but for our supplier," said Langford. "By using RFID to automatically alert associates, we're better able to make sure its out in the store."

RFID applications that work well for some suppliers may not make sense for others, said Wal-Mart's Walton. She talked about visiting a Wal-Mart store while on vacation in a beach resort town. One employee's only job was to restock bottled water that thirsty tourists constantly removed from the shelves. "All day long, he goes back and forth," she said. "He doesn't need a special list generated by computer that says it's time to get more water. You don't need to check out of stock because velocity is so rapid. What would be the point of our tagging that product to ensure it's on the shelf? So we don't. There's no mutual benefit for that product at this time."