"RFID is here and it's staring us in the face," says Tom Williams, spokesman for Wal-Mart. "To ignore it, is to ignore efficient change."

Clearly, Wal-Mart is not about to ignore RFID. In fact, last month, 128 of Wal-Mart's top suppliers trekked to Bentonville to hear the retail giant detail its plans for radio frequency identification (RFID) compliance.

Several things emerged from that meeting. One is that Wal-Mart is sticking to its mandate that these suppliers apply RFID tags to pallets and cartons by January 2005. Initially, those requirements will be limited to shipments to three distribution centers in Texas that serve 150 Sam's Club, Sam's Market, and Wal-Mart stores from coast to coast. Wal-Mart will gradually expand shipments across its network of 102 DCs as the year progresses.

The tags will also evolve over the first year. To get the ball rolling, suppliers can use 96 bit Class O tags that will be programmed at the factory by Matrics, according to ARC Advisory Group's (www.arcweb.com) Steve Banker who is working with Wal-Mart suppliers on RFID compliance. Subsequently, Wal-Mart will use 96 bit Class 1, version 2 tags with one-time read-write capabilities that are available from Alien, Texas Instruments, Phillips and Intermec.

Wal-Mart was less specific about how suppliers will meet those requirements. However, Wal-Mart does expect 100% reads on both pallets and cartons at conveyor speeds up to 600 feet per minute. Given that many pilot tests produced read rates of just 80%, that may be the toughest challenge of them all, according to Jim McNerney, principal with ESYNC (www.esync.com) and an attendee at a follow-up meeting Wal-Mart had with technology vendors.

"Suppliers may have to put tags on two sides of some cartons just to be compliant," says McNerney. "If you're a supplier spending 35- to 40-cents a tag you will see your margins erode unless you can find value from RFID in your own operations."

Ultimately, finding a way to make RFID pay off for suppliers as well as Wal-Mart may be the biggest challenge of all. Wal-Mart said at the meeting that each of its suppliers will fund its own compliance program without any financial support from the retailer.

"I sat on the plane on the way home with an executive whose company does $3 billion a year with Wal-Mart," says McNerney. "He didn't know how he was going to justify to his board how much compliance was going to cost, but he didn't know how he could say no to $3 billion in business either."

From Wal-Mart's perspective, the answer is that there will be a cost associated with RFID for both Wal-Mart and its suppliers. But the benefits will outweigh the costs.

"No one is more penurious than Wal-Mart when it comes to watching costs," says Williams. "This is going to cost us, but we think there's a great value. And we think our suppliers will not only see improved sales, they'll end up providing RFID to their other customers. There are advantages there."

Williams continues on to say, "We expect to take costs out of our business and to increase sales because of RFID. A 1% increase in our in-stock position equals $1 billion in sales," he says. "We're currently at 99.3%. That means we're losing about $700 million a year in sales. And if we improve our in-stock positions, our suppliers will benefit with greater sales as well."

According to Williams, Wal-Mart plans to use RFID throughout its DCs.

While most analysts have focused on RFID to streamline receiving, Wal-Mart does not plan to stop there. "We've also been testing RFID for putaway, picks and shipping," says Williams. "Knowing the way our DCs work, I believe our goal is to get moving on RFID throughout the facility right away."