This story was changed on Jan. 5 to indicate that Ace Hardware hopes to pilot RFID at one of its 15 distribution centers by year's end.

E.&J. Gallo Winery next week starts hammering out its plans for using radio-frequency identification technology in its supply chain, including setting up a pilot project at its Modesto, Calif., warehouse. But Gallo's pilot is vastly complicated by the fact that it needs to bring some 480 U.S. distributors into the project, since most states require that wine and liquor be sold through distributors. And those distributors often put wines from multiple companies on the pallets they ship to retailers. "This opens a discussion on who really owns the responsibility of the identification for the case and the mixed pallets," says Ernie Chachere, Gallo's VP of supply chain. "There's a lot of discovery left to do."

Gallo is one of about 200 consumer-product makers--the so-called second wave--that are required to ship RFID-tagged cases and pallets to Wal-Mart Stores Inc.'s distribution centers by January 2006. Until now, the retail and consumer-goods industries have been fixated on January 2005 as Wal-Mart's deadline for its largest suppliers--the likes of Procter & Gamble Co. and Unilever plc--to start shipping cases and pallets of goods to several Wal-Mart distribution centers in Texas. Wal-Mart says all 137 in the first wave will meet that mark. And a few others have pushed the industry forward on RFID, notably German retailer Metro Group AG, which has at least 20 suppliers shipping with RFID tags to 20 locations.

Yet the complicated issues ahead for Gallo show why the next wave of companies to work with RFID won't face a simple matter of riding the early adopters' technology coattails. In fact, it's only in the coming year that companies will have the technology, tools, and experience to start making marked progress toward the business innovation RFID promises.

Wal-Mart's and Metro's initiatives got under way just as EPCglobal Inc., the industry group developing RFID standards, was finalizing its first global specifications. The group didn't decide on the long-awaited second-generation RFID standard, or Gen 2, until late in 2004, and the first products based on the standard aren't expected in the market until early this year. The more-advanced specification offers enhanced read/write capabilities, faster transmission speeds, and one standard that can be used across supply chains around the world. EPCglobal expects to offer certification for UHF Gen 2 equipment and software this year, says Michael Meranda, president of EPCglobal U.S. Yet widespread adoption of Gen 2 standards and products will take most of the coming year, and probably more. Even a logo to indicate equipment is compliant remains in the planning stages.

Still, an increase in RFID projects, and a more stable set of standards, is paving the way for industry heavyweights such as Cisco Systems to jump in, which in theory could make it more affordable for companies to piggyback RFID product-tracking projects atop existing network infrastructure. Cisco says RFID fits neatly into its long-term strategy of building more intelligence into the network, and most of its product plans are part of a multiyear development strategy to build RFID into its routers, switches, and software. It's participating in a handful of pilots and by the end of March expects to reveal its first set of RFID offerings, including a security provision to authenticate RFID traffic on an IP network. "Companies will deploy tens of thousands of IP readers inside their network, and these devices must be manageable, addressable, and secure," says Mohsen Moazami, VP of Cisco's Internet business-solutions group for retail, consumer packaged goods, and transportation--and an EPCglobal board member.

There's also progress in supply chains' mechanical infrastructure to address basic RFID problems. Companies today typically stick tags to cases and pallets by hand. Food maker Nestlé SA, which is participating in Metro's pallet RFID initiative, tapped UPM Rafsec to create a tag used with an applicator produced by SATO Deutschland GmbH, a label-printer manufacturer. The companies claim the system is the first automatic labeling device used with UHF RFID tags, and it's scheduled to begin operation at a Nestlé distribution center this month.

Many retailers are getting more comfortable with RFID and are moving into pilot-project mode in the coming year as standards and technology get worked out. Ace Hardware Corp. will begin testing RFID and by year's end hopes to pilot the technology at one of its 15 distribution centers, says Mike Altendorf, VP of IT for the hardware chain. "We're toying with the idea because one of our vendors has a proof-of-concept kit that includes some software, tags, and readers to get a feel for how it works," he says. Yet, like Gallo, Ace faces complicated business-partner issues along its supply chain, since Ace would need to collaborate on the project with the independent owners of its stores.

Companies also must juggle RFID projects alongside other major IT priorities. Binney & Smith Inc., whose products include Crayola Crayons and Silly Putty, will start an RFID project with 10 products this year at the same time it installs its first enterprise-resource-planning platform, says Richard Siegfried, manager of global UCCnet for data synchronization and RFID.

The cost of tags and related RFID equipment and software will come down, but pricing will continue to plague businesses. Tag prices hover between 20 and 80 cents, depending on the tags' capabilities, says Timo Lindström, president at UPM Rafsec. Large consumer-goods companies such as Gillette, Kraft Foods, and Procter & Gamble collectively spent about $250 million on RFID tags and equipment in 2004, AMR Research estimates.

Cost is the biggest reason most companies will spend 2005 tagging goods just before they're shipped to meet a retailer's mandate, rather than using RFID to track goods throughout their supply chains. "During 2005 and 2006, retail suppliers will continue to struggle with meeting retailer mandates, and the slap-and-ship model will remain the preferred method to comply," says Gene Alvarez, VP of technology research at Meta Group.

But the retail leaders driving the movement show no signs of letting up. Wal-Mart will expand its project to six distribution centers and up to 250 Wal-Mart and Sam's Club stores by June, and 12 distribution centers and 600 stores by October. Metro expects to have 100 suppliers shipping to 250 locations and about 10 distribution centers by November. Gerd Wolfram, managing director for the retailer's IT division, expects by midyear Gen 2 products that will make it practical to go from one tag on each pallet to tagging each case. Metro also expects to start receiving RFID-tagged pallets from manufacturers in China this year, once China opens a radio frequency to transmit the RFID UHF signal. Other RFID proponents, including Target Corp. and U.K. grocer Tesco plc, will propel the agenda. Target's first RFID deadline is in June.