Radio frequency identification (RFID) tags have been making headlines lately, largely as the target of privacy advocates who decry the technology’s potential to “spy” on consumers forced to cart the little buggers home in their groceries and clothes. Wal-Mart’s highly touted trial with Gillette, which would have seen all Gillette products embedded with the chips and placed on Wal-Mart’s “smart” shelves for inventory tracking, was deep-sixed over complaints that consumers’ privacy would be compromised. But while the storefront trial bit the dust, the concept is thriving on the loading dock, where plans call for Wal-Mart’s top 100 suppliers to affix RFID tags to all cases and pallets by 2005. Doing so will enable products to be tracked individually as they move along the supply chain, with a resulting efficiency in inventory control, saving both suppliers and Wal-Mart 20% to 40% or more in inventory and out-of-stock costs. But to achieve this rosy scenario, several things have to happen. The cost for RFID tags, now hovering around 25 to 40 cents apiece, must drop to about 5 cents in the next few years, and vendor companies will need to invest large sums of money in the costly enterprise-resource-planning (ERP) software that RFID technology requires. In addition, server and network infrastructure will need to be fortified to handle the thousands of additional data transactions per product.

McKinsey Quarterly No. 4 2003