Is ROI the Best Way to Judge an RFID Investment?
There have been quite a few developments in the Radio Frequency and Identification (RFID) technology space which have increased the adoption of RFID technologies in supply chain. For instance:
- Reduction in technology / implementation costs
- Development of uniform standards for implementation
- Developments in middleware technologies like SAP AIE which integrate better with existing ERP systems
- Improved technology performance
The use of RFID technology is hence gradually moving from pallet or case level applications to the item level applications. However, companies are concerned with the Return on Investment (ROI) of RFID implementations and often opt for other investment opportunities.
As May Tajima puts it in ‘Strategic value of RFID in supply chain management’, some of the tangible benefits which are typically considered while estimating the ROI of RFID implementations in supply chain are:
Process Automation through Wireless Technology
- Reduced shrinkage and theft of products
- Better material handling leading to reduction in process times and reduced errors
- Automation in shipping, leading to fewer delays & shorter delivery lead times
- Reduced number of stock-outs through automated replenishment
Closed loop tracking through unique object IDs
- Tracking of raw materials, WIP inventory, finished goods and assembly status during production, leading to reduced errors and better quality
- Lower safety stock inventory levels, as products move faster through the supply chain
- Ensuring continuity in production through supply availability
- Reduction in maintenance time and maintenance costs
- Improved efficiency and flexibility of space and asset utilisation
Visibility in supply chain to track and trace:
- Increased data accuracy & improved inventory records leading to reduced out-of-stock situations, prevention of inventory obsolescence
- Improved demand forecast and production planning due to better information
However, there are a lot of benefits that a company derives from an RFID implementation, which are not tangible but give a strategic long term value to the entire supply chain. For instance:
- Faster exception management due to timely data, business intelligence, alert management
- Authentication and Counterfeit Protection through e-pedigree, which prevent erosion of sales volumes and enhance the product brand
- Organization culture change due to visibility, information sharing and automation of processes, leading to improved innovation capabilities
- Enhanced customer experience: Staff free from inventory related activities can focus on customer. RFID kiosks installed at retail outlets can be used to display product information
- Enhanced after-sales service: Faster response to recalls, improved warranty processing and returns handling enabled by track and trace capabilities
- Improved regulatory compliance (Pharmaceutical industry)
These aspects can best be realized if there is a strong willingness among the buyers and suppliers to collaborate through the use of RFID. Achieving such high level of collaboration across multiple stakeholders entails significant effort and trust between partners. There is hence, a considerable first mover advantage and organizations can learn the art of transforming organizational practices for optimum use of technology.
These investments should not be viewed as purely revenue increasing / cost reducing over a horizon of 2-3 years and hence should not be judged by ROI alone. The investment in RFID in fact facilitates a sustained competitive advantage over the long term and can perhaps be better judged by estimating the discounted Net Present Value (NPV) or Incremental Rate of Return (IRR) of both the tangible and intangible benefits.
– Vivek Jha, Supply Chain Consultant, Bristlecone
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