Looking for the ROI from RFID

The ROI that could be gained from radio frequency identification (RFID) was probably not on the forefront of many minds in the 1940’s when the technology was first used to help British pilots distinguish between its planes and those of its enemy during World War Two. Today, however, many industry insiders are calling the possibility of attaining ROI from RFID the million-dollar question.

Although experts tend to agree on the various advantageous and benefits organizations can reap from the technology — especially suppliers that have been mandated by Wal-Mart to deploy RFID by 2005 — they also agree that the ROI may not come in dollars in cents.

RFID isn’t a one-size fits all technology. Various companies will see different costs and ROI when deploying RFID, said Christian Stephan, a partner with the strategy and operations consulting practice of Deloitte in Toronto.

Finding ROI in RFID will depend on the situation of each company, Stephan said. It will depend on the value of their product; the way the supply chain is structured; the way they organize their warehouse; and the way they organize the product flow between them and their distributors.

There are also cost elements involved, he noted. “You have the visible part, which are the readers and the tags and then you have all the IT parts, not just the middleware but also the integration with the systems, which can be pretty huge.”

Because of the high cost of deploying RFID, companies that have products with relatively low price points and low value will struggle when deploying the technology, Stephan said, adding that these companies aren’t alone.

“This might be a paradox but I think that those companies that are actually pretty leading edge in terms of where the supply chain is, they might find out that lots of the benefits we can get from RFID, from some extent, [they] already have them,” he added.

The companies that will see the largest benefits and perhaps the greatest ROI will be organizations that have less sophisticated supply chain processes in place today, and may see RFID as a way to leap-frog older technologies and head straight into this one, Stephan explained.

He cautioned companies that are looking for ROI from RFID that the method known as ‘slap and ship’ in the industry — which is the bare bones implementation of the technology, placing RFID capabilities within a single distribution centre — isn’t the best option.

“It’s probably a pretty fruitless way of using the technology,” Stephan said. “If you just comply [to Wal-Mart] for the sake of complying, I don’t think you are a winner on the long-term basis. You might be better to bite the bullet and say, ‘I have to comply because it is part of the cost of doing business. I might as well take more advantage of the technology and see what I can get.'”

Companies might be drawn to the slap and ship solution initially because it appears less expensive, but Stephan said in the long-term, this isn’t necessarily true.

“At $0.40 cents a tag, depending on the number of units you want to ship to Wal-Mart or whomever, various millions of units a year, it adds up fairly quickly. For an easy way out, I think it can be pretty expensive,” he noted.

Descartes Systems Group Inc., a supply chain services provider based in Waterloo, Ont. is involved in a pilot project designed to help companies separate RFID hype from reality by measuring the costs and business benefits of deploying RFID across a company’s supply chain.

The project is on-going and the company has yet to publish its results, but Art Mesher, executive vice-president of corporate strategy at Descartes, said that companies planning on limited RFID implementation aren’t going to see any additional value from it.

The real key is that companies have to understand that RFID is a technology that allows them to improve the timeliness of their information. The benefits lie in what the company is going to do with the information that they are getting and figure out how it can improve supply chain processes, Mesher explained.

“The real benefit is the consumption of the information driven by RFID…failure to integrate real-time information into your supply chain is going to give you a disadvantage,” he added.

Mike Dominy, a senior analyst with the Boston-based Yankee Group agrees with both Stephan and Mesher and said although ROI may be hard to find in the early stages of implementing RFID and although slap and ship may not be the best way to find those advantages, the visibility that the technology gives a company can be priceless.

“A good example would be, if you have RFID-tagged cases…and you access the information from Wal-Mart’s retail link system about the inventory movement at the store level…now you can make sure you have the right amount of inventory in Wal-Mart’s stores, making sure that your cases or product are always available for Wal-Mart customers,” Dominy said.

Although this example may make the benefits of RFID sound simplistic, Dominy said there are definitely opportunities for companies to obtain ROI from RFID, but it is a question of will companies make the commitment to do something with the information that comes from RFID.

Although the ROI possibilities from RFID may be vague today, the disadvantages of not implementing the technology will come at a great price to suppliers of retailers including Wal-Mart, Dominy explained. He added that retailers could fine or penalize those suppliers that don’t comply or may threaten to stop carrying a certain line or products altogether.

“The potential negative consequences of not [implementing RFID] are extreme. Ten to 30 per cent of your revenue could be directly affected or 10 to 20 per cent of your revenue could have additional costs tied into it that are the result of penalties that are imposed on you by Wal-Mart or whoever the company is,” Dominy said.

Although Wal-Mart’s stipulations sound harsh, Dominy said that from discussions he has had with those in the industry, Wal-Mart isn’t being a “tremendous bully’ but are instead working with its suppliers to help them figure out what why it makes sense to implement RFID.

Today we are seeing the same emotional environment we saw with the introduction of the Internet, explained Deloitte’s Stephan. The benefits from RFID are probably going to be different than the ones that were expected, and there will be other areas of application where the advantages might not be as quick or as fast as expected.

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Jim Love, Chief Content Officer, IT World Canada

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