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ROI for RFID: A Case Study Part Two: Implementation and Results

Written By: Joseph J. Strub
Published On: June 29 2004

Implementation Plan and Timeline

This research note looks at how one company, KiMs, with the assistance of Microsoft Business Solutions, achieved its anticipated return of investment (ROI) and successfully implemented RFID. See Part One for an introduction to RFID technology, statement of the problem it is to solve, and companies involved in implementing it.

Not too surprisingly, the implementation plan for RFID is not very different from that an enterprise-wide software implementation project. In fact, while the detailed plan has more the 260 tasks and subtasks, the major phases employed at KiMs were exactly the same as those for an ERP implementation. Specifically, the major phases were

  • Project Planning to include project kickoff, contractual matters, risk assessment, budget allocation, and administrative procedures such status reporting and steering committee meetings.

  • Business Requirements to include "as is" definition, "to be" projections, and gap analysis and resolution.

  • Solution Design to include establishing baseline environment, switch settings, reports, and minor enhancements.

  • Piloting and Testing to include testing business conditions and verification of interfaces.

  • User Training

  • Go Live/Production Rollout/Parallel

What should be obvious from the previous section on vendors is that an RFID implementation requires working with and managing more third party vendors than typically found in an implementation project. Consequently, chemistry among the vendors and team members is particularly critical. Being open to suggestions, willing to learn and listen to each other, and doing whatever it takes to make the project a success are all important in any project. However, in an RFID implementation, without these characteristics the project is doomed to fail.

One way to facilitate these characteristics is to focus on making and keeping the process simple, understandable, and sustainable. How the KiMs project team prototyped the overall process can best illustrate this objective. To represent the trucks, cardboard boxes were used; Lego blocks represented the pallets; and chalk outlines represented the palletizing and staging areas. Playing with cardboard boxes and Lego blocks, the project team worked out the kinks and bottlenecks. Obviously, the real winners in the project were the kids of the team members who got to keep the Lego blocks.

The ERP implementation of the Axapta software was completed in June 2003. As shown on the timeline below, with barely allowing the project team to catch its collective breaths, the RFID project started in August 2003.

The project was completed by the end of the year under an aggressive schedule. At the first of the year, KiMs began running in parallel with its old barcode technology, anticipating cutover to RFID completed in the second quarter of 2004.

Generally, the project team did not feel that having previous exposure to barcode technology was a significant advantage. RFID technology is even more transparent to the warehouse personnel than traditional scanning guns. Consequently, introduction of this technology for the first time may not represent a tremendous shock to existing operations. Obviously, this would require careful consideration and full knowledge of the organizational culture by the on-site project team.

Post-RFID Environment and Benefits Realized

As illustrated in the figure 2, at Station 1 pallets are manually tagged. The pallet is automatically checked for the presence of a tag and the pallet ID and data is written to the tag. At Station 2 the new location, namely palletizing to staging, is automatically updated. At this point the pallets are ready to be transported. At Station 3, the pallets are registered as they are loaded onto waiting trucks. At this point in the process, the pallets are considered to be in transit. Station 4 is at the 3PL warehouse and out of the control and responsibility of KiMs. The 3PL is considering installing RFID at this step of the distribution process. However, from KiMs' perspective full accountability and visibility of warehouse operations has been established.

Below in figure 2a is a pictorial depiction of the warehouse process after the implementation of RFID.

As a result to the deployment of the RFID tags and scanning equipment, KiMs has

  • Improved the quality of operations by providing better visibility.

  • Eliminated the uncertainty about what was shipped to the 3PL warehouse.

  • Reduced the instances of lost sales from inaccurate inventory levels.

  • Reduced the occurrence of shrinkage or, at least, identified the cause by better and continued tracking.

  • Permitted the re-deployment of labor resources by reducing the need for manual scanning.

  • Resulted in reduced inventory levels and corresponding carrying costs at 3PL warehouse.

