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More Manufacturers Use RFID to Improve Than Comply

A new study from ChainLink Research produced some surprising results about RFID implementations: manufacturers are more likely to install RFID for internal process improvements than because of compliance requirements, and small companies are enthusiastic adopters.
Dec 22, 2006This article was originally published by RFID Update.

December 22, 2006—Manufacturers are more likely to install RFID systems for internal process improvements than to meet customer mandate requirements, according to a new study released this week by ChainLink Research. The finding will come as a surprise to many because of the heavy attention given to Wal-Mart, U.S. Department of Defense (DoD), and other large compliance projects, which can skew user perceptions about RFID technology and the value it provides, the study author told RFID Update.

"The underreported aspect of RFID is non-mandated activity," said Bill McBeath, research director at ChainLink Research. "Many implementations are for process improvements and not compliance, and don't necessarily use EPC technology. There is a lot happening with active RFID and passive 13.56 MHz [high frequency] technology."

The study included 275 manufacturers from a wide cross section of industries and company sizes, mostly operating in North America. Sixty-seven percent of all respondents were already using RFID or had solid plans to do so. Of these, 41 percent are using RFID for process improvements and 34 percent because of customer mandates, with the balance responding "both." McBeath said he was somewhat surprised that RFID adoption for internal process improvements outpaced mandate systems.

More surprisingly, smaller companies showed a strong inclination to install RFID for process improvement. Among manufacturers with $25 million or less in annual revenue, 63 percent are implementing or planning to implement RFID for process improvement, and only 10 percent are doing so purely because of a customer mandate.

Among all respondents, the strong majority of process improvement implementations were closed-loop systems that do not involve supply chain partners. The study identified more than 20 specific processes and provides RFID adoption data for each. The five leading process improvement applications in place at manufacturers are: outbound shipping (installed at 53.6 percent of manufacturing users surveyed); distribution and logistics (45.7 percent); manufacturing/plant floor (34.4 percent); receiving and inbound materials (33.2 percent); and asset/capital equipment tracking (25.3 percent).

Companies that use RFID for internal process improvement were much more likely than compliance users to report a positive ROI experience. More than twice as many process improvement users (16 percent) than compliance users (7 percent) reported good ROI; conversely, 33 percent of compliance users said ROI would be bad, compared to only nine percent of process improvement users. Overall, 14 percent of respondents said they were getting or expecting good ROI, 15 percent said bad, and 71 percent said it was too early to tell.

"The ROI for compliance companies can get better," said McBeath. "The initial changes they make are very inefficient, especially if they're only tagging a small percentage of their products. Going through the learning and installation stage can take several years, where there is cost but not a lot of benefit. Once companies hit a critical mass of their products that are being tagged, they can find benefits more easily."

The study identified four leading inhibitors to increased RFID adoption: technology cost/ROI; lack of understanding about what RFID can do; in-house capability to design and use RFID systems, and; misperceptions about RFID maturity.

"Education is going to be a big key to moving the market forward," said McBeath. "Wal-Mart and the DoD really changed the market, in a lot of ways. They have brought a lot of attention to RFID, and not just for compliance applications." But he noted that some of the attention resulting from compliance programs has created misperceptions about overall RFID technology, limitations, and ROI potential.

Based on the study, ChainLink Research is predicting RFID spending by manufacturers in 2007 will be double the 2005 amount. McBeath also predicted the cost of active RFID tags will fall dramatically in coming years. "I predict really amazing price drops in the active technology, like what we’ve seen in the passive, Gen2 arena," he said.

ChainLink Research will present more of its findings in a webinar on January 10, 2007.

The Industry Predictions & Research section of the RFID Update archives includes many other forecasts and analyses, including reports on manufacturing adoption by ABI Research and Frost & Sullivan (see MRO is Major RFID Opportunity for Aero and Defense and Robust Demand for RFID from Heavy Manufacturers, respectively).
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