Quantifying ROI in RFID deployment for supply chain applications
means knowing up front what
will work best for your company's particular situation.
By Shahram Moradpour
Contributing Editor
The decision to deploy RFID in the supply chain is one that
is based solely on business rationale, not technology. This makes
cost-benefit analysis a key component of the decisionmaking process.
If an RFID deployment cannot be justified in terms of its economic
value to a company, it is not likely to help that company.
Consequently, it is not likely to remain a viable solution over the
long term.
While mandates such as those issued by Wal-Mart or the U.S.
Department of Defense (DoD) are requiring various suppliers to use
RFID tags, unless the supplier can figure out how this utilization
can be leveraged in its business to improve profit and increase
capacity utilization, the net benefit to the supplier will be
negative.
Many factors play a role in determining RFID technology's
costs and benefits. For example, costs can be fixed, such as
investment in new tools and processes to install and test tags.
Conversely, costs can be recurring, such as the cost of the RFID tags
themselves, or those associated with applying the tags on cases and
pallets.
Similarly, benefits can be direct, such as the reduction in
shrinkage or buffer stock. They also can be indirect, such as better
customer service due to more detailed and accurate visibility of ship
time and date of arrivals.
In this article, we will analyze these factors in detail to
help you quantify the return on investment (ROI) of implementing an
RFID-enabled supply chain solution that fits your particular
situation and requirements.
Elements of cost
The costs of an RFID deployment can be broken down into three
key areas: hardware, software, and services.
Hardware costs includes the cost of tags, readers and
antennae, host computers, and network equipment (cables, routers, and
so on). Software costs include those associated with acquiring new
middleware and application software. Service costs include the cost
of installation, tuning, integration, process reengineering, and
support and maintenance.
Let's take a look at each of these elements individually.
Tags-key considerations
Tag costs are one of the key considerations in any RFID
deployment. Tags come in various shapes and sizes based on
application requirements. These factors affect tag pricing
significantly. Other factors such as range, onboard memory,
read/write capability, and active/passive configuration also impact
the cost of tags. Generally speaking, the application requirement is
the primary driver for the selection of a particular type of tag. Two
types of costs are associated with tags: acquisition cost and
preparation cost. Also note that some of these costs may be
recurring, so careful planning and negotiation can bring volume
discounts, thus lowering tag costs.
Acquisition Costs: The Electronic Product Code (EPC) passive UHF
tags-typically used to satisfy Wal-Mart, DoD, and other retailers'
mandates-cost around 40 cents each. These so-called "smart labels"
often are embedded inside adhesive labels, which is all that is
required for the majority of case and pallet tagging applications.
Significant volumes in hundreds of millions, however, can yield
discounts of 20% to 30%.
In applications where cases and pallets contain metallic
items or liquid-filled products, or are subjected to harsh
environmental conditions (such as freezing temperatures), more
sophisticated and expensive tags may need to be used.
Preparation Costs: Tag acquisition costs are not the only
factor driving the overall cost of tags in an RFID deployment
scenario. One must factor in related costs as well. For example, when
using smart labels, the cost of the RFID label printer/encoder (and
possibly a robotic applicator) should be factored in. Mounting tags
on a metal surface or a container filled with liquid may require
special mounting accessories so that the tag can be read properly by
a reader. Smart label printer/encoders can cost anywhere between
$5,000 to $25,000 (when equipped with a robotic applicator). Mounting
hardware or other specialized tag packaging can sometimes double the
price of a single tag.
Readers and antennae
Reader range, multi-frequency handling capability (agile
readers), and antennae capability affect reader costs. A typical
reader comes with a set of application programming interfaces (APIs)
to communicate data with upstream processing elements such as a host
computer running RFID middleware or other applications. Some
manufacturers combine the host computer functionality and a reader in
one package to create a reader appliance (discussed later). Reader
prices, with one or two external antennae, vary from $1,500 to more
than $5,000 for readers used in rugged industrial environments.
Additional antennae can cost $500 or more. Handheld readers typically
combine the antenna and the reader in one package, costing more than
$1,500.
Host computer, middleware, and host applications
The host computers typically run the RFID middleware
software-responsible for collecting, filtering, and routing RFID tag
data-and other applications such as warehouse management and
inventory control. Depending on the type of application, a host
computer system infrastructure can run anywhere from a few thousand
dollars to hundreds of thousands of dollars.
The good news is that this is not a totally new cost to
incur, as oftentimes a computer infrastructure already exists.
Additional computers are only necessary if new software (middleware
or application) is acquired that cannot be accommodated on the
existing infrastructure. This typically is the case when new RFID
middleware needs to be acquired. As mentioned earlier, some vendors
offer a reader appliance that already includes much of the RFID
middleware functionality. Such appliances provide out-of-the-box
functionality and manageability, thus making them ideal for small and
medium-size facilities that don't have extensive resources to set up
and manage additional system infrastructure.
