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By Alorie Gilbert, 10 November 2003 08:20

NEWS Wal-Mart plans to spend $3bn over the next few years on a new inventory tracking technology that uses radio frequency signals to keep tabs on merchandise, sources familiar with the project said.

The system is based on a technology known as radio frequency identification (RFID), a new breed of computer network designed to track the location of everyday objects such as razors and shoes by embedding them with special microchips. Wal-Mart has enlisted its top 100 merchandise suppliers to participate in the high-profile project, one of the first and largest of its kind in the retail industry.

A Wal-Mart representative refused to comment on the company's spending plans.

Wal-Mart's multibillion budget is an unofficial estimate that the company has discussed privately with other companies involved in the project, said the sources, who wished to remain anonymous.

Nevertheless, the large sum bodes well for a number of information technology companies that specialise in the fledgling RFID niche. Among them are companies that make RFID chips and readers, including Philips Semiconductors and start-ups Alien Technology and Matrics. According to one source, Wal-Mart will spend about two-thirds of its RFID budget on readers and the installation of them in more than 100 distribution centres and thousands of stores.

The rest of the budget is slated for other hardware and software to collect, process and store data the new system generates, the source said. Several major tech companies, including Sun Microsystems, SAP, IBM and Intel, are developing such infrastructures and are lining up to sign on customers.

Wal-Mart and its top 120 or so merchandise suppliers met near the retailer's Arkansas headquarters last week to coordinate the US launch of the technology, set to begin in 2005.

The project's success depends on the cooperation of Wal-Mart's suppliers. The retailer has asked them to purchase millions of RFID tags and attach them to all shipments headed for Wal-Mart warehouses. Analysts estimate that it will cost larger suppliers as much as $23m just to start.

Wal-Mart expects a big payoff from the technology, mainly from having fewer logistical errors and reduced labour costs related to inventory processing. One analyst pegged the savings at nearly $8.4bn annually, once Wal-Mart completes the project.

Alorie Gilbert writes for CNET News.com