The Three Rs of RFID: Rewards, Risk, and ROI

Introduction

The promise of radio frequency identification (RFID) is every supply chain manager's dream—real time tracking of every single product, from manufacture to checkout. Compared to universal product code (UPC) bar coding, which RFID promises to replace, RFID proactively transmits information, eliminating the manual point-and-read operations needed with bar coding. This enhanced visibility could significantly decrease warehouse, distribution, and inventory costs; increase margins; and enhance customer service.

Several of the most prominent suppliers and retailers are already taking advantage of this new technology; Wal-Mart and the US Department of Defense (DOD) are the most visible. Wal-Mart is demanding its top one hundred suppliers put RFID tags on all pallets, cases, cartons, and high-margin items by January 2005, and according the retailer, those one hundred, plus thirty-seven volunteers, are already in line to comply. The DOD has set an early 2005 deadline for its suppliers as well, insisting that all pallets and cases are tagged. If these deadlines are met, suppliers will be forced to invest quickly and heavily, despite the serious business risks. As adoption accelerates, the cost per tag, which is an obstacle today, will also lessen. Companies that invest early will have a serious advantage over competing companies, which will be scrambling to catch up with this new "best practice."

Rewards for Early Adopters

RFID holds promise for significant bottom-line benefits, including

Reduced warehouse and distribution labor costs: Warehouse and distribution costs typically represent 2 to 4 percent of operating expenses for retailers. Replacing point-and-read, labor-intensive operations with sensors that track pallets, cases, cartons, and individual products anywhere in the facility can significantly reduce labor, resulting in 30 percent or more in savings.

Reduced point-of-sale labor costs: Using RFID at the product level can help retailers reduce the labor costs and service fees of regular stock management and store shelf inventory. With RFID-enabled products, the current "scan-it-yourself" checkout can be improved with increased self-service adoption, shortened checkout times, and reduced fraud.

Inventory savings: Accurate inventory eliminates write-downs. RFID reduces inventory errors, ensuring that the inventory reported is indeed available. By tracking pieces more exactly, companies can more accurately detail what has sold in the past twenty-four hours, and improve the accuracy of their forecasts about what inventory is actually needed.

Reduced Theft: Theft costs retailers more than $30 billion (USD) yearly, and is conservatively estimated at 1.5 percent of overall sales. With RFID, products can be tracked through the supply chain to pinpoint where a product is at all times, and eliminate inventory oversights that can cause shipments to "go missing." RFID has already been successfully deployed in stores, particularly on higher-margin or costly items.

Reduced out-of-stock conditions: When an item is out-of-stock, disappointed customers often buy from a competitor, resulting in fewer sales per customer visit. Grocery stores lose as much as 4 percent of revenue yearly due to out-of-stock conditions. Better RFID product tracking, inventory visibility, and forecasting can have an immediate top-line revenue impact; residual benefits include improved customer service and satisfaction.

Risks to Adoption

Several ROI challenges, including cost and risk, should be considered before investing in RFID:

The high cost per tag: The cost of RFID tags is 25 to 30 cents (USD) per tag, down from 40 cents (USD) in 2002. It typically makes sense to place tags only at the packaged product level (pallet or carton), or on the highest-margin products, where the tags represent much less than 1 percent of the total cost of the product. With demand increasing and production costs declining, the tags are expected to reach 5 cents per tag in 2006.

Mountains of data: The location of pallets, cases, cartons, totes, and individual products in the supply chain, the activities of picking, packing and shipping, the tracking of expiration dates, and recalls will all produce mountains of real time data. Most organizations are not ready to transmit, store, process, warehouse, and integrate that data with warehouse management, inventory management, financial, and other enterprise systems. The business processes and systems for effectively processing, purging, storing, and analyzing this information often aren't in place.

Limited edge computing power: Most retail outlets are not set up to handle the data and information workload required to make RFID effective at the product level. Reaping the rewards will require a large investment in computing power, bandwidth, storage, IT operations, and administration per store.

Product level tagging does not always work: Current tags do not transmit well on certain products, such as liquids or metals. This limits the overall benefit of RFID until the problem can be resolved.

Complexity and required investment levels: RFID implementation is complex in all ways: process re-engineering, integration, maintenance, data storage, and design and deployment. A full implementation on an accelerated cycle could require a full year's IT budget and resources As a result, most companies have only rolled out limited pilots and are cautious to commit to broader deployments.

The Bottom-line

The competitive advantage and bottom-line business benefits of RFID are significant to both retailers and suppliers, despite the typical risks associated with adopting any early-stage technology. Early estimates indicate that a comprehensive RFID solution can generate a 2 to 3 percent increase in revenue, reduce days in inventory by 1 to 2 percent, and reduce operating expenses by 2 to 5 percent. Companies that achieve this ROI early will have significant financial advantages over the competition, mitigating the risks and making a strong business case for RFID, especially for companies that rely on their supply chains.

About the Author

Tom Pisello is the president and CEO of Orlando-based Alinean (US), the ROI consultancy helping CIOs, consultants and vendors assess and articulate the business value of IT investments. He can be reached at tpisello@alinean.com.