The past life of the bar code

Like every revolution, this one did not start with a bang. But that does not mean that what happened on June 26, 1974, did not bring about a revolution. When a cashier at Marsh's Supermarket in Troy, Ohio, ran a 10-pack of Yellow Arrow gum through a bar-code scanner and the price was automatically displayed at the register, an era was born.

Thirty years later, barcodes are scanned five billion times a day, and few transactions do not use them. A study by Pricewaterhousecoopers a few years ago estimated that barcodes could save customers in supermarkets and malls, retailers and manufacturers $30 billion a year. Those numbers don't capture the impact of barcodes on other industries, where they are also nearly ubiquitous.

To call barcodes an integral part of a Fortune 500 company's business is to understate them. The reality is that the entire American economy cannot function without them. Today, those black and white strips are attached to your airport luggage or rental car, printed on your UPS and FedEx packages, often on mail sent by the United States Postal Service, printed on library books and lawsuit documents, and sometimes on your corporate identification, And these are just a few of the things you see inside the manufacturing and distribution industry: on assembly lines and conveyor belts, on pallets and boxes, on warehouse doors and loading platforms.

Bar codes may seem mundane, but they have also become a pattern and even influence politics. How many logistics tools are on the cover of magazines or tattooed on people's bodies like bar codes? How many things were as much of a factor in a presidential election as barcodes (George Bush Senior made a fuss at a demonstration of the technology, causing people to think he was ignorant)?

Needless to say, without the ingenuity of inventors and engineers, the barcode would never have been created. But if companies cannot agree on a standard, the common product code that consumers are most familiar with is unlikely to succeed. So the development of barcodes, including those moments when the enterprise seemed doomed, depended as much on diplomacy as on technology. We've come to take barcodes for granted, so it's easy to overlook the extent to which they've changed business.

The implications of these changes go beyond the obvious ones of improved inventory management. Bar codes have changed the balance of power between retailers and manufacturers, changed the face of the marketing industry and even played a key role in the astonishing rise of Wal-Mart.

The story begins in Miami's South Beach in 1949. Joe Woodland, an aspiring engineer, was 27 years old. He was determined to invent an automated supermarket checkout system. Manual price calculation is too slow and expensive, and often wrong. The following story is best left to Woodland himself.

Woodland, 82, is full of energy. He was short and spoke in a commanding baritone, sounding like Larry King or a Brooklyn cab driver. "I got a beach chair and went to the beach and sat down. I wonder what the hell to do? I was just thinking to myself what do I need? The first thing I need is a code. The only code I know is Morse code. I learned that in the Boy Scouts when I was young.

I was thinking [Woodland begins to sing] : tick, tick, tick. Do you remember what this is? This is an SOS signal. Tick is the letter S. I stuck four fingers in the sand and pulled them out for some reason. I just looked. I made four ditches. And I was like, wow! I can code it as a line. I can use different lines wide and narrow! Right? That's how the bar code was invented, at that time and in that place. That's it!"

By 1952, Woodland and a partner had patented their method. But, as Woodland says now, "I was ahead of that technology." At the time, there were no inexpensive lasers and computers that would later be indispensable in bar-code systems. So although Woodland joined IBM hoping the company would produce his invention, he found that his idea fell on deaf ears and ended up selling the patent to another company.

By the early 1970s, it was clear that supermarkets needed such a tool. Profit margins are shrinking and Labour costs are rising. But for the system to work, supermarkets and packaging companies need to agree on a standard bar code to translate the bars into prices. If stores use incompatible bar codes, there will be confusion. So representatives of supermarkets and consumer goods companies met to address the issue. After considering various suggestions, the committee chose the Universal Product Code (UPC), which IBM had designed based on Woodland's ideas.

But then came the trouble. Supermarkets like barcodes because they eliminate price tags and save on Labour costs. Industry planners have not taken into account that customers may not be happy with it. Food inflation was very high in the early 1970s. Suddenly, stores were asking customers to buy products without price tags and to trust that prices would not be changed behind closed doors.

Consumers are furious, and supermarkets' response is ineffective. Many supermarkets give out pencils so customers can copy down the prices on the shelves. That didn't placate customers, and state legislatures began passing laws requiring goods to carry price tags. With the issue likely to be legislated at the federal level, supermarkets finally capitulated and promised to price their products.

At first, bar code use was minimal, including a 1976 BusinessWeek article titled "The Failed Supermarket Scanner." Experts had predicted 1,000 stores would be using scanners by this time, but only 50 have installed the expensive devices. It wasn't until the early 1980s that scanners became commonplace in supermarkets. Steven Brown, author of Revolution at the Checkout: The Rise of the Bar Code, said, "It's not the grocery industry that's really turning things around. It's the malls. The big stores, especially Kmart, decided to adopt barcodes, and the momentum couldn't be stopped."

Supermarkets won by twisting and turning on barcodes, and grocery stores weren't the first to adopt them, or even the second. Those credits go to the railroads and General Motors, which adopted barcodes in the mid-1960s and early 1970s, respectively.

Railways have 1,200 scanners across the country, says John Hill of ESYNC, a consultant who has been in the industry since its inception. Railcars are printed with stripes that reflect the scanner's light, allowing inspectors to know where they are at a given moment. The system worked but was eventually abandoned, largely because the stripes faded easily, making barcodes difficult to read.

In 1971, Hill helped GM install a four-wire bar code system to track transmissions at the Buick plant in Flint, Mich. But it has taken a decade for the industry to form a co-operative group to agree standards for barcodes to be used by carmakers and suppliers.

