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In experiments, Wal-Mart has used RFID to track individual items with Gillette; cases with Coca-Cola, Kraft, P&G, and Unilever; and pallets of paper towels. Wal-Mart concluded that pallet-level tracking was the most feasible, given today's capability and cost of the technology. "We need to focus our resources on the first thing we think is viable and will bring value to the business," Dillman said.

The technology used in those tests isn't ready for real-world use, Dillman said. The list of problems Wal-Mart found is long: RFID readers don't come in the variety of form factors needed; wireless networks in the stores interfere with readers; readers aren't fast enough; and there are problems with integration, reading errors, and even forklift drivers knocking out readers. There's also a chicken-and-egg problem: Tags are too expensive to put on lots of items, but their cost won't come down until they're mass-produced.

It's a long list, but that's not uncommon at the beginning of such a significant technology implementation. "This is a challenge for [our technology suppliers] to help us make it deployable," Dillman said.

P&G is experimenting with tagging high-value items such as cosmetics, but David says it isn't practical to tag items across the board until chip prices come down dramatically. The industry is on track to hit 1 or 2 cents per tag in five years or so, David says, but the price will need to be even lower. "If we had to tag every single pallet and shipping case and unit package, that's something like 23 billion items," David says. "Even if it's 1 cent per tag, that's $250 million."

Lots of other retailers are testing RFID as well, particularly in Europe. United Kingdom retailer Marks & Spencer plc late last year started adding RFID tags to the 3.5 million reusable plastic containers used to deliver produce, calling it the largest supply-chain application of the technology in the world.

Starting with RFID in the supply chain instead of at the item level might also give the industry time to deal with consumers' privacy concerns. The industry needs to assure customers that RFID tags on items can't be used to collect information on products outside the store.

Dillman says the value of RFID doesn't depend on being able to manage more data, at least initially, since it provides a more efficient way to collect information Wal-Mart already collects. "If we don't get one piece of data beyond what we get today, it's still a great technology that provides an advantage and adds value," Dillman said.

David Hutchings, senior director of enterprise system integration for Kraft Foods North America Inc., has worked with the AutoID Center for more than two years, and he says Kraft is building the business case to move ahead with RFID. But Wal-Mart isn't the only force driving RFID, Hutchings says, and innovation will come from more than retail and consumer-goods companies. He notes that the U.S. military is using the technology in its supply chain.

And while Kraft in the near future will need to put the little tags on pallets of Macaroni & Cheese bound for Wal-Mart stores, Hutchings says there's also an opportunity to apply the technology to Kraft's supply chain.

With those kinds of ripple effects, it's easy to see how RFID technology won't be limited to the pallets of 100 Wal-Mart suppliers for long.