Scanning the Globe The humble bar code began as an object of suspicion and grew into a cultural icon. Today it's deep in the heart of the FORTUNE 500.

(FORTUNE Magazine) – As revolutions go, this one ignited with something less than a boom. But that doesn't mean the events of June 26, 1974, didn't usher in a transformation. On that day a checkout clerk slid a ten-pack of Juicy Fruit gum over a bar-code scanner at a Marsh supermarket in Troy, Ohio. The cash register automatically displayed the price, and an era was born.

Thirty years later, bar codes are scanned five billion times a day, and rare is the transaction that doesn't involve them. A PricewaterhouseCoopers study a few years back estimated that bar codes save customers, retailers, and manufacturers $30 billion a year in the supermarket and mass-merchandise sectors.

Those numbers don't even address the impact on other sectors, where bar codes have become almost as ubiquitous. To call them integral to the operations of FORTUNE 500 companies would be a gross understatement. Fact is, the entire U.S. economy would have trouble functioning without them. These days black and white bars are affixed to your luggage at the airport and to your rental car. They're stamped on your UPS and FedEx packages and often on letters delivered by the U.S. Postal Service. They're printed in library books, on documents in litigation, and sometimes on your company ID. And those are just a few that you see. There are more to be found in the innards of manufacturing and distribution: on assembly lines and conveyor belts, on pallets and cases, on warehouse doors and loading docks.

Bar codes embody the mundane, but also the iconic and even the political. How many logistical tools have made the covers of magazines--or been tattooed on people's bodies--as bar codes have? How many can be said to have contributed to the defeat of a U.S. President, as bar codes did after the first President Bush was judged to be excessively clueless when he expressed wonder at a demonstration of the technology?

Needless to say, the bar code couldn't have emerged without the ingenuity of inventors and engineers. But the universal product code--the bar code most familiar to consumers--also couldn't have succeeded without the ability of companies to collaborate on a standard. And thus the history of bar codes, which included moments when it looked as if the whole enterprise would collapse, hinged as much on diplomacy as it did on the technology itself.

We've come to take bar codes so much for granted that it's easy to miss the extent to which they've changed business. Beyond the obvious, such as improvements in inventory management, the transformations are epic. Bar codes have altered the balance of power between retailers and manufacturers. They've changed the face of marketing. They even played a key role in the astonishing rise of Wal-Mart.

The story begins in South Beach, Miami, in 1949. An ambitious engineer, Joe Woodland, then 27, had decided to invent an automated supermarket-checkout process. Ringing up prices manually was slow, expensive, and rife with errors. Here it's best to let Woodland himself tell the story. Now 82, Woodland is animated. His bantam physique produces a commanding baritone that sounds like Larry King crossed with a Brooklyn cabby: "I took a beach chair down to the beach and sat down. And I'm thinking, How the hell am I going to pull this off? I was just thinking to myself, What do I need? Well, the first thing I need is some sort of a code. And the only code I knew of was Morse code. You know, I had to learn that in the Boy Scouts when I was a youngster. And I was thinking"--Woodland starts singing--" 'dit-dit-dit, daaah-daaah-daaah, dit-dit-dit.' Remember what that is? That's SOS. Dit-dit-dit was 'S.' I stuck my four fingers down into the sand and for whatever reason I pulled them to myself. And I looked, and I had made four furrows. And I said, Wow! I can have encodation in the form of lines! I could have wide lines and narrow lines! Right? And that was the invention of the bar code, right then and there. That was it!"

By 1952, Woodland and a partner had patented their system. But, as Woodland says today, "I was way ahead of the technology." Lasers and computers, which would play integral roles in bar-code systems, didn't yet exist in cheap form. And so, despite joining IBM in the hopes that it would produce his invention, Woodland watched his idea languish and eventually sold his patent to another company.

By the early 1970s it was clear supermarkets needed such a tool. Profit margins had withered; labor costs had risen. But for an automated checkout system to work, supermarkets and packaged goods companies would have to agree on one standard code to translate lines into prices. There would be chaos if different stores implemented incompatible codes. So representatives of supermarkets and their counterparts from consumer-goods companies convened to tackle the problem. After weighing proposals, the committee chose the universal product code, or UPC, an IBM design that built on elements of Woodland's idea.

