Where's the ROI for RFID?

Retail giant Wal-Mart Stores Inc. is largely responsible for turning radio frequency identification (RFID), a 20-year-old technology, into an overnight sensation. But many in the audience are holding their applause for the RFID while they look for ways to generate a return on their investment.

When they first heard about the RFID initiative, the majority of Wal-Mart suppliers had exactly zero budget to take care of that mandate, says Steve Brown, executive vice president of marketing for Acsis Inc. (www.acsisinc.com), a provider of RFID-enabled supply chain execution solutions. The timeframe also limited the scope of those companies' response to applying RFID-enabled labels to affected shipments on the shipping dock — a process described as "slapand-ship."

"A lot of people got started [looking into RFID] slowly and hoped it would go away," comments Kevin Ashton, vice president of marketing for Thingmagic (www.thingmagic.com), a supplier of reader technology. And then there are companies like computer maker Hewlett-Packard Co., which went from thinking about RFID to executing RFID very comprehensively in a short period of time, says Ashton.

Most organizations aren't that agile, agrees George Cavage, APL Logistics (www.apllogistics.com). In contrast, he says, "We've spent all year looking at RFID," an unusual tactic for a third-party logistics provider (3PL). A 3PL tends to follow its customers into new markets and new technologies; it doesn't usually take on the expense and risk of developing capabilities before it is asked. Cavage says companies facing the RFID mandate didn't necessarily turn to their 3PLs for help immediately.

What did the minority see that others missed? Ashton, who had a front-row seat into the RFID movement as the cofounder and executive director of MIT's Auto-ID Center, notes, "Everybody has to come up with an answer because January 2005 is when Wal-Mart's initiative starts, not when it ends. Wal-Mart is just the beginning for retail and just the beginning for industry in general."

"This is not just about putting RFIDenabled labels on a box," notes Brown. "It's about enterprise-wide data collection. If you keep this at a late-stage label application process, if you keep it in the warehouse, it's going to be awfully tough to generate ROI.

"Many organizations are being forced to reexamine their processes because of RFID," adds Brown. "There's balance sheet exposure, and the companies affected by the RFID mandates are digging deep to find improvements they couldn't fund before because they didn't have the visibility. RFID moved data collection up to the top of that list."

Most organizations are still a long way from achieving ROI from RFID. That's because they are aligned in silos of automation, Brown laments. There will be a receiving system, a production system, a quality assurance system and a shipping system, and they won't share the same enterprise-class data collection solution to tie it all together. "Now you have RFID entering the fray, and a lot of people will build another silo for RFID, typically in a late-stage process (e.g., slap-and-ship)."

Getting past slap-and-ship is the ultimate goal, but it won't be easy. Overcoming internal barriers that block the spread of automation will help RFID contribute to larger scale and longer term results, but there are still the more immediate problems of compliance, and those needs will broaden as more Wal-Mart distribution centers (DCs) are added to the RFID initiative, more SKUs are covered and more suppliers are subjected to the RFID mandate. And Wal-Mart isn't alone in adopting RFID. Target Stores' initiative follows in a few months and other retailers, including Best Buy, Home Depot and Albertsons are following Wal-Mart's lead. At the same time, suppliers to the U.S. Department of Defense will have to apply RFID tags to products they supply to the world's largest customer.

The price of labels is still somewhat high when you consider the volume of labels that will be required, points out Ashton. You may have been applying a single label to a pallet and shrink wrapping that pallet, he explains. As RFID requirements push forward from palletlevel to carton-level tagging, you may need as many as 60 RFID tagged labels — one for each carton on that same single pallet.

The price of tags can't be dismissed, though they are a small percentage of the initial move to RFID. The reason to keep an eye on tag costs is that they are a constant consumable, and as Ashton has pointed out, consumption will only rise.

Consulting firm Accenture (www.accenture.com) has studied the costs of RFID implementations, and has found that tag prices at start-up typically range from under 2% to over 8% of the total cost. Hardware costs — readers, controllers and associated peripherals — come in at a range of 7% to over 10% of the total. The lion's share of the cost is in data management software and software integration — 52% to over 80% in the scenarios Accenture studied.

The initial benefits in the Wal-Mart mandate, say the experts, will come from labor savings in receiving at the Wal-Mart DCs. Suppliers can achieve at least these benefits themselves if RFID tags are applied further up the supply chain.

Wal-Mart has also identified opportunities to reduce labor cost at receiving. If suppliers are using RFID in their operations, they can take advantage of some of those same labor savings, Cavage notes. And, he continues, if producing and applying RFID tags is an expense, there's an advantage to doing the tagging overseas where the costs will be lower.

Right now, though, RFID is a slapand-ship scenario for domestic manufactured product, driven by the consumer packaged goods companies like Procter and Gamble Co. and Gillette Co., Cavage points out. But most of what Wal-Mart sells, outside of grocery products, is retail product that originates in Asia, primarily China.

While Wal-Mart has worked closely with EPC Global to promote open standards, those standards are still far from being globally accepted. The International Standards Organization (ISO) has been invited into the process, so the momentum of the world's largest retailer and other global companies could help carry the EPC Global initiatives into accepted standards worldwide.

TAGS: Archive
Hide comments

Comments

  • Allowed HTML tags: <em> <strong> <blockquote> <br> <p>

Plain text

  • No HTML tags allowed.
  • Web page addresses and e-mail addresses turn into links automatically.
  • Lines and paragraphs break automatically.
Publish