By Mary Catherine O'Connor
FORTUNE -- In June 2003, Linda Dillman, then CIO of Walmart (WMT), laid down the hammer. At a retail supply chain trade group meeting, she revealed that the retailer would require its suppliers to apply radio frequency identification, or RFID, tags to pallets and cases of goods sent to its distribution centers. Initially, the company would only require this of its top 100 suppliers, companies such as Procter & Gamble (PG) and Hewett-Packard (HPQ). But by 2006, it wanted all suppliers to get on board.
By 2007, after various delays and slow starts -- and with many suppliers balking at the high costs and meager benefits of their investments in the technology -- Walmart changed its RFID strategy. Neither it nor many suppliers completely abandoned it, but the promise to foment the smartest darn supply chain in the world, with every product landing at the right place at the right time, did not materialize.
RFID lets retailers identify individual items, cases or pallets the same way bar codes do, but wirelessly, with richer data and without need for a line of sight. But it was a solution looking for a problem. Today, RFID has landed a high-demand job: Helping retailers become more competitive with online sellers, through "omnichannel" sales -- closing a sale on the buyer's terms, whether in the store, on the Web, using social media, or through some combination of those channels.
According to market research firm Monetate, one in five online purchases were made on a mobile device in 2012. That jumped nearly 50 percent, to one in three, in 2013. Knowing its customers will stand inside a Macy's (M) store and comparison shop, the company is making sure that what its website says is in the store is actually in the store.
"RFID enables frequent [inventory] counting, which enables inventory accuracy. You can't be great at omnichannel without having high confidence at the store level, at the size and color level," said Bill Connell, Macy's senior VP of logistics and operations.
"Hindsight is always 20/20," said Bill Hardgrave, dean of Auburn University's College of Business. Hardgrave founded and directed the RFID Research Center at the University of Arkansas until 2010, where he led research into various RFID applications for Walmart and other retailers. "But when we look back, it almost seems silly that we started it as a supply chain tool. If you think about the way many manufacturing centers and distribution centers operate, for many retailers those were already Six Sigma. How much more efficiency or accuracy can you squeeze out of that? Well, by definition of Six Sigma, there's not much left to squeeze out."
Yet some retailers found RFID to be useful as they continued to tinker with it. In 2009, Macy's started piloting the technology in its Bloomingdale SoHo location. "We tagged virtually everything in the store and began scanning and doing cycle counts," Connell explained.
The tags, which contain a simple chip and antenna, are embedded into product pricing labels, such as those that hang from apparel. They are powered by the radio signal emitted from readers, which can be hand-held or fixed in place. It allows store associate to check the inventory of an entire rack of hanging dress shirts, for example, by simply walking around the display with a handheld reader. Software then displays a list of sizes or styles that need to be replenished, and the associate can narrow in on the needed items in the stockroom by turning the reader to a "Geiger counter" setting.
Attempting this kind of replenishment by visually inspecting items or scanning bar codes would take an untenable amount of time. "You can count [inventory] once or twice a year with bar codes with limited accuracy, because the person can be distracted, or scan the same code twice," Connell explained. "We can count up to 24 times a year using RFID. It just enables us to keep inventory accuracy in the high 90s [in terms of percentage]."
Based on early pilot success, Macy's began installing RFID infrastructure in all its 850 stores. Starting this month, Connell says, Macy's is expanding substantially the number of vendors it is asking to ship items that are pre-tagged with RFID. By the end of the summer, the retailer plans to have half of all replenishment vendors sending RFID-tagged merchandise.
As it turns out, RFID helps retailers much more significantly on the sales floor than in their supply chains. This is especially true with apparel, which thanks to multiple size and color combinations can be troublesome to keep properly stocked. "A warehouse can be Six Sigma, but [inside] a store is No Sigma," Hardgrave quipped. "Stores are chaotic. The processes are not repetitive; customers don't behave the same way every day; the weather isn't the same every day and that impacts buying patterns. So this is where RFID has the most value."
|What stumps Warren Buffett? Minimum wage|
|Water becoming more valuable than gold|
|GM's $1.3 billion recall cost wipes out profit|
|Will 7 Apples a day keep the bears away? - The Buzz|
|Ex-Wal-Mart CEO Duke retired with $140 million|