The federal government also got involved in the early 1980s, selecting a standard for suppliers of government procurement. The adoption of barcodes in business by the auto industry and government has had two effects that are still unnoticed by many. First, barcodes have become almost as ubiquitous in manufacturing and distribution as they are in retail. Second, there were 270 different barcodes, and the UPC was just one of them. Now, though, there are probably only a few dozen in widespread use.

Steve Winter, a senior vice president at Intermec, a maker of automatic recognition equipment, says UPCs are "very primitive" compared to the industrial barcodes commonly used. Upcs can identify the manufacturer and the product, while industrial barcodes can include a wealth of other information such as the shipment status of the product. As Winter says, "Barcodes are everywhere in the supply chain." Bar codes were first used in manufacturing.

Larry Graham, GM's global manager of manufacturing technology, said that by increasing the number of parts with barcodes, the number of assembly line errors -- such as installing the wrong part -- at some of the company's plants fell from 15% to zero. Then it extended to warehousing. Mr. Hill, the consultant, says that 80% to 90% of Fortune 500 companies already use bar-code systems to automate their warehouses (less than half of small businesses have done so, he says). This means that forklift operators often have on-board terminals that can read barcodes on the pallet and elsewhere in the warehouse. Each time an operator scans a bar code, the bar code notifies the computer of his location, allowing the system to instruct the operator about his actions.

This automation has led to double-digit productivity gains and double-digit declines in inventory at Procter & Gamble. Kimberly-Clark also saw shipping errors drop by more than 50 percent.

UPS started using barcodes several years ago to track packages. The company expects the technology to save it $600 million a year when the bar-code system is installed in 2007. Today, UPS drivers' wireless computers can not only monitor packages but also map out delivery routes, says Mark Hopkins, the company's director of package-handling management.

"It tells the driver which are all the packages you have to deliver today and where to drop them off, and which are the packages you should get." (fedex was a primitive business before bar codes. "Because there was no automation," says Jimmy Burke, the company's vice president of information technology, "we had to have people trained to memorize the 300 or so lines in our processing centers and know zip codes and cities so they could put packages on dedicated delivery devices.")

If you ask businessmen and academics about barcodes and logistics, one word will be used more than any other in their response: Wal-Mart. 'Wal-Mart is certainly the leader,' said Xiaoliang Li, a professor at Stanford's Graduate School of Business and an expert on supply chain issues. A key factor in Wal-Mart's growth has been its efficient supply chain and inventory management, which has kept costs and prices down. All of this is easy to do because of the bar code. "If you walk into one of our stores, you'll see that every price tag on our shelves has a barcode," said Linda Dillman, Wal-Mart's chief information officer.

We do this because we equip everyone on the job site with a wireless device. We already have 300,000 of these devices. With this wireless device, staff can scan price tags, change prices, accept orders or view sales records." That allows stores to be more flexible -- adjusting the price of a popular item, for example -- which is crucial for a global chain.

As is often the case with seemingly insignificant technological changes, the impact of barcodes has been huge and unexpected. The checkout counter used to be just a place to store money, but with UPCs, they are the best data channel. Every time a product is sold, a record of that product is kept. As anyone who has studied Walmart will tell you, this has changed the balance of power between retailers and manufacturers. In the past, manufacturers controlled sales data through warehouse inventories, so they knew better than retailers what was selling. But now businesses have data, too. Both sides will learn to use this information.

An example can illustrate the problem. In the early 1980s, a Pepsi brand manager named Scott Klein was called into the office of the company's then-CEO, John Sculley. Klein recalled Sculley holding a soda and asking, "Have you noticed these bar codes we put on all the packages? If we could get some of that data, we might learn something from it." 'It was the beginning of a big change,' says Mr. Klein, now chief executive of Information Resources.

Information Resources is a market research company that uses barcode data. Pepsi soon began buying merchants' sales data. Not surprisingly, daily figures show a surge in sales before and after the promotion. Pepsi's staff noticed something unusual: the increase in sales occurred just before the promotion. They eventually realized that it wasn't the price cuts that were driving sales so much as the giant displays of Pepsi products that stores typically put up days before promotions.

Market research has changed. Where analysts used to walk the aisles of stores, jotting down their observations in notebooks, now there is accurate, rigorous data. Marketing words of wisdom are starting to give way to numbers. Who needs intuition when you have your own customized sales data? By creating a database of individual shoppers' current purchases (linking their loyalty card numbers and the family information they submitted to their purchases), barcodes link actual purchases to specific shoppers.

Some businesses realise how little they know about their customers. This is true of the beef industry, which is lagging behind in the use of barcodes for various technical reasons. Herb Masen, a vice president at Cargill, says the giant meatpacking company has only known in the past three or four years who is actually buying its products. Companies have long assumed that steak is a luxury for wealthier consumers, but the reality is that the people who eat the most steak aren't rich at all. "They are rural, blue-collar, and their average household income is around $40,000," Mr. Maisen said. "It's a bit of a surprise to us here and a bit of a surprise to the retailers," Mr Masen said.

That knowledge, and bar code data since then, has led to improvements in Cargill's ability to offer different product categories to different supermarkets and adjust prices and product sizes. He says beef sales at Cargill stores where these strategies are in place are up 10 to 12 percent, on top of increases in recent years driven by Robert Atkins' theory of a meaty, fatty, low-carb diet.

And just like that, the bar code wins. Retailers know more about consumers' shopping habits than consumers do. The next step in the productivity march is for consumers to scan prices themselves. Home Depot now has self-checkout lanes in 850 stores; Wal-mart offers this service in 600 stores. Supermarket giant Albertson's is running 100 stores