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Building the Business Case
To achieve a return on investment in RFID, companies need to have different departments work together to solve the many minor, low-level problems that contribute to a big issue, such as excess inventory. Here’s how to build a bottom-up business case.
Jan 16, 2005—Many 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.
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