Jan 16, 2005Many analysts have been quoted recently as saying there’s no return on investment in RFID technology. In one sense they’re correct. Manufacturers won’t achieve an ROI by placing tags on pallets and cases for retail customers or the U.S. Department of Defense any more than they’ll achieve an ROI for adding newly mandated safety features to their products.
But companies that are meeting mandates—and even those that don’t need to—can achieve an ROI by using RFID technology to attack problems within their own supply chain. The key to doing this successfully is to use RFID to achieve lots of small benefits that add up to a big benefit, such as reducing excess inventory, out-of-stocks or losses through theft and/or counterfeiting. rfid journal calls this the “benefits stack.”
The problem most companies are encountering is they are taking a top-down approach to the business case. They recognize there are inefficiencies in the supply chain, but solving systemic problems would involve deploying readers everywhere, which is prohibitively expensive. A bottom-up approach is more efficient because small, inexpensive tactical deployments can be combined with one another to solve a systemic problem in a cost-effective way.
The benefits stack is based on a bottom-up business case. Here’s how it works. Let’s say a company can save millions of dollars a year by reducing inventory. Instead of deploying readers throughout the warehouse to achieve visibility, readers can be deployed in areas that target specific problems that contribute to higher-than-necessary inventory levels. And the systems can be linked to provide visibility.
For example, one problem companies have is maintaining accurate records of what’s received by the warehouse. By scanning pallets or pallets and cases as they leave the manufacturing facility and alerting the warehouse to what’s coming, companies can automate the receiving process, thereby cutting labor costs and reducing errors. Now, by having an accurate record of everything that arrives at the warehouse, companies can cut paperwork and reduce theft (workers exploit sloppy record keeping by taking goods that were never checked into inventory).
Additional readers can be set up in the warehouse either at key choke points or on forklifts to track the movement of goods. By recording which forklifts move which goods to which locations, companies can reduce put-away errors and perhaps cut the amount of damaged product (people are more cautious when they know the finger can be pointed at them when goods are damaged). Readers at the dispatch bay can ensure more accurate shipments out of the warehouse and update inventory in real time.
Solving each of these small issues won’t deliver huge benefits alone, but taken together they give a manufacturer more accurate and more timely data about what’s in the warehouse, which enables the manufacturer to achieve a major benefit—significantly lower inventory levels. And that, in turn, frees up working capital and lowers inventory carrying costs. Combine these benefits with the additional benefits manufacturers can achieve with the same infrastructure—fewer cycle counts, less paperwork and lower labor costs—and the system could pay for itself in 18 months to two years.
The savings can help offset the cost of tagging goods for retail customers. And as more retailers adopt RFID, manufacturers can leverage their RFID infrastructure to achieve even greater returns by sharing inventory and demand data with retailers.
There are several potential benefits stacks and many micro-level issues within each stack. Here are 10 steps to help you develop a bottom-up business case.
1. Create a cross-functional team.
Some companies that have a chronic problem might have a clear idea of which benefits stack to go after. But most will need to investigate which benefits stack is likely to bring an ROI first. The key is to look at the micro-level issues that contribute to larger problems, and then determine how accurate, real-time RFID data could be leveraged to solve those micro-level problems.
2. Educate the team.
Many senior executives are skeptical about RFID’s potential to deliver efficiencies. Part of that skepticism is rooted in ignorance about RFID. It’s important to educate the cross-functional team about the components and costs of an RFID system—tags, readers, middleware, enterprise applications and so on. They also need to know how data can be leveraged internally (and eventually with supply chain partners) to achieve benefits today. Companies can bring in consultants or systems integrators and early adopters to do the teaching.
Team members need to understand that RFID is an enabling technology that can be used in many ways to solve problems. “People can’t think of RFID as just a data collection technology or a replacement for the bar code,” says Sean Campbell, a partner with IBM Business Consulting Services. “You need to get people thinking about how they can use timelier, accurate information, and in some cases new information that isn’t available today, to drive process changes.”
3. Identify problems and opportunities.
Once the cross-functional team has been educated, members should meet with their department’s senior and midlevel managers and discuss the major areas of the business where RFID could have an impact and what micro-level issues contribute to the larger problem. They should be encouraged to think creatively about how RFID could be used to resolve those issues. This not only leads to better solutions, it also creates buy-in from the various company departments.
