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To get better ROI from RFID, consider drivers beyond compliance

Radio frequency identification (RFID) projects continue to be driven by compliance initiatives but getting better ROI from RFID involves looking deeper.

The primary driver for radio frequency identification (RFID) projects in many companies is meeting compliance initiatives, but identifying other business drivers can help bring a better return on investment (ROI).

A closer look at where errors are occurring in the supply chain or how inventory management can be improved, as well as a review of the current technology landscape to ensure that it's optimized for RFID, can help ensure that RFID projects bring compliance and ROI, according to analysts.

"I think that a lot of [companies] … look at RFID tagging as simply a response to a requirement by a Wal-Mart or a Sam's Club. They're not looking at the bigger picture and the value auto-ID technology can deliver," said Andre Pino, chief marketing officer for Marlton, N.J.-based Acsis, an SAP partner that focuses on automated data collection and traceability products for SAP SCM software. "They can really start … [using] auto-ID to benefit their own business, and as a benefit of that they get the compliance."

To better protect supply chains on the pharmaceutical products side, several states, led by California, have put in place regulations that require organizations to track the chain of custody for prescription drugs from manufacturer to sale, producing what is called an E-pedigree.

On the consumer products side, major retailers like Wal-Mart are starting to require RFID identification at various levels -- from the case level to the pallet level. Ultimately, Pino said, the goal is to automate the point-of-sale checkout so that a consumer can walk out of the store with a cart full of goods, and a credit card is automatically charged for it.

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Operational improvements justify implementing RFID for a complex scenario like supply chain visibility, according to Roy Wildeman, senior analyst with Cambridge, Mass.-based Forrester Research. Identifying these improvements depends on the current state of operations, as well as the level of tagging necessary, he said -- whether a company is tagging pallets, cases and/or item-level tags.

Simple upfront diagnostics can show how a company's products map to common benefit areas, like reduced shipping errors or improved inventory management, and can help find the operational areas or product groups with the highest potential ROI, Wildeman said.
Because business process executives -- such as supply chain vice presidents -- are closest to operations, they are best suited to identify such opportunities, he said. From this standpoint, a strong technology foundation isn't as important as strong business leadership to drive the value of RFID projects.

That said, RFID investment with minimal systems integration is unlikely to produce ROI, at least not at today's tag prices, Wildeman said. Combining RFID-generated event data with the right business context from enterprise applications can produce a modest ROI -- around 13%, assuming 80% of products are tagged -- and positive business benefits in a typical manufacturing and distribution supply chain, he said.

"Of course, increased systems integration also spells increased costs," he said. "All the more reason for RFID project champions to be clear and vigilant about the scope and deployment risks of their systems integration activities."
Another driver is cutting down the time it takes to enter the data, Pino said. Before beginning an RFID project, look at how automated the data collection is, and if it requires multiple screens and manual entry into SAP, RFID can automate the transaction and eliminate all of that.

"How much time are the various folks on the floor spending on getting data into the system, which in the case of SAP is not always that easy," Pino said. "[With RFID] employees don't have to stop what they're doing and enter the transaction. They only have to deal with exceptions. They're not dealing with the day-to-day processes."

In turn, look at the current error rate for data that's entered into the system, Pino said. A good place to start is to look at errors associated with shipping and receiving.

Trying to better manage and control outsource partners by gaining greater visibility is also a common business driver for SAP SCM projects in this economy, he said, as is improving processes around warehouse management (WM), such as shipping, receiving and load operations. RFID is an opportunity to integrate those silos and streamline existing processes.

"Any of the operations that require someone to stop what they're doing and interface with a system is an opportunity to optimize the system," Pino said.

Analysts don't expect the state of the economy to be a major inhibitor to RFID projects in the coming year.

"Successful RFID initiatives tend to be driven by champions from the business with a strong, long-term vision for the technology," Wildeman said. "From this standpoint, many RFID programs are complex, multi-year endeavors that will be continuously pursued throughout the ups and downs of the economy."
But factors such as the high cost per tag -- which is still in the 10 to 12 cent range -- will continue to slow adoption. Still, a larger challenge is achieving better coordination and alignment between manufacturers, distributors and retailers, Wildeman said.

For example, manufacturers and distributors have a mutual dependence on the value from the technology, he said. Oftentimes, a plant will front product tag costs, trusting that valuable downstream information will be shared, while a distribution center will build out its RFID infrastructure and plan on automation benefits assuming that product will arrive fully tagged from its suppliers.

"Given this dependence, technology ramp-up schedules, specifications and level of data sharing all must be clearly coordinated and committed to by each organization," Wildeman said. "[That is] no easy task and a continuing barrier in many industries, like consumer products and pharmaceuticals."

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