Future RFID Deployments

Once the current application settles in, KiMs has plans for future projects to exploit the RFID technology. The most intriguing application is in the area of raw material validation. In this process, raw material ingredients would automatically be recognized in terms of quality, batch size, and expiration date. Invalid ingredients would be flagged for inspection. Anyone who has worked for a major bread bakery knows that adding no yeast or too much yeast can have disastrous effects and lead to other lines of employment. (FYI For the non-bakers: If you do not add any yeast, the dough does not rise and you are left a thick mass of goo. Too much yeast will quickly become apparent as the dough starts spreading over the edge of trough.) In either case, if KiMs anticipated application of RFID were in place, these types of situations could be avoided.

Now that the pallets are under control and visible, KiMs wants to proceed down the production line and provide end-to-end traceability at the carton level. While KiMs' objective is even better accountability, for other industries this level of traceability can help achieve other goals. For example, in light of recent incidents of Mad Cow Disease in the meat industry, the use of RFID technology in product recalls can minimize the scope and effect of the recall and improve lot tracking. Not only can RFID reduce the costs associated with a recall but also lessen the fallout of bad publicity.

Finally, KiMs expects to utilize RFID technology to track the inventory in the sales representatives' vans. Because of the value of the floating stock, you would expect this application to third on KiMs list of priorities. However, if your company provides a mobile maintenance and repair service, the value of the repair parts in the fleet can be considerable. Tracking of this cost would be much higher on the list of priorities.

While not specifically mentioned on KiMs' list of applications, RFID technology can greatly expedite and improve the accuracy of cycle and physical inventories. Imagine walking through a warehouse with a portable device and collecting all of the information from the ID tags—product number, location, and quantity in case of a partial pallet, and comparing this data with what has already been recorded in the ERP application.

Many companies say that out-of-stock situations are not permitted. For a distributor of McDonald's supplies to their restaurants, failure to completely fulfill an order is not acceptable—no way, no how. Even at the first instance of being unable to fulfill a restaurant's order, losing restaurants to another distributor is a real possibility. On a second instance, it's a given. For this reason, complete inventories are taken weekly. Using RFID technology would make the weekly process of taking an inventory a-walk-in-the-park or, at least, a walk in the warehouse.

Summary

Obviously but surprisingly, from KiMs' experiences RFID technology plays well in a warehouse and distribution center. However, from what is on the drawing board, RFID fits well in other segments of an organization's structure. Through the introduction of RFID, visibility of the product can be increased, resulting in improved accountability, management, and control.

The major phases of the plan for an RFID project are not significantly different from any other implementation project. However, be prepared to deal with more vendors, representing a variety of products and services. As a result, managing and coordinating the vendor activities will require more time and energy.

While opinions may vary on the time it will take to recoup your investment in RFID, it is almost unanimous that the benefits are significant and the savings are in real US dollars, European euro marks, Japanese yen, Danish kroner, or Mexican pesos. In any language, RFID serves closer inspection and should be on every company's radar screen.

However, given that KiMs is still running in parallel with its barcode systems and quantifying the benefits, two conclusions can be made. First, implementing RFID does not happen overnight and management needs to be prepared for this eventuality. Secondly, RFID requires a significant capital investment. According to a recent industry study, silicon chips currently represent 6080 percent of the total cost of a RFID tag. While the cost of RFID chips are declining from the current 30 to 70 (USD) levels, until the price hits the forecasted 5 (USD) per chip, RFID implementation projects for early adopters may require a major financial commitment and a large slice of an IT department's budget pie. If companies are to find value in RFID, they need to view this technology as more than eliminating the scanning gun from the barcode equation as KiMs has done. Companies considering implementing RFID must think beyond the confines of the four walls of the plant and factory in order to take full advantage the benefits that this type of technology has to offer. However, as is with any emerging technology, the bottom line is to only implement RFID when the ROI justifies it.

To view a short video on RFID and some of the other Microsoft components, which are mentioned in this article that in action at KiMs, click on the icon:


(High-Speed Connection Strongly Recommended)

This is Part Two of a two part note.

Part One was an introduction to the company and RFID.

Part Two describes the implementation and results.

About the Author

Joseph J. Strub has extensive experience as a manager and senior consultant in planning and executing ERP projects for manufacturing and distribution systems for large to medium-size companies in the retail, food and beverage, chemical, and CPG process industries. Additionally, Strub was a consultant and Information Systems Auditor with PricewaterhouseCoopers and an applications development and support manager for Fortune 100 companies.

He can be reached at JoeStrub@writecompanyplus.com.

 
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