But obstacles emerged. Supermarkets liked bar coding because it allowed them to eliminate price stickers, saving labor costs. Industry planners hadn't considered that shoppers might not cotton to that. Food inflation in the early '70s was intense. And now the stores were asking customers to buy products with no stickers on them and trust that prices weren't being changed behind their backs. Consumers were incensed, and the supermarkets' response didn't help. A number of them dispensed grease pencils so shoppers could copy prices off the shelves. That didn't placate shoppers, and state legislatures began passing laws mandating price labels. Faced with potential federal legislation, the supermarkets capitulated and promised to label items.

Initial bar-code adoption was so anemic that in 1976 Business Week published an article headlined "The Supermarket Scanner That Failed." Experts had predicted 1,000 stores would have scanners by that point, but only 50 had installed the costly equipment. Not until the early 1980s would scanners become pervasive in supermarkets. "What really turned the corner was not the grocery industry, but the mass merchandisers," says Stephen Brown, author of Revolution at the Checkout Counter: The Explosion of the Bar Code. "When the mass merchandisers, most notably Kmart, decided to adopt the system, that built a momentum that never stopped."

As much as bar codes are a supermarket triumph, grocery stores weren't the first or even second to employ them. Those distinctions belong to the railroad industry and General Motors, which began using them in the mid-'60s and early '70s, respectively. The railroads deployed 1,200 scanners around the country, according to consultant John Hill of ESYNC, who has been in the "automatic identification" business since its birth. Railcars were imprinted with stripes that reflected light from the scanners, allowing controllers to know where cars were at any moment. The system functioned but was ultimately abandoned, mostly because the colors tended to fade, making the bar codes hard to read. In 1971, Hill helped GM install a four-line bar-code system to track transmissions at a Buick plant in Flint, Mich. It would, however, take the auto industry a decade before it too assembled a cooperative group that agreed on a bar-code standard for automakers and suppliers. The federal government also got in on the act in the early '80s, choosing a standard for vendors that wanted to sell to the government.

The actions of the auto industry and the government took bar codes deep into the machinery of business. And that had two effects that escape the notice of many even today: First, bar codes are nearly as common in manufacturing and distribution as they are in retail. And second, the UPC is only one of 270 different species of bar code, though perhaps only a few dozen are in widespread use today.

The UPC is "very rudimentary" compared with commonly used industrial bar codes, says Steve Winter, senior vice president of Intermec, which makes automatic identification equipment. Whereas the UPC identifies manufacturer and product, industrial bar codes can include extensive additional information such as the product's routing history. As Winter puts it, "Bar code is just pervasive in the supply chain."

It starts with manufacturing: GM reduced assembly-line errors, such as installing the wrong parts, from 15% to zero in certain plants by increasing the number of parts that were bar-coded, according to Larry Graham, GM's global manager of manufacturing technology. The process then continues into warehouses. Between 80% and 90% of FORTUNE 500 companies have automated their warehouses using bar-code systems, according to consultant Hill. (He says less than half of smaller companies have done so.) That means forklift operators often have onboard terminals that read bar codes on pallets and elsewhere in the warehouse. At each point the operator scans a bar code, which informs the computer where he is, allowing the system to direct the worker's actions. Such automation has brought double-digit productivity improvements and inventory reductions for Procter & Gamble and has reduced shipping errors at Kimberly-Clark by more than 50%.

UPS projects that bar-code technology will save it $600 million a year when the system is fully installed in 2007. The company began implementing bar codes years ago to track packages. Today, says Mark Hopkins, director of the company's package process management group, the UPS driver's wireless computer not only monitors the packages but actually plans delivery routes: "It tells the driver, Here's all the packages and stops you have today, and here's the order you should pull them in." (Over at FedEx, life before bar codes was positively prehistoric. Says Jimmy Burk, a FedEx information technology VP: "We had to have people specially trained to memorize about 300 routes in our hubs, to know the zip codes and the cities so that they could put them on these special conveyors, because there was no automation.")