The cost of standalone RFID middleware can be anywhere from
$25,000 to $100,000 and up, and includes a site license (e.g. for a
single plant or warehouse location). A reader appliance, on the other
hand, could provide similar functionality at a cost of $8,000 to
$10,000 per appliance. The cost of application software depends on
the application. In some cases, an existing application, such as a
warehouse management system, will need to be upgraded to an
RFID-enabled version of the application. In many cases, vendors of
such application software provide built-in RFID middleware, thereby
eliminating the need to install and integrate a separate middleware
infrastructure.
Installation and tuning
Installation of all these components-tags, readers and
antennae, host computers, and related network infrastructure-can
indeed be complicated.
On the packaging floor or in a distribution warehouse, new
power connections and other network cabling might need to be provided
to install the RFID hardware infrastructure in various locations.
Special RFID portals may need to be constructed to detect or test
tagged items. Depending on the environment, additional gear may be
required to set up a network, whether it is wired Ethernet or
wireless. Depending on the size of the project, cabling costs (CAT5
or others) can also be substantial. Each environment has its own
unique set of challenges.
Separately, tuning plays a critical role in successful
implementation of an RFID application. This refers to activities such
as tag/reader placement or shielding to get optimum performance.
Because an RFID application is based on radio waves, many common
elements (water, metal, motors or engines, other wireless equipment,
and so on) can affect the accuracy of reading or writing RFID tags. A
signal sent by a reader may not be equally powerful in all
directions, or may have certain "blind" spots where RF energy is low.
Hence, the RFID system may need to be tuned by an experienced RF
engineer. The engineer can tune the reader and antennae for specific
situations, or use shielding to block RF noise emitting from other
devices. Note also that tuning requirements can vary greatly by
environment.
Finally, it is not possible to put a price on the cost of
installation and tuning without a comprehensive site survey and
analysis of both the existing infrastructure and the specific
requirements for the new RFID project.
Integration and business process reengineering
Full benefits of an RFID deployment can only be realized when
the data collected from tagged items is integrated into existing
systems and processes to increase operational efficiency and
effectiveness. This leads to reduced costs and better capacity
utilization. Integration efforts can be modest and entail integration
within a company's own operations. Or, the integration can be more
bold and cross company boundaries to involve cooperating supply chain
partners such as a supplier and its shipping and logistics provider.
Depending on the type of application into which RFID data
needs to be integrated, the cost of implementation can vary
significantly. It is usually easier to integrate with Web-based
applications that run on standards-based middleware (e.g. J2EE
application server or Web server). On the other hand, legacy
applications with proprietary interfaces may require more
integration. In some cases, the integration project may require an
overall re-architecture of the network as well as other business
processes, going into the realm of business process reengineering.
The extent and cost of integration depends entirely on the
level of benefit your company desires given the amount of investment
it is willing to make. A fully integrated and leveraged RFID
infrastructure that spans multiple supply chain partners may cost
millions of dollars, take several years to implement, and have a
payback over an additional three to five years. On the other hand, a
simpler integration project using in-house warehouse management
system to track inventory more efficiently and avert stock-outs can
cost no more than the upgrade fees associated with the warehouse
management software.
Support and maintenance
The on-going support and maintenance of the new
infrastructure and re-evaluation of existing processes to maximize
the usage of newly available data represent additional costs as well.
For example, a software support and service agreement can
cost 15% of software license costs on an annual basis. Physical
equipment can depreciate or fail altogether and need replacement.
Various existing processes may need to be re-engineered to take
advantage of the real-time data collected by an RFID system.
Different stakeholders may need to be trained on how to use these new
processes. Such costs should be factored into planning and
cost-benefit analysis to create a clearer picture of the scope of an
RFID deployment. A good rule of thumb is to assign somehwhere between
20% to 25% of the
total project cost to annual support and maintenance costs.
End result: the benefits
The benefits of an RFID deployment can be categorized based
on time (short-term versus long-term) and tangibility (direct versus
indirect). In some cases, a network effect will also be realized. For
example, the value and benefits of an RFID deployment will increase
exponentially, when the majority of the participants in a supply
chain deploy RFID to collect and share inventory and logistics data.
These categories are shown in the matrix illustration on this
page. For each quadrant of the matrix, a typical supply chain
application and its benefits that fit the characteristics of that
quadrant is also shown.
Using this matrix as a model and keeping the cost elements in
mind, let's take a qualitative look at how your company should
evaluate where to start, and what level of benefit best fits your
requirements and investment parameters.