The focus should be on all the issues that contribute to macro-level problems. Take, for instance, a DVD manufacturer that loses significant sales whenever there’s a hit movie because retail stores don’t have the DVD in stock 20 percent of the time. What issues within the manufacturer’s own supply chain cause the product to be out of stock so often? Employee theft? Poor inventory accuracy? Lousy order fulfillment?
The team should also look for ways to cut labor costs and boost efficiencies. Let’s say the DVD manufacturer employs five people to check shipments to retail customers before pallets are put on a truck, but accuracy is still wanting. By deploying RFID, the manufacturer might be able to achieve perfect order fulfillment and eliminate the positions of the five workers because counts would be automated and problems flagged.
Consider all possibilities, including changes to packaging or a switch to reusable containers. Changing packaging is costly, but the savings from being able to read every carton on a pallet before it is shipped might make it worthwhile. Using reusable containers means the expense of RFID tags can be amortized over the containers’ lifetime.
4. Define the scope of the RFID deployment.
After the team reports back, members should identify which benefits stack to tackle. Don’t worry about what the system will cost and whether it will do everything you would like it to do. Concentrate on identifying which macro-level problem would deliver the most benefits to the company if you could use RFID to solve it. Would the company save more by cutting inventory than it would gain by reducing out-of-stocks?
Once you’ve selected the benefits stack to go after, list the factors within the company’s control that contribute to the macro-level problem. Chances are the team will identify many potential applications within the benefits stack. It’s not possible to go after all of them simultaneously, or to solve the macro-level problem across the entire company all at once. Instead, narrow the scope of the project to, say, a region where a particular problem is chronic. Or it might make sense to start a pilot in a region where customers have begun requiring tagged product.
It’s also important to narrow the scope of a project in terms of the level of tagging (pallet, case or item). In most cases, the cost of a project rises as you move from pallet- to case- to item-level tagging because the tags represent a more significant cost. At the same time, the benefits tend to increase as you move toward item-level tagging. So it’s a question of determining what benefits can be achieved and at what cost.
5. Analyze operations and processes.
Next, the team needs to itemize the business processes associated with the macro-level issue. Here’s where the ROI will be revealed. “When you start quantifying processes, the potential savings often become very clear,” says Duncan McCollum, a principal focused on auto-identification technologies with the supply chain practice of Computer Sciences Corp. (CSC), an El Segundo, Calif.–based IT consulting and outsourcing company. “How much labor is required to manage an asset or certain goods? If you’re using labor to search for goods in your D.C., you can use RFID to set up hot zones or choke points so you know the product has moved to a particular area. That cuts costs right away.”
Companies are often not as efficient as CEOs think. More than 80 percent of 885 midsize companies surveyed by ChainLink Research said administration had to intervene at least once to complete a customer order. The number of interventions in the warehouse was far higher.
If less-than-perfect shipments to stores contribute to out-of-stocks, examine how orders are handled. What percentage comes in by fax (and therefore has to be processed manually)? What percentage has errors that must be resolved manually? How long does it take to fill an order?
Break down all the processes related to a macro-level problem, not just the ones where there are clearly inefficiencies. Some companies avoid looking at potential applications, because they don’t have a glaring problem in a particular area. But by itemizing the processes, they may learn that some steps can be eliminated through RFID tracking. For instance, companies might be able to eliminate cycle counts or redeploy warehouse employees who do nothing but count boxes.
6. Prioritize projects.
After breaking down all the processes, the cross-functional team will likely have a list of five to seven projects where RFID can help solve micro-level issues that contribute to a macro-level problem, and another three to five projects that could cut costs or boost efficiencies associated with the same macro-level problem. It would be difficult and costly to try to tackle them all at once, so companies need to prioritize these projects.
BearingPoint, a McLean, Va.–based management consulting and systems integration company, has come up with a four-quadrant grid that it uses to evaluate potential projects. The X-axis shows the complexity, effort and risk involved in a project, from least to most complex. The Y-axis shows how central a project is to optimizing a company’s supply chain. This approach can be used to prioritize projects that can resolve micro-level issues and lead to achieving the macro-level goal.
