Its time to take an RFID reality check

March 6, 2006
While the costs of RFID (radio frequency identification) technology are on the decline, many companies that have invested in RFID are still straddled

While the costs of RFID (radio frequency identification) technology are on the decline, many companies that have invested in RFID are still straddled with inadequate IT infrastructure, face major adoption challenges and haven't focused on achieving meaningful return on investment (ROI).

By comparing various estimates for RFID market growth against conservative ROI scenarios, DiamondCluster International, a global management consulting firm, predicts that in some cases it will be possible to achieve a one-year payback on RFID by 2008. That timeframe is the bar set by many companies when considering whether or not to invest in new technology. But while achieving that payback may be possible, don't expect RFID adoption to reach critical mass at that same pace.

“Companies in the health services, particularly pharmaceutical drug makers, high-value consumer goods like electronics and apparel, some select retail channels, transportation, and government agencies are where we'll see the greatest success in the near term,” predicts Darin Yug, a DiamondCluster partner and co-author of a new report, Achieving RFID's Full Potential. “The lack of critical mass, however, in these and other industries makes it a tough investment decision.”

Skepticism about RFID is easy to understand, according to Mark Baum, a DiamondCluster partner who works extensively with consumer packaged goods (CPG) companies. “There are plenty of RFID horror stories out there,” Baum says. “Companies can't get accurate read rates on pallets in the warehouse. Although tag costs declined some 60% in 2005, they haven't declined as much as some expected and the price is still too high for CPG companies with lower case and item values. IT departments are handcuffed in upgrading systems that are too brittle to process the huge amounts of new data RFID generates. Supply chain partners often won't buy in to the process changes RFID demands. And the majority of RFID adopters will still have to maintain their bar code platform for the foreseeable future."

So how can companies mitigate the hidden costs of RFID and ensure that RFID investments are well spent? DiamondCluster recommends that regardless of whether a company is just starting internal discussions about RFID or already knee deep in an implementation, there are five actions every company should take:

1. Reaffirm your strategy. Will rapid RFID adoption define the winners and losers in your industry? Is it part of the cost of doing business with your partners or customers? Are you looking for huge productivity gains, improved processes or greater transaction accuracy? In most cases small-scale implementations, followed by rigorous cost/benefit analysis is a more effective than a "big-bang" strategy. Rationalizing the investment cycle is a must.

2. Reassess the readiness of your IT infrastructure. Connectivity and infrastructure costs can account for more than 50 percent of an RFID investment. That financial burden of building out the existing infrastructure can undercut any potential savings RFID might ultimately provide. Your company’s chief information officer (CIO), with the CEO's executive sponsorship, should take the responsibility for explaining how and why IT infrastructure improvements will support the company's RFID strategy by tying those investments to specific business processes.

3. Get the business benefits nailed down. A key benefit of RFID today is to reduce errors that invariably occur at any point in the supply chain where human intervention is required. In general, the business case will improve as more opportunities to improve error-prone processes are identified as candidates for RFID applications. For example, benefits to consumer packaged goods companies might include greater supply chain integrity, product quality control, including expiration date and recall lot control and improved customer insights for marketing purposes.

4. Marshall executive sponsorship. You'll need senior-level support inside your organization -- and among stakeholders across your value chain to be successful. Even retail giant Wal-Mart Stores Inc., whose clout with suppliers is legendary, has been challenged in influencing its entire supplier base to place RFID tags on cases and pallets due to the questions surrounding the return on investment assumptions.

5. Look to improve processes. Companies that are being compelled by influential partners to adopt RFID should view it as an opportunity to make long overdue process improvements than can increase competitiveness. RFID leaders, in turn, can exert influence on their value chain partners to reengineer cumbersome processes that are costing both parties time and money. In any case, overlaying RFID on outmoded, inefficient processes is a case of good money after bad.

"The question going forward isn't whether or not RFID will reach critical mass. It's clear that the technology is approaching maturity, and will ultimately pay off enough today to justify well-placed investments," said Yug. "The real question is: Can my company develop and implement an RFID strategy that will achieve specific, measurable benefits, even without my industry having achieved critical mass in the near-term?”

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