Beyond RFID mandates ? looking for ROI

Exclusive interview with Supply Insight Inc.'s Uday Shankar.

US. RFID technology has been used by companies in closed-loop systems for years. RFID usage in open-loop supply chain systems has been initiated by the mandates from various retailers. These mandates from retailers and government organizations like Wal-Mart, Best Buy, Department of Defense (DoD) and Federal Drug Administration (FDA) are driving the first wave of RFID adoption (2003-2007). And they are driving the RFID technology providers to innovate and improve their products, improve read rates, agree on standards, reduce cost and build better solutions.

In the second wave, we feel that companies will use RFID to improve their internal business processes and derive steady ROI (2006-2008). This will set the stage for the third wave, which will drive mass RFID adoption. Once the mass adoption starts, we will see better information visibility and supply chain optimization across enterprise.

ERS. There has been lot of talks on high cost of RFID infrastructure. Is it a real hurdle in RFID deployment?

US. Cost of RFID infrastructure is definitely a major factor in an RFID project. If the cost of a tag is high, low value items cannot be tagged. In recent months, after Gen2 acceptance, we are experiencing that the cost of RFID infrastructure is going down. Tag, reader and printer manufactures are reducing their price to jump-start the market and gain market share. If you look at the latest AMR report on RFID ROI, you will realize that cost is not the only factor. Price can go down only to a certain level; after that business cases and ROI will drive the market. If the business sees a good case and solid ROI, the IT team can easily justify the cost to the management. If there is no ROI, projects with any cost will be a difficult sell.

ERS. Is ROI achievable? If yes, what kind of ROI are being achieved in RFID projects?

US. Yes, ROI can be achieved in RFID projects. A recent study by the University of Arkansas has shown 16% reduction in out-of-stock merchandise at Wal-Mart stores equipped with RFID labels using EPC codes. The study also shows that out-of-stock items with RFID were replenished three times faster than items using standard barcode technology. Similarly RFID can be used to authenticate products, reduce excess inventory, and reduce losses due to theft and counterfeiting. Different ROI can be achieved by implementing RFID in different projects. It is also important to choose the right product line for tracking. High value items like, televisions and DVD players are good candidates for tracking and they can bring the ROI immediately. I can imagine low value items like a loaf of bread is going to be tracked only after a long time.

ERS. When do you think people will move into ROI projects?

US. Companies have been doing ROI based pilots in 2004 and 2005. We expect to see more and more pilots to happen in 2006. Once positive results hit the market from these pilots, people will start doing full project implementation by 2007.

ERS. What kind of role do you think standards will play in RFID projects?

US. We feel standards will help the projects – and the vendors – to achieve ROI faster. EPCglobal is driving to achieve these standards. The emergence of Gen2 had a very positive impact on the RFID market; reader and tag companies supporting the Gen2 standard have brought a lot of interoperability. This has reduced the prices of the tags and readers.

EPCglobal is working on other standards like ALE, EPCIS, ONS and other industry standards. These standards are going to accelerate the development of hardware, software and other applications in the market. Standards are also going to bring interoperability across hardware and software – which definitely reduces the implementation cost to a greater extent.

ERS. Does RFID implementation need process changes?

US. Supply chain processes are very complex in nature as it spans across departments within an enterprise and in some cases across enterprises. Implementing RFID to gain the best ROI definitely demands change to the supply chain processes across enterprises. Organizations should be open to change the person and process to get the best benefit. For starting a pilot, companies can start with closed-loop systems to gain the ROI. But to get the best results, it is important for companies to understand how their supply chain planning and execution works and reengineer the process. Reengineering the process can be within the enterprise and across the trading partners.

ERS. What kind of software is needed for best ROI?

US. Most of the organizations have supply chain software running in their enterprise. Either it could be a large ERP system or homegrown applications. Changing these software applications completely is an impractical task. When you select the software to implement RFID you have to keep this in mind. You should select the right software for the project. The software should collaborate with the existing systems rather than changing it completely. Software should be standards based, scalable and vendor neutral. Selecting a simple slap and ship product might solve the problem now but not for future expansion. People should select an RFID platform that can scale with the implementation. For example, we have an RFID platform that not only solves the slap and ship scenario now but it will prepare for the future scalability. Our software will provide the functionalities of a middleware at the same time it provides the integration capability needed for the back end systems. It can do the translation between RFID data and the business events. Choosing software that can scale like this is critical.