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New ROI Calculator for RFID

The Auto-ID Center has created an online calculator designed to help companies determine whether deploying EPC technology will pay off.
By Bob Violino
May 04, 2003May 5, 2003 -- The Auto-ID Center has posted a free ROI calculator on its Web site. It is based on studies done by sponsors Accenture and IBM and is designed to help companies determine whether investing in Electronic Product Code technology will pay off.
Auto-ID Center's Lo

"The purpose is to give people who may not be very familiar with the technology some insights into the business benefits," says Joyce Lo, project manager in charge of developing business cases for the center. "We created the calculator to help them assess the benefits and test their assumptions."

The calculator is aimed at senior executives who want to build a case for launching an RFID pilot. It factors in reductions in theft, labor costs, inventories and other potential benefits associated with using EPC technology. The Web site says you should spend about 20 minutes, but it's worth investing considerably more time to run what-if scenarios. You'll also need some very specific information about your company's operations, such as length of store aisle and hourly wages.

You start by indicating whether you are a retailer, manufacturer or distributor and whether you want to track pallets, cases or items. Then, you indicate which benefits you are looking for (reducing inventory, improving shipping accuracy and so on). You are then asked about your operations, based on the information you've already provided. For instance, if you indicated that you are a retailer looking to track pallets and improve shipping and receiving accuracy, the calculator asks you about the number of DCs you have, their size, number of dock doors, number of retailer outlets, average price of your products, and so on.

The calculator then asks you to enter some information related to applications you are interested in, such as the "undetected incorrect incoming deliveries at distribution centers." Not everyone will have this information at his or her fingertips, but the calculator enters industry averages as the default setting.

This section of the calculator is a bit confusing. For instance, it isn't clear what you are supposed to enter next to "Time saved to check incoming deliveries for errors." Are you supposed to enter what you think the benefits will be, leave the default as it is, or enter some other number? Clearer instructions would be helpful.

At the top of this page, there is a link that says, "Click here to view/change calculator settings." This is an important link, so don't skip over it. When you open it, a box pops up on screen, which lets you change important variables such as the hourly wage of workers in your DCs and stores. You can also change some of the setting for the prices for tags and readers. The estimated reader cost of $250 per unit this year falling to $150 next year is overly optimistic. The calculator uses a tag cost of 30 cents today, which is possible if you place a very large order.

The great value of the calculator is that you can enter whatever variables you like and begin to get a deeper understanding of which factors are likely to have an impact on your return on investment. You may find, for instance, that whether you track pallets or pallets and cases has a bigger impact on ROI than whether the tag cost is 50 cents or 40 cents.

The calculator is sophisticated, but as with any tool like this, it can only provide some basic insights. Each company is different. It's hard to vouch for how accurate the calculations might be, but it is clear that you can come up with a negative ROI.

"It's not a guessing machine," says Lo. "Before we created the calculator, we did series of interviews with our end-user sponsors to see if these are these the correct variables. Then, we had 25 users test it with their own numbers and they validated it."

The underlying business logic was designed by the Auto-ID Center. Kevin Ashton, the center's executive director says the aim was to balance making the calculator as easy to use as possible and making it as sophisticated as possible.

"Models like this are not guaranteed predictors of the future," he says. "But what they can do is let you see what variables make the most difference to the end result you are driving for. When you use the calculator, you start to get a feel for the levers that determine whether this technology has value for you. That's the benefit of this tool."

Learn how RFID can benefit your company. Register for RFID Journal Live!, an executive conference being held in Chicago from June 11 to 13, 2003.

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