Finding the right benefit level
In addition to looking at the type of RFID application and
its benefits, a company also needs to look at its business
environment and organizational readiness for innovation to make the
right cost-benefit decision. Because the specifics of these two
factors vary from company to company, it's wise to look at a few
examples to clarify the point.
A company that is under pressure from its customers or
regulatory bodies to comply with a certain mandate may have to deploy
RFID in its operations, or risk losing business or face a penalty.
Many Wal-Mart or DoD suppliers fall in this area. Such companies
derive indirect benefits from the deployment.
A company whose organizational readiness for innovation is
high can use RFID to gain competitive advantage, even if the benefits
of the specific application are not short-term in nature. Wal-Mart is
a good example. It has a history of using technology (e.g. barcodes)
to improve its operations and gain a competitive advantage.
Naturally, it also is one of the early adopters of RFID technology.
Long- and short-term benefits
In some situations, a company may decide to deploy RFID even
if the benefits are indirect or long-term. RFID use in healthcare to
deliver the right medicine to the right patient fits in this
category. On the surface, the direct benefits of improved
productivity seem to be minor. However, the indirect benefits are
quite compelling considering that the wrong medicine could harm or
potentially kill a patient. In a report recently published by the
Institute of Medicine, it is estimated that more than 7,000 patients
die every year in hospitals due to medication errors, and many more
suffer adverse reactions. If the use of RFID technology can curtail
this number, not to mention the reduction in lawsuits against the
hospitals, the cost-benefit trade-off is indeed worthwhile, even
though the benefits are indirect and long-term.
A company that can reap direct benefits from RFID deployment
in the short term may have a different consideration. In this case,
the reason to deploy RFID is straightforward, but the time to
deployment may be a factor. If such a company wants to delay the
deployment due to its IT readiness, it may have to rethink that
decision because of competitive pressure.
Tapping into third-party logistics
A third-party logistics (3PL) company that distributes goods
to retailers is a good example. It can use RFID in place of barcode
scanners to reap direct benefits in labor cost and accuracy. Barcodes
on various pallets at such facilities are usually scanned manually.
If a pallet is not oriented correctly, a physical move may be
required to read the code. A forklift equipped with an RFID reader
can read all such pallets. This not only saves time, but also adds
accuracy. Strategically placed readers can detect the movement of
pallets throughout the warehouse, thus significantly reducing the
number of items that are lost due to misplacement or shrinkage. The
3PL provider may have to invest in the RFID gear, but if it doesn't
make the investment, one of its competitors might.
Calculation of the benefits requires looking at savings
across the overall business process affected by the RFID deployment.
Many times, proper calculation requires breaking down the result into
its components.
The Smart & Secure Tradelanes project, a global effort to tag
and track container shipments around the world, provides a good
example. In this case, the benefits from tracking containers as they
travel across the sea come from better supply chain visibility, in
addition to indirect benefits such as security and compliance with
regulations. However, to calculate the benefits, one needs to break
"better supply chain visibility" into its components, such as, in
this case, reduction in safety stock (0.25% to 0.30% of cost of
goods), reduction in inventory pipeline (0.13% to 0.16%), reduction
in service charges (0.08% to 0.10%), administrative savings (0.04% to
0.05%), and reduction in pilferage/loss (0.04% to 0.05%). The
combined benefits yield a savings reaching 0.54% to 0.66% of the cost
of the goods in an average container.
What should you do next?
Clearly, cost-benefit analysis is critical to the successful
deployment of an RFID project. If an RFID project cannot be evaluated
in terms of its potential benefits to the company, and if those
benefits don't exceed the benefit threshold required, the solution is
not likely viable in the long term. As such, your company should take
a phased, well designed, and carefully planned implementation
approach. This will help you to minimize the up-front costs of
integration and maximize your return on RFID infrastructure
investment.
To start, you should choose a trusted advisor who understands
not only RFID technology, but also the intricacies of the supply
chain business, to guide you through a detailed cost benefit analysis
based on your very own application, investment, and objectives.
Several consulting companies provide tools and templates that
cost-effectively help you quantify the cost-benefit parameters based
on your specific objectives. The small amount of money spent in this
area might very well save you lots of money that you might otherwise
spend on unexpected or unnecessary hardware, software, or services.
Shahram Moradpour is chief executive of Cleritec Systems Corporation,
San Jose, Calif. Cleritec provides RFID solutions for manufacturing,
retail, and healthcare companies as well as logistics providers to
improve the efficiency and accuracy of their operations. Prior to his
appointment at Cleritec, Moradpour, with more than 15 years of
experience in the high-tech industry, most recently served as senior
director of market development at Sun Microsystems. He holds master's
and bachelor of science degrees in computer science from UCLA.
Moradpour is co-author of RFID Field Guide: Deploying Radio
Frequency Identification Systems.
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