In 2003, Wal-mart using its economic prowess mandated that its top 100 suppliers begin using Radio Frequency Identification (RFID) tags by 2005.  This new technology allows for monitoring inventory remotely, electronically, and automatically.  Its application ranges from tracking how many items of a particular product is on the shelf in a store to how many pallets of a good is available at a distribution warehouse.  Wal-mart is interested mostly in the large scale application; it wants to track its supplies.  It is estimated that the company could save $8.35 billion by forcing its suppliers to adopt this technology.

The cost of developing and implementing is not going to be incurred by Wal-mart.  The suppliers have to upgrade it facilities and equipment and they will have to develop RFID tags that overcomes present limitations.  The reason the suppliers are willing to bear this cost is because of Wal-mart’s size.  The company employs over one million people, earned over $300 billion in revenues (FY 2006), and has been atop the Fortune 500 list for several years.  (It was number two in FY 2006 largely because of record high energy prices).  For many suppliers, Wal-mart account for 10-40% of their sales.  Losing that would be detrimental to their business.

This mandate from Wal-mart will likely result in a network effect.  In the initial stage, the market for RFID tags is less than the critical n₁ value (from April 2nd handout) where the network effect is large enough to sustain the technology.  In this situation, the technology normally fails to gain traction; suppliers and retailers would be reluctant to adopt the it.  Wal-mart’s mandate immediately moves n from 0 or less than n₁ to n₁.  In essence, the suppliers have no choice but to adopt the technology.  Further, Wal-mart’s suppliers tend to be the biggest in its respective industries meaning that n would most likely be sufficient surpass n₁.  Once n₁ is reached, network effect benefits can be reaped.  Suppliers tagging products for Wal-mart will likely tag products for other retailers as the marginal costs for doing this is minimal after the initial fixed cost of complying with Wal-mart.  In addition, actual costs of production will decrease as well as the market for RFID tags increase allowing other smaller suppliers to adopt it.  If the technology does not fail to deliver the cost savings it promises, RFID tags will spread throughout the retail industry supply chain.  Depending on n₂, it could spread to other industries and smaller scale applications as well as well.