The two most important letters shaping the future of warehouse management are WM.

They stand for Wal-Mart. The retailer will have a major impact on warehouse and distribution operations of its suppliers over the next year, especially on their warehouse management systems (WMS).

That's because Wal-Mart has launched an ambitious initiative to require its top 100 suppliers to provide case- and pallet-level tracking using radio frequency identification (RFID) tags by early 2005. Just last month, the retail giant met for the first time with its top suppliers to work out the details of just what Wal-Mart expects (see Wal-Mart outlines its RFID plans).

Clearly, the RFID era is upon us because Wal-Mart, which expects all of its other suppliers to be RFID proficient by 2006, is not alone. The U.S. Department of Defense has also announced that it is going to require RFID compliance from its suppliers by early 2005. That puts the total number of suppliers affected well north of 10,000.

While there are still many unanswered questions, one thing is clear: implementing RFID systems won't be cheap.

The software and hardware required to manage the information needed just to print 'smart labels' that combine bar code labels with embedded RFID tags at the shipping dock will cost $250,000 to $500,000 per warehouse, estimates Steve Banker, service director for supply chain management at ARC Advisory Group (781-471-1000, www.arcweb.com).

'That's going to be the cost of doing business,' Banker says.

Incorporating RFID technology into a company's receiving, picking and shipping operations could raise the price tag as high as $25 million per company, according to AMR Research (617-542-6600, www.amrresearch.com).

Performing the system upgrades necessary to extend that solution across a network of trading partners for real-time supply chain visibility could cost more than $100 million per company, according to an estimate by McKinsey & Company (212-446-7000, www.mckinsey.com).

To comply with these new requirements, manufacturers will have to develop new value-added processes to segregate Wal-Mart and DoD orders and write RFID tags, along with new WMS and supply chain execution technologies to enable those processes.

That's why one of the most important questions being asked by suppliers is whether their current WMS system is RFID-ready.

The short answer is: no. That's because today's WMS systems were designed to work with bar codes and not RFID data collection systems.

There are important differences between the two. For one, in addition to a UCC code associated with a bar code label, there is now an electronic product code (EPC) that uniquely identifies a product for the RFID system.

That means the WMS has to manage one more set of numbers. 'The UCC 128 number on a bar code typically includes a shipping and part number,' says Greg Gilbert, a product manager with Manhattan Associates (770-955-7070, www.manhattanassociates.com). 'Now you're also going to have an electronic product code (EPC) on the RFID tag that is another unique identifier.'

That means the WMS will need to be able to track and cross-reference multiple unique identification numbers for the same product: a UCC 128 number for when the bar code is scanned, and an EPC number for when the RFID tag is read.

A company that wants to use RFID in its own receiving and picking operations will also need a WMS with databases that can track items at the individual case level. 'Many WMS today are designed to track inventory by the number of units in a putaway location,' Gilbert explains. 'When you put one or more pallets in a location, the system knows how many cases are in that location, but it doesn't identify the cases individually. If you need to track at the individual case level, you're looking at a major software re-write.'

Integrating RFID into internal order fulfillment operations also requires another leap in performance for the WMS. 'Existing WMS are designed to scan license plate bar codes sequentially, meaning that you scan one bar code at a time,' explains John Pulling, COO, Provia Software (616-285-3311, www.provia.com). 'With RFID tags, the system needs to receive and read all the tags on a pallet in one big burst.'

A system accustomed to getting one scan at a time may now have to accommodate reads from 200 cartons on a pallet at one time. The system needs to be able to handle that from a speed and an architecture standpoint.

Fortunately, there are solutions to those WMS problems. In fact, three vendors are ahead of the pack with middleware solutions for WMS users that will create RFID tags and advance shipment notices (ASN) to comply with Wal-Mart's requirements: Manhattan Associates, Provia and RedPrairie.

Each has worked closely with the Auto-ID Center at MIT (617-452-2521, www.autoidcenter.org), where standards are being developed, and has a consumer goods customer participating in an RFID pilot program.

'These are simple solutions that can bolt on to an existing system so you don't have to rip out your present WMS,' says John Pulling. 'Like band-aids, they're a short-term fix that will allow WMS users to become compliant while they create an RFID strategy.'

All three vendors have designed their solutions to work with most other best-of-breed WMS and not just their installed base. 'We see an independent market for selling RFID middleware to other WMS customers so that they can comply with Wal-Mart's requirements,' says Mike Dempsey, group leader, industry strategy for RedPrairie (888-624-8448, www.redprairie.com).

While those solutions are available now, other WMS providers, in-cluding V3 Systems (704-343-0057, www.v3systems.com), HighJump (800-328-3271, www.highjump.com), and Logility (800-762-5207, www.logility.com), will soon have their own solutions.

These initial systems will pull order information related to Wal-Mart or the Department of Defense from a WMS or enterprise resource planning (ERP) system. In the early going, most vendors expect that product for those orders will be sent to a new value-added station at the shipping dock where special printers will create 'smart tags.'

When the case shows up, the operator will key in or scan the contents of the case, and the WMS will send the information to print the bar code/RFID label.

Once the label has been printed, the carton goes back into the normal flow at the dock. The WMS, meanwhile, will cross-reference the UCC 128 and EPC number to create an ASN that will go directly to Wal-Mart.

There will be other hurdles to implementing an RFID system besides upgrading the WMS, especially for those companies that want to use the systems in their own operations.

For one, RFID tags have not been nearly as accurate as bar codes in early tests. 'In some cases, the failure rate is as high as 20%,' says Matt Bilodeau, senior analyst with AMR Research. 'You're going to need quality control processes to verify the RFID tags until the technology catches up with the accuracy of bar codes.'

Some products and pallet loads are especially difficult to read. Tough to read products include liquids and metal products. The systems also can most-easily read the outside cartons on a pallet, but have difficulty reading cartons in the middle of a pallet load. 'If you're unloading cartons in a trailer onto flex conveyor, you're going to get very accurate reads,' says Greg Gilbert of Manhattan. 'But if you have a nested pallet, or product with a high metal or water content that will absorb or reflect some of the RFID energy, it's harder to get an accurate read.'

Software vendors are building configurable parameters into their systems to accept the data it can read, or refer the product to a process center for verification.

But the biggest hurdle of all may be transforming that investment for Wal-Mart or the Department of Defense into something other than the cost of doing business. Afterall, if you don't change the process, compliance with the new requirements is all that's happened.

Right now, at the dawn of the RFID era, that issue seems further off in the future. 'My view is that there is no return for Wal-Mart suppliers until their trading partners put RFID tags on the products coming into them,' says Steve Banker of ARC. 'Eventually, I think we'll get there, but it's several years away.'

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