Where’s the ROI?

The buzz about mandates has cooled and adoption rates have slowed as shippers question RFID’s cost/benefit equation. But some are finding that the technology offers substantial benefits in unexpected places.

By Bridget McCrea, Contributing Editor -- Logistics Management, 11/1/2006

It has been a few years since Wal-Mart shocked the world—and its suppliers—by mandating the use of RFID tags on cases and pallets of merchandise. Now, the buzz surrounding radio frequency identification has all but died down, and the hype over the Wal-Mart and Department of Defense (DoD) mandates has faded into the background. But does that mean RFID will become another technology “miss”?

Not quite. Technology vendors, product manufacturers, and large retailers have jumped into the fray, hoping to replace antiquated bar-code equipment and labels with this newer, more dynamic application. There’s so much interest that the RFID market is expected to grow from $504 million in 2005 to $3 billion in 2010, according to analysts at Gartner Inc. That has shippers asking themselves an important question: What’s in it for me?

Manufacturers like Procter & Gamble and retailers such as Best Buy and Sears are already getting their answers. They’re expanding RFID’s uses far beyond sticking tags on cases and pallets, to include such applications as physical-asset management, theft prevention, and process tracking. The financial benefits are still being calculated, but it seems clear that under the right circumstances, costly investments in RFID can indeed pay off.

What’s behind the slowdown in RFID adoption? Ann Grackin, CEO of ChainLink Research in Boston, credits a slower approach by Wal-Mart and the DoD with taking some of the heat off of shippers that have been scrambling to integrate RFID or risk being crossed off their biggest customers’ vendor lists. A ChainLink study of shippers found that only about one-third of companies that are implementing RFID programs are doing so primarily in response to customers’ mandates. More than 40 percent said they were adopting it to improve operations and supply chain processes (see chart, below - Driver: Mandate vs. Process Improvements).

Some blame the technology itself for the waning interest. At one time, RFID promised to replace the bar code, cut down on the number of warehouse workers, and reduce the number of mistakes caused by human error. But the technology’s unpredictability makes it difficult to harness and use in a manufacturing setting, says John Hill, principal at Toledo, Ohio-based ESYNC, a technology consulting firm. “Technical issues surrounding data synchronization haven’t stopped RFID, but they’ve certainly stalled it,” he says. “RFID is a combination of science and black magic, and it behaves in strange ways. While engineers focus on overcoming some of the issues associated with making RFID more universally applicable, the progress has been pretty slow.”

The fact that manufacturers have yet to see significant ROI from their investments has also put a damper on the RFID movement, says Peter Abell, RFID program director at IDC/Manufacturing Insights in Framingham, Mass. “The EPCglobal area of RFID is clearly treading water at the moment, primarily because manufacturers aren’t seeing any ROI from tagging cases and pallets,” he says. (EPCglobal sets standards for electronic product code technology, including RFID.)

ChainLink’s study supports that belief: Just over one-third of small companies and nearly half of medium-sized companies reported no plans to adopt RFID (see chart, below - Implementation Plans by Company Size).

But that’s not to say that shippers should give up on the technology, Abell advises. Those able to think outside the box (or carton or pallet) are finding some new and profitable ways to apply RFID. “We are seeing real-time locating systems and container tracking starting to gain traction and provide real ROI to the companies that are moving forward with those programs,” he says.

RFID’s versatility has even caught analysts by surprise, according to Grackin, who says she’s been “blown away” by the innovative uses that companies are finding for RFID. There are so many unexplored possibilities, in fact, that ChainLink runs a class called “RFID Innovators,” where students come up with new uses for the technology. “Not only are the ideas mind-boggling, but some of our students have gone on to implement them in their companies,” Grackin says.

Among the companies that are seeing meaningful benefits from RFID programs are Best Buy and Sears, who with help from IDC have put together an RFID council of consumer-electronics manufacturers. According to Abell, one of their suppliers is applying tags at the factory on printer chassis (the plastic cases that hold printers’ working parts). That move alone is expected to produce measurable ROI through cutting 15 to 27 percent on manufacturing cycle time, better process tracking, reduced theft, and labor savings on data collection.

