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Inability to Measure Process Performance Hides RFID Value
AMR Research analyst John Fontanella argues in this guest article that it is far easier to measure the costs of RFID than it is the benefits, and it is for this reason that determining ROI has been so challenging. But just because measuring the benefits is difficult does not mean they don't exist, especially when trading partners collaborate.
Nov 09, 2006—This article was originally published by RFID Update.
November 9, 2006—The growth of RFID implementation activity in areas such as asset management and tracking and maintenance, repair and overhaul (MRO) gives a clear indication of where companies see the value of RFID in the near term. Several integrators and RFID solution providers I spoke with at the recent EPCglobal US Conference told me that the majority of their revenue is coming from closed loop implementations of the technology. This trend shouldn't surprise anyone. Exerting tight control over all the variables of a project, from technology selection to process design, backed up by a business case that demonstrates quantifiable value, is the most risk-averse approach to new technology adoption.
Closed loop implementations may be the next phase of RFID adoption, but not the last by a long shot. Even companies with the most focused applications of RFID technology recognize the value that can be derived by inviting participation from external organizations. The RFID community at large faces the huge challenge of creating a cooperative working environment and business processes across multiple companies. This challenge extends well beyond creating data standards.
A recent paper from the MIT Center for Digital Business, What is RFID Worth to Your Company? Measuring Performance at the Activity Level, makes the observation that costs "come mainly from an activity's parts," while "benefits usually result from how an activity affects other activities." Because of this, the paper concludes, "measuring costs is relatively easy, but measuring benefits is hard."
Costs are captured at the functional level; it's standard accounting practice. Combine functions into a process, such as order to cash, and the ability to assess the benefit of an intervention -- or identify the fundamental causes of poor performance -- becomes increasingly difficult. This has and will continue to be the bane of any attempt to improve process performance, yet it is here that the greatest rewards lie. As an example, let's look at a fulfillment process that extends past the four walls of a supplier, reaching all the way to the retail store shelf.
The MIT authors created a model that estimates the benefit a large consumer products company would realize by implementing RFID in its retail supply chain. They also examined where those benefits would occur. The report found that internal efficiencies realized by the manufacturer from RFID would alone not be sufficient to justify its implementation. By working collaboratively with the retailer to reduce deductions, out of stocks, and excess inventory in the supply chain using RFID, the report estimates that benefits realized would be three times the actual cost of implementation. Thus, it is difficult to single out, and even more so to quantify, the benefits that are created in a collaborative relationship. The effort is worth it. They could potentially out distance those of any process improvement that the manufacturer might launch independently.
This is the true promise of RFID, and the whole technology family that sits on the edge of the enterprise. Future, expected gains from RFID justify its strategic importance. The challenge now is to take these visions and transform them into operational reality.
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