RFID: An ROI Black Hole

Few technologies have as much potential to impact a wide array of businesses' decisions as radio frequency identification (RFID). The promises of massive cost savings, efficiency gains, and unprecedented visibility into the supply chain have many companies scrambling to devise an RFID plan.

Listening to the hype surrounding RFID, many managers are considering RFID technologies over the long term but are taking a wait-and-see approach. Others are being forced to implement RFID because customers, such as Wal-Mart and the Defense Department, are mandating it. Is this yet another case of a mad rush to adopt a technology without a proven ROI?

The current high cost of RFID equipment will make it difficult for companies to reach a quick payback if they implement within the next six months. While early evidence suggests that larger companies can reap cost savings from RFID systems, most companies - except those under pressure from major customers - are advised to wait.

The current high cost and immaturity of RFID technology creates an unacceptably high risk of negative ROI if RFID is deployed today.

To analyze the early impact of RFID technology, Nucleus analysts conducted interviews with representatives from 22 manufacturing companies that currently utilize supply chain management systems.

Seventy percent of the companies interviewed have no plans to implement RFID in the next six months.

Key findings included the following:

  • Eighteen percent of the companies are currently using RFID technology.
  • Of those companies that are not yet using RFID, 12 percent have plans to implement in the near future.
  • Sixty-nine percent of companies without RFID say that the cost must come down before they will consider deploying the technology.
  • Of the companies interviewed, 24 percent have customers and 27 percent have suppliers currently using RFID.

Nucleus found few companies that had implemented or planned to implement RFID technologies because of a desire to reach a positive ROI. Instead, most were doing so because of pressure from trading partners or large customers or simply because RFID is the latest technology.

Sources of Hesitation

The results of Nucleus's research show that among manufacturers, there is both hesitancy to deploy RFID technology and uncertainty about its potential ROI. These companies can be divided into two major categories: those that are forced to think about RFID because of pressure from customers and/or suppliers and those that are unsure how to proceed.

Twenty-five percent of interviewed companies without RFID systems cite existing investments in optical scanners and barcode readers as the primary source of their hesitancy.

Turning the Thumbscrews

For companies pressured by customers such as Wal-Mart, there is little choice but to proceed. Nucleus recommends that companies:

  • Wait as long as possible before starting large-scale deployments because the cost of RFID technologies is dropping monthly.
  • Carefully assess the costs of labor, stock-outs, theft, and inventory before implementing RFID. A company can conduct a predeployment ROI analysis only if it is armed with extensive metrics related to previously existing business processes.
  • Invest in open standards, such as XML, as much as possible. If a company ties an RFID system to proprietary software processes, it will be locked into out-of-date technology almost as soon as its deployment is complete. An RFID project is an excellent opportunity to revamp proprietary systems and invest in open standards.

Wait and See

Though Nucleus generally recommends that waiting to deploy technologies with clear benefits means only delaying a payback, RFID is clearly a different situation. Companies that are not being forced into action have more flexibility to wait out the first wave of products and allow the market to mature. As noted earlier, the prices of RFID equipment are dropping rapidly, thus making a wait-and-see approach an excellent option. However, companies will need to find a balance between waiting for prices to drop and going ahead and reaping the benefits of RFID. In other words, companies that wait too long could actually find themselves losing out on potential benefits, especially once prices begin to stabilize.

To determine at what point to jump in, companies can follow a few simple steps:

  • Quantify the expected benefits from an RFID employment. How many warehouse and other supply chain employees can be reassigned or cut? What systems can be eliminated? How much can be saved with lower inventory levels?
  • Determine how the above metrics translate into monthly net benefits.
  • Use the monthly benefits to help identify where a payback point would occur given a certain fixed investment plus ongoing costs.

Conclusion

As with any new technology, early adopters often pay a high price and suffer from extended ROI payback periods. Those companies that are being forced to adopt RFID technologies because of mandates from trading partners clearly have little choice, but they can still take steps to maximize ROI and minimize risk. Companies lucky enough to have more flexibility should start planning RFID strategies now but can take the time to wait for costs to drop and ROI potential to increase.

Copyright © 2003 IDG Communications, Inc.

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