Place all of the potential projects on the grid. Consider whether the same RFID infrastructure can be used for more than one project. For instance, can readers installed at choke points be used to help reduce theft as well as improve inventory accuracy and reduce cycle counts?
Related projects that are easiest to achieve and do the most to advance the macro-level goal are the ones you should do first. These projects are the most likely to deliver an ROI, and they will also give the cross-functional team the experience they will need to tackle more difficult implementations.
7. Assess the financial impact.
RFID is an enabling technology that must be coupled with other technologies and process changes to deliver benefits. So quantifying the benefits of an RFID system is difficult. And it’s even harder when that technology is immature, and standards and equipment costs are changing rapidly. But it can be done.
Readers range from $1,000 to $3,500, depending on their functionality. List prices don’t usually include antennas and cabling. Also factor in the cost of installing a reader, installing electric cables to power it, hiring a systems integrator and the time your own internal staff will spend on the project.
It’s important to bring a good consultant or integrator into the process to find the best ways to achieve your goals. For instance, putting reader antennas at key choke points, or placing them under forklifts, and installing tags in floors is a less expensive way to track goods than putting readers on every shelf.
When the system design is complete, you should have a good idea of the cost and the potential return. Be sure to consider how the ROI picture will look if RFID is deployed enterprise-wide. Will you be able to close a warehouse or two if inventory can be reduced by 5 percent? Will you be able to eliminate positions or redeploy people to value-added jobs?
It’s very likely that by carefully targeting applications within a particular benefits stack, a company will achieve a return on investment in RFID. Forrester Research, a Cambridge, Mass.–based research company, estimates that for a $12 billion manufacturer shipping 2 million cases with RFID tags, it would cost about $9.1 million a year to deploy RFID to meet Wal-Mart’s mandate (see box, opposite page). If a manufacturer could deploy an RFID system within a benefits stack for a similar price and were able to increase sales by just 0.1 percent (or $12 million), it would earn almost $3 million per year on that investment.
Of course, it could take two to five years to deploy RFID across all of a company’s product lines and facilities, but much of the total potential benefits within a benefits stack can be achieved by applying the 80-20 rule—focus on the 20 percent of the products, regions or facilities that will deliver 80 percent of the benefits.
8. Factor out the impact of other projects.
As you determine the costs and benefits of your RFID projects, be sure to consider them in relation to other projects that the company might be undertaking at the same time. If the company has another initiative to reduce inventory—say, installing wireless terminals on forklifts—and RFID is deployed to assist that effort (by putting RFID readers on the forklifts as well), don’t double count the benefits. A 3 percent reduction in inventory can’t be attributed to both the wireless terminals and to RFID.
9. Do a sensitivity analysis.
When developing the business case for investing in any new technology, it’s common to analyze how variations in your assumptions could alter the business case. This is particularly important for RFID, because the variables can change quickly. The prices of tags and readers could fall faster or slower than expected. More retailers could issue mandates. Pilots might prove that you will get more or fewer benefits than originally expected. All of these factors could have a big impact on the business case.
One of the biggest assumptions manufacturers have to make is how quickly retailers will adopt RFID technology. That’s because the number of retailers that mandate RFID adoption will affect how quickly your company moves toward tagging all of its products. And the level of retail adoption will affect the price of tags and readers, because prices are highly dependent on volume.
Tag price is a critical factor in determining the business case for manufacturers. If tag prices fall quickly, manufacturers will be able to go after more benefits within the benefits stack.
10. Revisit the business case regularly.
Once you’ve built the bottom-up business case, do a pilot to see whether the expected benefits can be achieved. Even if they can be achieved, revisit your assumptions regularly. “An RFID business case should be a living, breathing document,” says IBM’s Campbell. “It’s a snapshot of a point in time, based on your best estimates of what is going to happen. There are so many variables with RFID—trading partner adoption, tag costs, capability of the technology—that you need to keep going back and updating it.”
It’s important that the members of the cross-functional team monitor the implementation and continue to report on progress. It’s likely that as the implementation moves forward, the business case will improve. That’s because RFID is an enabling technology, and once people start using it, they often come up with unanticipated ways of cutting costs or improving efficiencies. Companies may find there are more ways to achieve a healthy ROI within a single benefits stack than they ever imagined.