If you ask businesspeople and academics about bar codes and logistics, one word comes up more than any other: Wal-Mart. "Wal-Mart is certainly the champion," says supply chain guru Hau Lee, a professor at Stanford's business school. A key element of Wal-Mart's rise has been its hyperefficient supply chain and inventory management, which have allowed it to keep costs--and prices--down. And all of that has been facilitated by bar codes. "If you walk our stores," says Linda Dillman, Wal-Mart's chief information officer, "you'll see that on every price label on our shelf, there's a bar code. And the reason we do that is because we give pretty much everybody in the field wireless devices. We have over 300,000 of them deployed. And associates have the ability with this wireless device to go up and scan that tag. And they can make price changes, they can place orders, they can see sales histories." It allows stores to be flexible--for example, to tweak prices on a popular item--a crucial need for a worldwide chain.

As often happens with seemingly minor technological changes, bar codes have had a huge and unexpected impact. Cash registers had been mere repositories of money; post-UPC, they became data conduits par excellence. Each time a product is sold, a record of the item is now preserved. And as any student of Wal-Mart can tell you, that altered the balance of power between retailers and manufacturers. Once, manufacturers controlled data about product sales via warehouse inventories. They understood what was selling much better than the retailers. But now the stores had data too--and both sides would learn to mine that information.

Case in point: In the early '80s a Pepsi brand manager named Scott Klein was called into the office of then-CEO John Sculley. As Klein recalls it, Sculley held up a can of soda and asked, "Have you ever noticed these bar codes that we put on all of our packages? If we can get our hands on some of this data, we might be able to learn something from it." Klein, now CEO of Information Resources Inc., which uses bar-code data for market research, says that was the beginning of a sea change. Pepsi soon began buying store sales data, and the daily figures showed, unsurprisingly, that volume surged around the time of sales promotions. But Pepsi staffers noticed something unusual: The increases occurred right before the sales began. They eventually realized that it wasn't the lower price that was driving higher volume as much as the big displays of Pepsi products, which stores tended to erect days before sales events began.

Market research was transformed. Where analysts used to wander up and down store aisles jotting observations in notebooks, there was now cold, hard data. Marketing maxims began to give way to numbers. Who needs gut instinct when you can get customized sales data? By creating databases of individual customers' ongoing purchasing information (by linking customers' loyalty card numbers, and any household information they submit, to their purchases), the bar-code data connected actual purchasing with specific shoppers.

Some businesses realized how little they knew their own customers. Consider the beef industry, which for various technical reasons was a bar-code laggard. According to Herb Meischen, a vice president for meat-packing giant Cargill, it's only in the past three or four years that his company realized who was actually buying its product. Companies had always considered steak a luxury item bought by affluent purchasers. But it turns out that the biggest steak-eaters aren't wealthy at all, Meischen says: "They're rural. They're blue collar. They've got a median household income somewhere in the $40,000 range." Meischen says the information "blew the socks off our people here, and it blew the socks off retailers." That knowledge and subsequent bar-code data have allowed Cargill to improve the way it tailors product mix and adjusts pricing and product size at different supermarkets. He says that in the stores in which Cargill has been able to implement such strategies, beef sales are up an additional 10% to 12% on top of the Atkins-stoked increases of recent years.

So bar codes have won, and retailers know purchasing habits better than the consumers themselves. The next step in the march of productivity is to let shoppers do the scanning. Home Depot now has self-checkout lanes in 850 stores; Wal-Mart offers them in 600 stores. Supermarket giant Albertson's is testing portable handheld scanners, which allow shoppers to scan each item as they pick it off the shelf and then check out automatically, in 100 stores.

Perhaps someday no one will scan anything at all. A technology called radio frequency identification, or RFID, uses a small tag with an integrated circuit in it to send information about an item via radio waves. It eventually could eliminate supermarket checkout entirely, as RFID readers detect items you select and deduct their cost from your credit card. Since RFID tags can store more information than the UPC, they may soon, for example, improve the effectiveness of a recall of tires: The tag would reveal not only the manufacturer and model but also which factory produced the tire and when.

Wal-Mart, Target, Albertson's, and the Defense Department have all announced plans to begin using RFID in the next year--but in most cases, only on cases and pallets rather than on individual store products. RFID does have its drawbacks. Even when the cost of the tags drops, they'll still be about 5 cents each; bar codes are essentially free. And the fact that RFID uses a chip with electric current in it means that products containing liquids or metals can screw up the signal. For all of RFID's momentum, Woodland's lines in the sand aren't likely to be washed away just yet.

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