Making Wal-Mart Compliance Pay Off for Pharma

Compliance with the Wal-Mart mandate is important, but applying RFID tags solely for that reason benefits only Wal-Mart. If you look at RFID as a way to increase efficiency, then there is ROI.

In June 2003, Wal-Mart announced that by January 2005, it will require its top 100 suppliers to use radio frequency identification (RFID) tags bearing electronic product codes (EPCs) on pallets and cases in all shipments. This mandate applies to pharmaceutical companies that also produce consumer products like baby formula and over-the-counter pain relievers. At the same time, the retailer has asked about two dozen pharmas to implement RFID tags on bulk containers of Class 2 prescription drugs starting this month.

According to a report in the RFID Journal, the Class 2 requirement could represent a win for both Wal-Mart and the drug makers. Wal-Mart's pharmacists will no longer have to scan individual bottles by hand to comply with FDA requirements because RFID tags allow the entire shipment to be tracked at once. Pharmas can use the system to reduce the counterfeiting and diversion of their products and streamline internal processes.

While the Wal-Mart mandate may seem to pharmas like a curse, careful planning can turn it into a blessing.

Investing in Business Process Efficiency

Although compliance with the Wal-Mart mandate is important, applying RFID tags solely for that reason benefits only Wal-Mart. "If you look at RFID as a way to increase efficiency—for example, reducing costs in order fulfillment and logistics—there is ROI. If you're just looking to comply with the Wal-Mart mandate, RFID is pretty one-dimensional," says Ben Griffin, RFID solutions architect at Sun Microsystems, which is working with a variety of retailers, manufacturers, and pharmas to design and implement RFID solutions.

Of course, as the largest retailer in the world with sales of $217.8 billion in 2002, Wal-Mart is in a position to dictate policy. According to AMR Research, this is not the first time it has influenced technology adoption. In 1973, a standard for bar codes was approved, but by 1984, only 15,000 retail suppliers were using them on their products. Then, in 1984, Wal-Mart began pushing for bar codes, and by 1987, more than 75,000 suppliers were using them.

The upside of RFID for Wal-Mart is apparent. In an interview with CNET's News.com, former AMR analyst Pete Abell, now senior partner and co-founder of the RFID advisory practice ePC Group, estimated that Wal-Mart's costs associated with the supply chain—including storing, transporting, and keeping track of goods—are about 10 percent of overall sales. RFID, Abell said, could shave off 6 to 7 percent of those costs annually. Based on 2002 sales figures, that's a potential savings of $1.3 to $1.5 billion for the retail giant.

Clearly, Wal-Mart benefits. But pharmas that supply drugs and other products to Wal-Mart stores can make the mandate work to their advantage, too, if they plan implementations carefully. "When the Wal-Mart mandate was announced, most manufacturers were optimistic at first about what they would be able to accomplish with RFID," says Jeff Woods, a principal analyst at Gartner. "They really overestimated the short-term benefits of this technology, but that doesn't negate the long-term benefits. Manufacturers are starting to realize that they can probably change their business with RFID, but it's going to take some time to do it."

To aid firms installing and testing RFID tags, Sun opened an RFID Test Center in Dallas, Texas, in January, and has plans to open another in Scotland soon.

At the centers, Sun can help firms design RFID solutions, drawing upon what it has learned from pilot programs conducted at companies such as the Gillette Company and Dai Nippon Printing. Sun offers a suite of turnkey solutions tailored to customers' specific needs. Combined with Sun's expertise, these solutions can be invaluable to firms that want to build an ROI case for RFID.

Short-Term Fix, Long-Term Challenge

Ignoring the potential long-term benefits of investing in RFID, some firms are taking a "slap-and-ship" approach to meeting the Wal-Mart mandate. By slapping on RFID tags as late in the supply chain as possible—usually right before shipping—firms can satisfy the mandate without changing their established processes.

While this approach certainly meets Wal-Mart's requirements, it has a downside according to Liz From, life sciences strategist for Sun. "The limitation of this approach is that it's only a cost—there will never be any ROI," she says. "To get internal benefits from RFID requires a bigger bet than meeting the Wal-Mart requirement, but it's not a huge bet. You don't have to spend $20 million to get internal benefits. But with slap-and-ship, it's just added cost and will never be anything more."

The key to building a business case for RFID is integrating it into existing processes, first for a few products and then more broadly. That requires not only successfully applying tags, but also managing the data that results from scanning those tags. Sun has developed an RFID solution for the EPC Network for this purpose.

When Boston-based Gillette Company wanted to improve profitability and reduce shrinkage and out-of-stock items, it engaged Sun to develop an RFID solution to enable tracking of shipments down to the individual item. Based on the Sun Java System platform and Java technology-based Web services—including connectors to SAP, J.D. Edwards, and Provia applications—running on Sun Fire servers and the Solaris Operating System, the solution stands to afford Gillette an estimated 15 percent increase in revenue once it's fully deployed.