Return on investment (ROI) is measured by the profit and cost savings realized by a company as a result of a given expenditure. For many manufacturers and retailers, one of the greatest investments they will have to make this year is implementing RFID, specifically the Electronic Product Code (EPC) technology being adopted by Wal-Mart and the Department of Defense. Many manufacturers are asking, Will RFID and EPC deliver the ROI that is being promised, or are they overhyped technologies that may fail to meet growing expectations?

“This question has no universal answer, but rather depends on the player asking,” says A.T. Kearney Inc., a management consulting firm. “Not all companies will benefit from these technologies equally. Some participants will see significant returns. Others will see very few, if any at all.”
The amount of benefit you can get out of RFID is relative to the performance level of your company. “If you have world-class, leading capabilities in your logistics functions, the amount of benefit you’re going to get out of RFID will be very small and incremental,” says Michael Dominy, a senior analyst for the Yankee Group. “But if your company is moving from a paper-based system that is updated once every 12 hours to an RFID-enabled system, there are going to be dramatic benefits. But you’re going to have to invest in a lot of technology, and your costs will be greater.”
When evaluating the benefits of RFID, Dominy divides the analysis into three stages. The first focuses on compliance with customers’ requirements. The second involves the internal supply chain. And the last stage deals with the inter-enterprise, or extended, supply chain.

In the first stage, there really isn’t an ROI. Whatever savings a company may derive from reduced labor costs (scanning and reading) are offset by the cost of the tags, readers and integration services. At this point, RFID is just a cost addition.

In the second stage, companies start to make internal supply chain improvements and can begin to leverage RFID information to make their processes more efficient (e.g., effective cross-docking).

“The third stage is the holy grail of RFID,” says Dominy. “We are three to seven years away from reaching this point. But when you start analyzing the complete flow of goods–from the manufacturing operations to the distribution and warehousing facilities to the transportation network to the customer–you can find ways, in a collaborative environment, to reconfigure the flow so that you reduce inventory and cut overall logistics expenditures.”

The major beneficiaries of RFID will be the retailers. According to an A.T. Kearney report, most retailers will see benefits in three primary areas:

* Reduced inventory. This is a one-time cash benefit, conservatively estimated at 5% of total inventory. The improved visibility afforded by EPC and RFID will enable retailers to improve demand forecasting accuracy, leading to reduced safety stocks and order cycle times.

* Store and warehouse labor reductions. Reduced labor expenditures are a recurring benefit, estimated at 7.5% of warehouse labor. These figures are based on retailers with sophisticated systems and processes–less sophisticated users could see greater savings.

* Reductions of out-of-stocks. The expected annual benefit in sales dollar basis points, based on improved inventory tracking, is conservatively estimated at seven. To achieve this benefit, retailers must be prepared to reengineer existing shelf-fulfillment processes.

Manufacturers will derive benefits both within their own organizations and with trading partners. In-house benefits will come in the form of enhanced inventory visibility, greater labor efficiency and improved fulfillment.

Improvements associated with trading partners depend on “the retailer or distribution partner taking action on events as a result of improved product information,” says A.T. Kearney. “These benefits primarily center on reduced store-level out-of-stocks, finished goods inventory and unsaleables. To counteract the dependency on partners and realize the potential savings, manufacturers need retailers to change their processes and share information currently considered confidential. For all manufacturers, there is a risk that retailers won’t share any information, or at least not as much as is expected.”

Costs

Retailers’ costs will include readers and portals, middleware and systems integration and consulting.

“Non-tag-related cost is a high percentage of the total investment,” says Yankee’s Dominy. “Somewhere in the neighborhood of two thirds to three quarters of the total investment is probably going to be consulting and systems integration work.”

“Preliminary estimates for large retailers, without taking distinct operating characteristics into account, have EPC and RFID implementations costing $400,000 per distribution center and $100,000 per store,” say A.T. Kearney. “Additional costs for systems integration could range from $35 to $40 million for the entire organization. While these are very significant amounts, the upside is that most of the costs are fixed. Software and hardware maintenance will be ongoing.”