Shortly before Christmas, we ran a piece titled "Wal-Mart Out-of-Stock Study - Proof or Not?" that reviewed of the University of Arkansas report on its test of RFID and its impact on out-of-stocks (OOS) at store shelf level at Wal-Mart stores.

Our piece generated a tremendous amount of reader feedback on all sides of the spectrum. Here was the gist of our review:

• This was a good bit of research that adds to the body of knowledge.
• In percentage terms, based on our back of the envelop calculation, the increased profits to Wal-Mart resulting from the 16% reductions in out-of-stocks is small.
• The study doesn't address whether the goal (reduced out-of-stocks) could be achieved by other programs or process improvements that were less expensive and/or less disruptive to Wal-Mart vendors. This was by study design, but therefore leaves unanswered questions.

First, let me get this out of the way - a couple of people on the vendor side of the equation basically told me to quit raining on the RFID parade, noting the uniformly positive coverage of the report in almost every media/analyst outlet. I understand these commentators were well-meaning, if biased - we'll just say they really are true believers and think we need continued positivism from all sides to really get the RFID train to take off.

Let me say yet again I am very positive on RFID virtually everywhere over the long-term - it's just mostly better - as the costs and performance vectors continue to improve, and very bullish on RFID in many applications right now. That said, we're going to give you our analysis on this and everything else straight up - there's lots of other avenues for the hype machine.

You'll find a number of the letters we received nearby - more next week. One theme throughout several of them was that while the economic return based on our calculations to Wal-Mart was small in percentage terms (increasing profits fine-hundredths of a percent), in absolute dollar terms it is still large.

Andrew Matorin from the research arm of investment banker Bear Stearns was one of those. He noted "that the returns would be very significant to Wal-Mart, which is perhaps why they are pursuing it with such gusto.  $100 million+ in additional cash flow a year could be meaningful to any company, regardless of size." But, he added, "I do agree that the study was not exhaustive.  Just a first step in a long road filled with analyses."

We even had a letter from Barnaby Feder, who often writes on RFID for the New York Times, commenting in part on the study's use of the figure of OOS's costing retailers 3.4% of potential sales - a number actually estimated in another study on the issues of OOS's generally. Noted Mr. Feder: "If Wal-Mart really wanted to make the case they'd share a little more data about how the 3.4% figure relates to their operations. If they are as good as they claim to be, that may be high."

Dr. Warren Martin of the University if Alabama at Birmingham noted that the impact of an OOS is likely greater for the manufacturer than the retailer: "If customers cannot find their favorite brand on the shelf, most people will select another brand.  So for a manufacturer being out-of-stock is a much more significant immediate problem than for a retailer. For the manufacturer, the out-of-stock can cost a sale and decrease market share since your competitors get your lost sales."

Though this makes common sense, the original study providing the estimate of 3.4% lost sales to the retailers found manufacturers lost only 2.6% from OOS's. Procter & Gamble also has some data on this we'll track down soon.

Finally, are there other ways to get at the OOS problem than RFID? Notes David Sandoval from B.U.S. Systems: "There may be several alternative process improvement ideas to automate pick-list creation based on POS, shelf space plan-o-gram, and backroom book inventory data.  It's a good case study justifying automated shelf pick-lists, but I don't think RFID is the only way to get there from here!"

We had many more letters. We publish all of the above comments in full and some others this week - more next week. We'd still like your opinion.

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Q. What was the rate of China's growth in total trade (import and export) in 2005?

A. Click to find the answer below

Feedback is coming in at a rate greater than we can publish it - thanks for your response.

As noted in our First Thoughts column, we received a significant amount of feedback on our review of the University of Arkansas/Wal-Mart RFID study. We print a number of those letters here, and will include more next week. We picked the letter from Andrew Matorin of Bear Stearns Equity Research as our feedback of the week, though there were many, many good ones. The full comments of all those responders cited in today's First Thoughts column are printed below, along with a few others - including one who says "It must be that Wal-Mart and a few others want to prove they are 'right' so badly that they are prepared to treat a lot of their suppliers/partners as if they are ignorant." He requested anonymity.

