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Does RFID Equal ROI?The promise of RFID is the dream of every supply chain manager – enabling the accurate real-time tracking of every single product, from manufacture to checkout. Compared to universal product code (UPC) bar coding, which it promises to replace, RFID proactively transmits information, eliminating the manual point-and-read operations needed with bar coding. This enhanced visibility could result in significant decreases in warehouse, distribution and inventory costs, increases in margins and enhancements in customer service. Several of the most prominent suppliers and retailers are already taking advantage of this new technology; Wal-Mart and the Department of Defense are the most visible. Wal-Mart is demanding its top 100 suppliers put RFID tags on all pallets, cases, cartons and high-margin items by January 2005; the DoD has set an early ’05 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, 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.’ 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 and 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 24 hours, and improve the accuracy of their forecasts about what inventory is actually needed. Reduced Theft – Theft costs retailers more than $30 billion yearly, and is estimated conservatively 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 end up not buying, or buying from a competitor. 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 AdoptionSeveral 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 per tag, down from 40 cents 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 and IT operations/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-LineThe 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 2-3 percent increase in revenue, reduce days in inventory by 1-2 percent and reduce operating expenses by 2-5 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.  The Marriage of ROI and SLAsPressure is high for CIOs and IT executives to deliver rock-solid IT strategies on smaller budgets. As a result, enterprises have an extremely low tolerance for project failure or spending that falls short of expectations. This sets the stage for a closer, more fruitful, relationship with vendors in helping companies reduce the risks and maximize the rewards from every IT investment. One way to bring about this relationship is to use the service level agreement (SLA) – long valued as a tool for guaranteeing availability and responsiveness – as a way to ensure that a return on investment is achieved. Under this model, vendors partner with their customers to ensure ROI goals are realized, and tie their financial compensation to the achievement of key benefits. Let’s say a company buys CRM software and establishes a minimum expected ROI from the software. If the minimum benefits aren’t realized, the vendor has an opportunity to help remedy the situation. If the vendor still fails to deliver, there are financial penalties. On the flip side, if the system delivers a higher ROI than expected, the IT vendor gets a financial reward (or less-tangible rewards such as public testimonials or future contract extensions.) This may be radical thinking. But when two-thirds of IT projects run over-budget or over-schedule and one-third are cancelled completely – and even when a project is successfully deployed, more than 50 percent fail to deliver on ROI expectations – offloading some of the project risk to the vendor is worth a second look. Besides, vendors should have a vested interest in making sure their products actually deliver business value. The ROI SLA can be mutually beneficial to vendors, IT departments and business units alike. Success requires close collaboration between vendors and the IT department at every step of the way: planning, implementing and managing the system. In the process, CIOs can be confident that IT projects will be less risky and will deliver tangible gains. Perhaps they’ll even have easier approval cycles with the CFO, CEO and board of directors? Developing an SLA up-front ensures that all stakeholders understand the proposed costs, benefits and ROI, and commit to their accuracy. In the case where a project veers off-course, the vendor and the enterprise are already tracking costs and benefits, and are alerted to step in for quick remediation if costs surpass expectations, or benefits fall short of projections. From the IT vendor’s perspective, implementing the ROI SLA is a difficult proposition because it creates uncertainty about revenue; the vendor is relying on the customer to successfully implement the system; and there’s the potential for higher expenses to meet the SLA. On the other hand, the SLA could greatly decrease the sales cycle by reducing doubts a company may have about implementing the product. Also, if the project exceeds expectations, the vendor can significantly increase revenue. Putting it into Practice
Did You Know?RFID implementation costs (defined as startup and one year of maintenance annually) for a typical supplier attempting to comply with Wal-Mart are approximately $9 million. Also, only 25 percent of suppliers will meet Wal-Mart's January 1, 2005 deadline. Source: Forrester Research
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