On April 30, trucks from eight Wal-Mart suppliers pulled up to the retail giant's Sanger, Texas, distribution center and unloaded their first shipments of pallets and cases tagged with radio frequency identification (RFID) devices. Their arrival marked not only an important step in the retail giant's aggressive rollout of this technology but also a major milestone on the road from RFID hype to reality.

RFID provides a means of identifying goods as they move through the distribution channel. It essentially consists of a tag containing a computer chip and an antenna that sends information identifying the marked item via radio waves to a reader. The reader collects the data and sends it to a computer, which analyzes the information and reports it to the appropriate parties.

RFID isn't a new technology; in fact it's been around for years. What is new is that some retailers and the U.S. Department of Defense are pushing for deployment of RFID to better track inventory and minimize out-of-stocks. To move their initiatives forward, they've issued mandates requiring suppliers to begin applying tags on pallets and cases.

Not surprisingly, those mandates have generated a lot of "buzz" and loud debate. On one side, proponents claim that RFID is the best thing to hit the supply chain since the bar code. On the other, critics counter that the technology is being asked to do too much at too high a cost. Caught in the middle are logistics and warehouse managers who are struggling to answer even the most basic questions: Do I really need RFID? Where do I start? When should I start? And how much is this going to cost me?

Evaluating the need for RFID requires a measured approach, says John Hill, principal of ESYNC, a Toledo, Ohio-based consulting and systems-integration firm. Even companies that are under pressure to meet customers' mandates need to take at least a few weeks to create a business case for the technology. "That way it's possible to tell senior management the extent of the investment they're going to have to make and where the opportunity lies down the road to gain from RFID," he says.

To build a business case, managers need to ask themselves three questions, says Robert Scher, CEO of Dynasys Technologies, a Clearwater, Fla. reseller and distributor of automatic identification equipment: "Do we have a problem? Can an RFID solution reliably solve the problem? And is there an easier and/or cheaper solution?" In other words, start by asking what problem needs to be solved, then figure out how to use RFID to solve it.

To identify problem areas, look for choke points in current supply chain processes. Hill suggests taking a close look at such areas as product identification and tracking; storage and cross docking; inventory and location management; order picking, packing, labeling, and consolidation; palletization and containerization; and shipment labeling and tagging.

Once you understand the nature of the problem, look at whether RFID could provide a solution. To make that decision, you'll need to become educated about the technology. It's relatively easy to find information, including white papers, technical and non-technical articles, and online seminars, over the Internet. (For a brief list of resources, see the sidebar on this page.)

RFID generally proves useful for solving certain types of problems, says Scher. He suggests investigating RFID when you face difficult conditions in the warehouse, including the following:

• There's no direct line of sight for a bar-code reader.
• You need to read many tags per second, such as when items are moving along a high-speed conveyor.
• You need to verify the authenticity of a product.
• Bar codes are impractical in your specific environment.
• You need to have an accurate record of a product's history.

Other potential RFID applications in the warehouse include tracking high-value and reusable items, such as returnable totes and containers; shipment verification and receiving; and reducing shrinkage.

Even if your company isn't completely sold on RFID, it might be worthwhile to test it on a limited basis. Tests allow you to gain experience with the technology and with potential suppliers on a small scale.

Ian Robertson, RFID program director at Palo Alto, Calif.-based Hewlett-Packard Company, suggests experimenting by using an RFID "starter kit." These kits, which typically include tags, readers, and integration software, are available from a number of technology suppliers.

When testing the technology, begin in a controlled environment or an RFID lab, recommends Shahram Moradpour of Sun Microsystems in Palo Alto, Calif. "If you have a read problem in an open-ended environment, there are a lot of variables that could be causing the problem," he says. "It could be the temperature, it could be humidity, placement on the conveyor belt. You don't know where to start." In an RFID test lab users could start by testing one factor at a time, then slowly work up to actual warehouse conditions.

When choosing a pilot site, select an area where you already exert control, Scher advises. That way if the pilot fails, you won't end up disrupting your entire operation. One possibility is quality control, where you're verifying work that's already been completed.

At the same time, the ideal pilot site should be a springboard for future RFID-enabled operations. HP managers selected an RFID pilot site after a careful analysis of their objectives. "What we did is figure out what type of work we wanted the technology to do and where there was a high volume of that type of work," says Robertson.

They settled on the company's Memphis, Tenn., facility for several reasons. First, HP has both a manufacturing plant and a distribution center at that site, which would allow testing to reach back into the company's supply chain. The distribution center, moreover, handles a wide range of HP's product offerings. Finally, the DC ships a variety of products on each pallet, which made them suitable for testing for radio wave interference, such as that caused by metals and liquids.