For importers that bring in merchandise by ocean, tagged shipments could result in quicker customs clearance and fewer customs inspections because all of the shipping-container data can be stored on an electronic manifest, says Abell. He knows of one large manufacturer that ships product from China to numerous U.S. retailers. That company now uses RFID at the item, case, pallet, and shipping-container level, from the factory through to customer delivery—shaving $44 million off its bottom line through faster customs clearance, fewer inspections, labor savings at warehouses, and inventory reductions.

Grackin cites a different type of implementation as proof of RFID’s ability to deliver ROI. Wanting to get its displays of Venus razor blades in stores two weeks before Mothers Day, Procter & Gamble used RFID tags on individual, store-ready displays to track the speed and accuracy of deliveries.

“P&G was able to see where the displays were delivered, how long they took to get there, and how long it took to get the displays packed, shipped, moved, delivered to the store, and positioned correctly,” Grackin says.

Sun Microsystems took a similar approach and used RFID to solve a specific problem. In August, the Santa Clara, Calif.-based high-tech manufacturer rolled out an RFID system that keeps tabs on the thousands of pieces of hardware it displays and demonstrates at trade shows worldwide.

Previously, says Staff Engineer John Wetherill, Sun used a “decidedly low-tech” tracking system that required manual entry of serial numbers. “It was labor-intensive and riddled with typos and errors,” says Wetherill, whose preliminary research led him to an RFID-based asset-tracking solution from Fluensee. That system comprises a portal (made up of antennas, readers, and six different RFID tags) located at Sun’s Milpitas, Calif., warehouse. There, tags associated with specific serial numbers are applied to the equipment, pallet, or cart. As the items are shipped out to the events, the portal reads the tags and keeps track of subsequent movements, letting Wetherill and his team know where everything is at all times.

Only a few months into the implementation, the ROI is becoming clear, Wetherill says. Informed in real time about late equipment arrivals and missing items, the manufacturer can act quickly when problems arise. Sun now has more up-to-date knowledge of where its equipment is and what is available, and its employees aren’t spending their time manually entering serial numbers and struggling with antiquated applications to figure out what goes where.

The RFID tracking system also creates a number of reports that allow Sun to determine how well it is utilizing its assets. “We can choose a hardware type, determine how often it has been used, and figure out what we need to order more of and what we need to make obsolete,” says Wetherill.

The tagging itself can be a chore, due to the fact that most of Sun’s equipment is made of heavy, dense metal rather than of cardboard or wood, Wetherill says.

But Sun has been able to overcome most of the issues associated with the metal’s interference with tags and readers by using luggage-type tags. “We have about 90 percent of our equipment tagged, and we’re working out the challenges for the remaining 10 percent,” he says.

Like most technology analysts, Grackin foresees a significant expansion of RFID use in the future and expects the ROI to increase along with it as the technology itself improves, standardizes, and comes down in price.

For many companies, the high cost of RFID systems remains a strong deterrent. But the fact that passive tags are inexpensive and active tags are reusable makes it easy to attain ROI based on a cost-per-use model, Grackin asserts. “Once you’ve used an active tag hundreds of times, it’s no longer expensive,” she explains.

The real value will come when multiple trading partners use RFID to do business with one another, says Grackin. Where many systems are now operating in an internal, closed-loop environment, RFID eventually will be used to work with downstream partners who install their own readers and share information via radio frequency. That will facilitate collaborative activities such as replenishment planning for retailers and inventory reductions across the supply chain.

“It’ll take time, but in the future we’ll see readers everywhere that are based on a standard that allows companies –given the right security access–to read [other companies’ data],” says Grackin. “RFID presents tremendous opportunities for shippers.”

For logistics managers who have been scratching their heads over the potential return on investment they might attain from RFID, says IDC’s Abell, now is the time to put this technology on their “roadmaps,” conduct some small-scale equipment tests, and keep their eyes peeled for innovative uses for RFID applications.

“One of our clients is using it to track the shock and vibration of shipments from one place to another to determine the source of product damage,” says Abell. “Going forward, I think you’re going to see more examples like this as shippers look to eke the best possible ROI from their RFID investments.”