Microsoft said Monday it has launched a pilot project to incorporate product-tracking radio frequency technology within the supply chain of Danish snack maker KiMs.

The radio-frequency identification technology has been incorporated in Microsoft's Axapta warehouse-management system for small and midsize businesses. KiMs employs 270 people and ships about 100,000 pallets of snacks per year.

Microsoft launched the pilot in December, following three months of design, development, and deployment. The RFID technology is being used to monitor pallets of finished goods as they move out of production and into a third-party warehouse for distribution.

Pallet-attached RFID tags, which combine silicon chips and radio-frequency technology to track inventory, are scanned during storage, loading, and shipment. Identification and location information is fed into Axapta as the tags pass across scanners, called readers.

Phillips Semiconductors supplied the RFID chips, Avery Dennison the tags, and SAMSys Technologies the readers and consulting services.

Because Microsoft's business-application customers are small and midsize businesses, it has taken an inexpensive approach to RFID, focusing on replacing the traditional bar codes used by consumer product makers today, Gartner analyst Jeff Woods said.

Wal-Mart Stores Inc., the U.S. Defense Department, and German retailer Metro Group are among the large organizations that have launched expensive RFID projects that will require gradual overhauls of their business processes, which will also filter down to their largest suppliers. Microsoft's customers, on the other hand, can take advantage of RFID on a smaller scale, avoiding the cost of business process redesign, for now.

"They're taking essentially the same business processes that people use for bar codes and their adding some RFID capabilities," Woods said. "It's simple, it's easy to do, and it's ultimately not going to impact the profitability all that much. But it will enable you to comply with your customers' requirements."

Eventually, the work that larger organizations are doing will trickle down to the smaller companies. "It doesn't make sense for them (small and midsize businesses) to redesign their businesses around RFID yet," Woods said. "It will make sense once there are templates for success-- once the large companies have figured out how to use RFID and develop new processes. "

Because RFID is capable of providing so much more product information than bar codes, the technology has the potential to cut expenses dramatically by closely aligning supply with demand and reducing the amount of inventory required on hand. However, the technology will eventually require dramatic changes in warehouse, logistics, and in-store operations among retailers and suppliers.

Microsoft plans to expand its pilot work with customers through the rest of the year and release RFID-enabled versions of Microsoft Axapta and Navision business applications in fiscal 2005. In the following fiscal year, Microsoft plans to release an RFID-enabled version of its Retail Management System.