Unfortunately, success with a pilot project doesn't guarantee smooth sailing with the rest of the rollout. "The major challenge will be that pilots are usually done in a controlled environment, but each application environment is different," says Michael Liard of Natick, Mass.-based research firm Venture Development Corp. "[You] might have a whole different set of problems at each warehouse."

Despite the demands of big customers like Wal-Mart and Target, some companies are taking a wait-and-see approach to RFID, hoping to avoid some of the cost and risk of implementing new systems and equipment.

"I anticipate that there are manufacturers who are going to be telling Wal-Mart, 'We're working on it, we're working on it,' all the way up until the mandate day," says Steven Banker, supply chain service director at ARC, a market analysis firm in Dedham, Mass. "Then they're going to call Wal-Mart and say, 'Sorry, the dog ate my compliance plan, and we're not going to be able to meet your demands.'"

Companies that delay RFID compliance should carefully consider both short- and long-term consequences. When ESYNC's Hill performed an analysis for a major supplier to Wal-Mart, for instance, he found that compliance would erode better than 50 percent of the company's gross profit. When he presented his findings to the supplier's executives, he told them, "Unless you are totally dependent on Wal-Mart, I would think seriously about not complying." At first, Hill relates, their response was, "Great! Let's move on to the next subject." But when he told them that if Wal-Mart should be successful other retailers would be sure to follow, they reconsidered, he says.

Thomas Ryan, a vice president with Boston-based analysts and consultants The Aberdeen Group, is convinced that those who drag their feet will lose out. "If you have to be compliant and you think that you can wait until things are better, you're screwed," he warns. "You can't assume that the 250 [top suppliers to Wal-Mart and the Department of Defense] will have solved all the problems, instituted all the specifications, and standardized all products in time for you to learn from their suffering."

Knowing how much RFID will cost plays a crucial role in deciding whether or not to move forward with implementation. As Hill's client discovered, it can be pricy indeed.

There's more to estimating that cost than figuring out how many tags and readers you'll need, advises Banker. You also need to factor in the cost of integrating RFID with other systems and the cost of implementing infrastructure and process changes, he explains. VDC's Liard, in fact, believes that the most expensive part of the deal will be infrastructure costs.

Banker expects that RFID will raise labor costs for most companies because, at least initially, the tags will have to be manually applied. Automated systems are being developed but for now, say experts, the cost of those systems are too high relative to the small volumes of RFID-tagged products.

For some companies, it will be difficult to justify the cost of implementation. "As fantastic as RFID is, it's not good for all situations," says Christopher Heim, president of Eden Prairie, Minn.-based HighJump software. "I think in some cases we're putting the cart ahead of the horse, trying to force a fit, even where bar coding continues to make sense."

The deciding factor for many companies won't be cost alone; rather, it will be what kind of return they will get on their RFID investment. That return most likely will come in the form of increased sales to customers that demand RFID compliance.

Focusing solely on RFID implementations that meet customers' mandates—taking the so-called "slap-and-ship" approach of manually attaching tags to pallets or cases before loading onto a truck—won't produce any meaningful benefits, Hill suggests. "If you simply slap RFID on a shipment, it will be pure cost with the only potential value being retaining Wal-Mart as a customer," he says.

Indeed, Wal-Mart itself is urging its suppliers to utilize RFID as a tool for finding internal efficiencies. "We encourage looking at the entire supply chain, all the way back to the raw material supplier," says Wal-Mart RFID Strategy Manager Simon Langford.

"Even the biggest companies that we deal with—that you might imagine are the most efficient—have found internal benefits from RFID."

Yet discovering those internal efficiencies takes more time and testing than the compliance mandates' deadlines may allow. For that reason, many manufacturers—including HP, one of Wal-Mart's most RFID-enabled suppliers—are taking a two-tiered approach to implementation.

"Some of the sites are focusing on how to fulfill the mandate, while others are more of a mixture of meeting the mandate and generating internal efficiencies," Robertson explains. "But the intention certainly is that all sites will eventually focus on how to achieve internal efficiencies."

In the end, the key to finding that ROI may be to keep a sense of perspective and neither embrace nor reject the technology based solely on the latest hype or headline. "RFID is nothing more than another tool to collect data," says Scher. "It's not something brand-new. It's not going to take over the world. It's not the solution to every problem. It's just another data-collection tool to utilize when necessary."