Does RFID equal ROI?

RFID is a hot trend, but will you be able to show ROI in the end? As usual, there are advantages and risks.

The promise of RFID is the dream of every supply chain manager -- enabling the accurate real-time tracking of every

single product, from manufacture to checkout. Compared to universal product code (UPC) bar coding, which it promises to replace, RFID proactively transmits information, eliminating the manual point-and-read operations needed with bar coding. This enhanced visibility could result in significant decreases in warehouse, distribution and inventory costs, increases in margins and enhancements in customer service.

Several of the most prominent suppliers and retailers are already taking advantage of this new technology; Wal-Mart and the Department of Defense are the most visible. Wal-Mart is demanding its top 100 suppliers put RFID tags on all pallets, cases, cartons and high-margin items by January 2005; the DoD has set an early 2005 deadline for its suppliers as well, insisting that all pallets and cases are tagged. If these deadlines are met, suppliers will be forced to invest quickly and heavily, despite the serious business risks. As adoption accelerates, the cost per tag, an obstacle today, will also lessen. Companies that invest early will have a serious advantage over competing companies -- which will be scrambling to catch up with this new 'best practice.'

RFID holds promise for significant bottom-line benefits, including:

Reduced warehouse and distribution labor costs -- Warehouse and distribution costs typically represent 2% to 4% of operating expenses for retailers. Replacing point-and-read labor-intensive operations with sensors that track pallets, cases, cartons and individual products anywhere in the facility can significantly reduce labor, resulting in 30% or more in savings.

Reduced point-of-sale labor costs -- Using RFID at the product level can help retailers reduce the labor costs and service fees of regular stock management and store shelf inventory. With RFID-enabled products, the current 'scan-it-yourself' checkout can be improved with increased self-service adoption, shortened checkout times and reduced fraud.

Inventory savings -- Accurate inventory eliminates write-downs. RFID reduces inventory errors, ensuring that the inventory reported is indeed available. By tracking pieces more exactly, companies can more accurately detail what has sold in the past 24 hours, and improve the accuracy of their forecasts about what inventory is actually needed.

Reduced theft -- Theft costs retailers more than $30 billion yearly, and is estimated conservatively at 1.5% of overall sales. With RFID, products can be tracked through the supply chain to pinpoint where a product is at all times, and eliminate inventory oversights that can cause shipments to 'go missing.' RFID has already been successfully deployed in stores, particularly on higher-margin or costly items.

Reduced out-of stock conditions -- When an item is out-of-stock, disappointed customers often end up not buying anything, or buying from a competitor. Grocery stores lose as much as 4% of revenue yearly due to out-of-stock conditions. Better RFID product tracking, inventory visibility and forecasting can have an immediate top-line revenue impact; residual benefits include improved customer service and satisfaction.

 

Risks to adoption

Several ROI challenges, including cost and risk, should be considered before investing in RFID:

The high cost per tag -- The cost of RFID tags is 25 to 30 cents per tag, down from 40 cents in 2002. It typically makes sense to place tags only at the packaged product level (pallet or carton), or on the highest-margin products, where the tags represent much less than 1% the total cost of the product. With demand increasing and production costs declining, the tags are expected to reach 5 cents per tag in 2006.

Mountains of data -- The location of pallets, cases, cartons, totes and individual products in the supply chain; the activities of picking, packing and shipping; the tracking of expiration dates and recalls will all produce mountains of real-time data. Most organizations are not ready to transmit, store, process, warehouse and integrate that data with warehouse management, inventory management, financial and other enterprise systems. The business processes and systems for effectively processing, purging, storing and analyzing this information often aren't in place.

Limited edge computing power -- Most retail outlets are not set up to handle the data and information workload required to make RFID effective at the product level. Reaping the rewards will require a large investment in computing power, bandwidth, storage and IT operations/administration per store.

Product level tagging does not always work -- Current tags do not transmit well on certain products, such as liquids or metals. This limits the overall benefit of RFID until the problem can be resolved.

Complexity and required investment levels -- RFID implementation is complex in all ways: process re-engineering, integration, maintenance and data storage, and design and deployment. A full implementation on an accelerated cycle could require a full year's IT budget and resources As a result, most companies have only rolled out limited pilots and are cautious to commit to broader deployments.

 

The bottom line

The competitive advantage and bottom-line business benefits of RFID are significant to both retailers and suppliers, despite the typical risks associated with adopting any early-stage technology. Early estimates indicate that a comprehensive RFID solution can generate a 2% to 3% in revenue; reduce days in inventory by 1% to 2%; and reduce operating expenses by 2% to 5%. Companies that achieve this ROI early will have significant financial advantages over the competition, mitigating the risks and making a strong business case for RFID, especially for companies that rely on their supply chains.

Tom Pisello is the CEO of Orlando-based Alinean, the ROI consultancy helping vendors, consultants and CIOs assess and articulate the business value of IT investments. He can be reached at tpisello@alinean.com.
 

This was first published in May 2004

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