Finding the ROI in RFID

by John Fontanella

June 14, 2004

Radio frequency identification delivers value when applied to well-defined and controlled business processes.

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Don’t paint all radio frequency identification (RFID) projects with the same
brush. The Wal-Mart mandate that its top 100 suppliers attach RFID tags to cases
and pallets by 2005 has thrown the entire technology of Automatic Identification
(Auto-ID) into the spotlight. In some ways, it’s a boon for the industry. Data
collection technologies like RFID have invariably taken a back seat in interest
to their more glamorous high-tech counterparts. But awareness is a double-edged
sword, particularly when market perception is shaped by a single, complex, and
hugely ambitious undertaking. Viewing RFID only in the context of an industry-transforming
initiative does a disservice to the technology. Companies that take a more simplified
and focused approach in the use of RFID technology incur much less risk in implementation,
receive tangible value, and build capabilities that give them significant differentiation
from their competitors.

A Brief Description of RFID

RFID is part of the larger Auto-ID technology family, a growing but constant
part of our business and personal lives. Smart cards, automated toll collection
devices, and sensors that track the condition of anything from tires to consumer
electronics all fall into this category. The RFID tag itself is a microchip,
millimeters thick, with an attached antenna that transmits information to a
remote reader. Because radio waves can pass through most solid objects, gathering
or disseminating information does not require the tag to be visible. This is
a radical departure from other identification technologies, such as the bar
code, and opens a whole new way to view a business process. Tags can be active
or passive, meaning that they can broadcast information or just transmit when
queried by a reader. They can also be designed to be re-used, or serve as a
one-time-only ID device.

The technology is already quite flexible. Information such as a serial number
can be burned into a tag in a one-time operation for the simple purpose of providing
identification throughout a process, much like the bar code is used today. Other,
more sophisticated uses include using the tag as a mobile database, recording
and directing workflow along an assembly line, for instance. The technology
can also be used to sense, monitor, and record environmental changes, such as
temperature, moisture, and exposure to light. Some of the capabilities of the
technology have been used for years while others are newly emerging.


RFID’s Value

RFID’s value lies in enabling companies to reach a level of process discipline
that is beyond the reach of human interaction or alternative technologies. Process
discipline provides accuracy and predictability, which in turn reduces cost,
optimizes the use of assets, and enables a company to deliver consistent, and
sometimes unique, service levels to its customers.

Eliminating Waste and Inefficiency

There are business processes in every company in which the level of process
discipline required is not achievable by humans working in tandem with technology.
Overcoming these limitations is difficult and expensive. While the option to
create a totally automated process may be available, the normal course of action
is to accept the waste and inefficiency created by noncompliance to process
as a cost of doing business. This is where applying RFID has proven most effective
– not marginally improving an already well-disciplined and well-performing process,
but by delivering a unique capability that overcomes the barriers commonly caused
by an operating environment or material characteristics.

Much of the RFID technology used to drive process compliance is mature and
represents little implementation risk. It also doesn’t need a complex problem
to solve before it can add value. A U.K. wholesale distributor cut energy charges
by almost 25 percent by using RFID to synchronize the opening and closing of
doors in its refrigerated warehouse with the arrival and departure of trucks.
The savings are a result of a dedicated and precise monitoring system, more
efficient than a dock worker already distracted by stock handling and administrative
tasks that are part of the receiving or shipping process. Short implementation
time with proven technology yielded a return on investment that surpassed expectations.

RFID as an Automation Technology

Manufacturing companies with highly automated assembly processes have been
early adopters of RFID. They view it not only as a data collection technology,
but as a way to further streamline the production flow.

The use of RFID as a process automation tool is being pioneered in the automotive
industry. A large automotive manufacturer in South Africa pioneered its use
by embedding processing instructions (recipe) on a reusable tag that is attached
to a part or component. The tag interacts with process control equipment on
the assembly line, directing the sequence of assembly and collecting data to
confirm completion. A large tier 1 automotive manufacturer uses RFID in a similar
way. The recipe embedded on the tag describes the component attributes for the
assembly process to ensure that production and loading of the delivery truck
is done to match the assembly sequence at the original equipment manufacturer.

Having data move together with a part or component offers a glimpse into the
real value the technology can bring. When used as a mobile database, RFID eliminates
much of the systems integration required today to direct assembly operations
and collect quality and production output of the process. Because it can capture
cradle-tograve data about an assembly process, RFID is also being used in industries
with strict compliance requirements.

Challenging the Natural Evolution

Challenging the natural evolution of RFID technology incurs more risk and poses
less chance for success. As with most other technologies, RFID implementation
plans should act as a road map for gradual adoption and business process improvement,
where each step adds value and forms a building block for future, larger-scale
implementations. In AMR Research’s RFID reference model, RFID implementations
reside in one of four levels.

Discrete Process

Applying RFID technology to a single activity or process yields the greatest
chance for success. Hardware and software is built to meet a specific purpose,
and the process is designed well within the boundaries of the technology’s capabilities
and limitations. The workflow is tightly controlled, with little or no process
variation. The RFID technology to support projects that typically fall into
this category is very mature, and, in many cases, the incidence of tag failures
surpasses Six Sigma standards. Integration to other systems is minimal, which
simplifies the implementation, and there are plenty of experienced service firms
available to assist in installation.

