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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.
By Bob Violino
RFID tag costs can range from 20 cents to 50 cents, depending on such things as the type of tags, how many you buy and whether you plan to use a plain tag or one embedded in a thermal transfer label. Companies need to make assumptions based on how many tags they are likely to buy for a pilot or initial rollout. Keep in mind that there may be some hidden costs, such as testing tags and removing those that are defective.

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.

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