(FORTUNE Magazine) – In the last week of April, Kimberly-Clark wrapped, sealed, and tagged several pallets of Scott paper towels and shipped them to a Wal-Mart distribution center in Sanger, Texas. Small electronic tags affixed to the side of each case of paper towels allowed Wal-Mart to track their every move. The significance? The experiment marked the first step in a mad dash to implement radio-frequency identification (RFID) technology.

The world's largest retailer has demanded that its top 100 suppliers implement the technology by January 2005, thereby greatly reducing distribution time and costs. And investors looking to cash in on the scramble for compliance can divide the beneficiaries into three baskets:

--Hardware. Pure-play RFID companies are few and far between, but there are a handful. Two companies creating buzz right now are small, privately held outfits. Matrics makes the RFID tags and readers that are used at airports in Las Vegas and Hong Kong. And Gillette purchased 500 million tags from Alien Technology. Some public companies are embracing the technology too. Label printer Zebra Technologies (ZBRA, $81), for instance, is working on tags. Although RFID makes up only a tiny portion of their revenues, big tech companies such as Philips (PHG, $27) and Texas Instruments (TXN, $25) are also getting into the RFID market.

--Software and systems. RFID technology doesn't stop with the actual tags and readers. Suppliers and retailers will need new software to handle the mass quantities of data amassed by the chips. Bear Stearns analyst Philip Alling believes that of all the software providers, Manhattan Associates (MANH, $30) may be best positioned to capitalize on RFID. The company also has a $2 million equity stake in Alien.

--Retailers. The best strategy might be to bet on the companies forcing the industry change. That, of course, means Wal-Mart (WMT, $57). If its January deadline is met, analysts estimate that the mega-retailer could save as much as $8 billion next year. Other companies are joining the race as well. Both Target (TGT, $46) and Albertson's (ABS, $24) have started pilot programs. Bear Stearns' Alling says investors shouldn't count on an instant payoff: "I would expect some snags along the way. RFID won't happen overnight, but it's definitely going to happen."