Intracompany

Extending RFID-enabled business processes across two or more entities within
your company adds complexity and risk, but it can also yield impressive results.
Companies that have experienced success with this model still maintain strict
control over workflow to minimize process variability. Additional steps must
also be taken to ensure that the operating environments through which a product
will flow conform to the requirements. This includes distance of readers from
product, elimination of potential interference from other automation equipment,
and protection of the tag from weather conditions or damage as it moves through
the internal supply chain.

The rigidity of the workflow required may be viewed as suboptimizing other
operations when crossing functional boundaries. The intracompany model is justified
on total cost, which should reflect an overall performance improvement.

A potential hazard to the incremental approach is independent projects that
are launched within a company without establishing enterprisewide standards
for hardware and data formats. This can prevent integration at a later date.
To mitigate this risk, a large discrete manufacturer chose one division to pilot
the use of RFID, but set up a cross-company governance board to make decisions
on hardware purchasing decisions and the tag data schema and format.

Intercompany

The synchronization and coordination of RFID-enabled processes with one or
a very limited number of supply chain participants can allow a company to offer
differentiated services at a level that exceeds its competition’s. Unless you
are a channel master that can dictate operating norms within your supply chain,
you will be expected to provide value and create a minimum amount of disruption
within a supplier’s or customer’s operation. Knowing that enforcing process
rules at an external site is all but impossible, this model must view an RFID
implementation as a form of process automation, requiring minimal human intervention.
The sponsoring company must also retain full control over the choice of hardware,
tags, and data schema, which in effect become a proprietary standard.

The proprietary standard will be an issue for many industries as competitors
flood customers and suppliers with alternative RFID initiatives. The inevitable
result will be a call for industry standards that will allow consistent application
and use of the technology in the entire supply chain. The intercompany model
can be a competitive differentiator early on, but the ultimate investment decision
should be made on the basis of expected value over a finite lifecycle and how
receptive partners are to interim and proprietary, solutions. If a project’s
goal is to increase efficiency only, a possible answer to this dilemma is to
use third-party services that in effect have created a de facto standard for
an industry. In the U.K., the brewing industry uses ruggedized RFID tags from
TrenStar to track the location and ownership of beer kegs. TrenStar also supplies
RFID-enabled ingredient bins to food manufacturers, whose information not only
tracks location and ownership but also guides stock rotation of the raw materials.

Synchronization

The ubiquitous use of RFID technology across an entire industry, installed
within thousands of companies, conjures up visions of a totally efficient supply
chain. Realizing and sustaining such a vision is well beyond the capabilities
of current technology, stretching the concept of inter-company collaboration
to a level not realized today. Low cost and adoptability to a multitude of operating
environments by tags and hardware, common standards, and massive adoption are
key ingredients to make this dream a reality.

The development of the electronic product code (EPC) standard and the Wal-Mart
mandate that its top 100 suppliers attach RFID tags to cases and pallets by
2005 are often considered the vanguard of the coordination stage. On its own,
Wal-Mart’s RFID initiative falls into the intercompany stage; its mandate legitimizes
by its market power. The real test of the coordination model will be to see
if other large retailers comply with a still-emerging EPC standard as they roll
out their RFID requirements.

While most successful RFID deployments today are at Level 1 (discrete process),
some early adopters have deployed at Level 2 and even Level 3 and are realizing
the value of following this strategy. A major food distributor is now attacking
the problem of multimillion-dollar supply chain losses with RFID, crediting
the gradual automation of first a discrete process, then an intracompany process.
Minimizing risk, maximizing learning, and returning real value at each step,
it is now poised for a multimillion- dollar savings annually.

It is worthwhile to note that as RFID projects widen in scope (advancing along
the maturity curve), services and integration costs become dramatically higher.
Companies interviewed experienced a services cost as low as 15 percent of total
budget for Level 1 implementations, while companies that transitioned to Levels
2 and 3 experienced a 40 to 70 percent services component, primarily because
of increased need for business application integration and RFID software infrastructure.

The Six Common Attributes of RFID Implementation Success

Based on the interviews with companies implementing RFID, we identified six
common attributes that successful projects shared. Excluding even one can cause
a chain reaction that might mean failure for the project.

  • Create company support for adoption of RFID technology by addressing a highly
    visible need or problem that has not been solved by alternative approaches;
  • Deploy only when all process, technical, and environmental variables are
    known to you and are under your control. RFID technology has very little tolerance
    for change;
  • Take no vendor claim of performance at face value. Be sure that the technology
    has been developed with your process and environment in mind;
  • Minimize application integration requirements;
  • Use services partners that have hands-on experience with the technology
    that you are implementing; and
  • Protect your investment by structuring RFID contracts to safeguard your
    intellectual property.

Conclusion

The value that RFID technology will deliver to the supply chain is significant.
Understanding its potential and shortcomings is vital for successful implementations.
RFID will ultimately have a profound impact on business processes and the applications
that support them.

Its true value hasnft been realized yet; RFID is answering questions that
companies arenft asking yet, but should be in a demand-driven supply chain.
Typical of any technology adoption cycle, implementers will choose simple approaches
for initial projects. As experience and confidence grows, RFID will be used
to build progressively more complex, and at times, revolutionary processes.

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