Keep the dialog going! Give us your thoughts on this week's Supply Chain topics. As always, we'll keep your name anonymous if required.

Interesting analysis. However, you don't take it far enough. Your numbers ($300 billion in revenue, a 0.54% increase in sales and a 10% operating profit margin), would imply $163 million per year in additional sales. Now, I don't know the total cost of Wal-Mart's implementation program but I would be very surprised if the Net Present Value (NPV) of $163 million in new annual pre-tax sales (or ~$100 million after tax net income, assuming a 35% corporate tax rate) would not be substantially greater than the NPV of implementing an RFID system.

Just a quick back of the envelop analysis, but it does seem to argue for RFID rather than against. Albeit, my analysis relies solely on Wal-Mart and your assumptions and also looks at the cost/benefit solely from the perspective of the retailer, thereby excluding the costs and benefits achieved by the other supply chain participants (i.e., the suppliers) where implementation costs may exceed benefits (although real studies have yet to be done).

Andrew Matori
Bear Stearns Equity Research

More on the Wal-Mart out-of-stock study:

Good points in your article - but if Wal-Mart really wanted to make the case they'd share a little more data about how the 3.4% figure relates to their operations. If they are as good as they claim to be, that may be high. And what types of goods they typically run short of would be good to know as well.

Barnaby Feder
New York Times

Your calculations are interesting. Based on your numbers, it seems the sales and profit benefits from RFID may not be as large as hoped. The result of a retailer having out-of-stock is an immediate reduction in sales. The implications for manufacturer's or wholesaler's brands are different. If customers cannot find their favorite brand on the shelf, most people will select another brand. So for a manufacturer being out-of-stock is a much more significant immediate problem than for a retailer. For the manufacturer, the out-of-stock can cost a sale and decrease market share since your competitors get your lost sales.

Furthermore, your analysis assumes that all products have the same profit margin. In fact profit margins may widely differ based on the local price and buying power. Specific information on which products were out-of-stock and their margins would allow someone to calculate the overall impact. The repeat purchase intentions by customers are lowered by a retailer being out-of-stock. At some point in time, customers will go to another store to be able to buy all of the goods they want in one location. There is a substantial danger in loosing customers. As more firms try to come closer to Wal-Mart's low prices, the cost of two shopping stops rather than one is significant to many consumers. Additionally based on the design and implementation of the specific inventory system, lost sales may adversely affect reorder sizes.

Warren Martin, PhD
School of Business
University of Alabama at Birmingham

Nicely done. When I read the report I had very similar reactions. My grocery background is supply side, so I am not well-schooled in store shelf replenishment practices, but it does seem to me that there may be several alternative process improvement ideas to automate pick-list creation based on POS, shelf space plan-o-gram, and backroom book inventory data. It's a good case study justifying automated shelf pick-lists, but I don't think RFID is the only way to get there from here!

Dave Sandoval
B.U.S. Systems, Inc

It must be that Wal-Mart and a few others want to prove they are 'right' so badly that they are prepared to treat a lot of their suppliers/partners as if they are ignorant. I would think this is very insulting. All I can think of is that they realize their maximum value for them will happen more quickly if it is ubiquitous much faster than how bar code evolved and they are prepared to do whatever is need to keep up the PR.

Name withheld by request

I do not work in retail but I am very surprised that they don't have system generated putaways based on what was sold and the allocated shelf space for the product. They must have an idea of how much shelf space they want to use for a certain product. I think it shouldn't be that difficult to know how many garments can fit on a rack or how many boxes of a certain product can fit in dimensional shelving or even floor space. It seems almost counter-productive to me to have an employee scanning boxes in a back room to see if there is shelf space available or am I missing something?

Terry B
Company unknown

Q.What was the rate of China's growth in total trade (import and export) in 2005?

A. About 23%, down from 35% in 2004, but still a substantial increase.