Building the RFID Business Case

Mandates from Wal-Mart, Metro Group AG, and the US Department of Defense ordering suppliers to use RFID tags on shipments have spurred many organizations into action. Reluctantly, suppliers have begun to form business cases focused on complying only with their customers' wishes.
Written by Bruce Hudson on

Mandates from Wal-Mart, Metro Group AG, and the US Department of Defense ordering suppliers to use RFID tags on shipments have spurred many organizations into action. Reluctantly, suppliers have begun to form business cases focused on complying only with their customers' wishes. This approach is shortsighted and will lead to wasted investment and failure of the organization to build a technology strategy that evaluates and deploys RFID technology enterprisewide for competitive advantage, rather than for customer appeasement.

META Trend: During 2004/05, external pressures to leverage new technologies (e.g., RFID, UCCnet), provide customized services, and improve visibility will drive organizations to upgrade supply chain execution applications (e.g., warehousing, transportation, manufacturing). Concurrently, international trade, security, and compliance pressures will motivate organizations to upgrade global trade, health/safety, and contingency planning solutions. Through 2008, organizations will merge information processes among CRM, SCM, and PLM applications to holistically scrutinize demand/revenue flows across customer and product life cycles.

There is no positive ROI within the first two years for suppliers focusing on complying with the Wal-Mart RFID mandate. That is the result of an analysis of client interactions centered on the forced adoption and implementation of Wal-Mart's RFID plans in open supply chains. However, that conclusion is not a reason to abandon RFID trials. Much of the negative ROI is related to immature standards and technology, a lack of economies of scale, and limited adoption by members of the supply chain. As these issues are resolved, and as costs shift from manufacturers to packaging suppliers that embed RFID labels in packaging, the ROI equation will shift toward the black. The bleak picture painted by Wal-Mart suppliers underscores our belief that organizations need to fully understand the technology and examine all business processes where RFID technology could be applied. Without a broader view, organizations risk becoming soured on RFID and will miss higher-return, higher-impact applications.

Building the case for current enterprisewide RFID adoption is much like building the business case for corporate Internet access was in 1995. At that time, organizations made a leapof-faith investment in servers, routers, and networks to be prepared for applications, unknown at the time, when they arrived. Conservative organizations that were overly cost-focused viewed the investment as frivolous, seeing e-mail as the only application at the time. Consequently, these conservative organizations found themselves at a competitive disadvantage as new applications and business processes were developed based on Internet technology. In the case of RFID technology, organizations should not make their decisions solely based on ROI or Wal-Mart compliance. They must focus beyond to the bigger impact of RFID, or risk being at a competitive disadvantage in the future.

Leading organizations will examine RFID in its entirety (i.e., focus not only on electronic product code technology, but also on all RFID technologies), and apply its potential across all business processes (see Delta 2100). RFID is still a very immature technology in some aspects. Standards will change, as will costs of tags, readers, and software. It is important that organizations develop a process to periodically revisit their analyses and decisions based on new developments, as well as the means to capture knowledge gained during analysis and trials. The key steps in building the business case are described below.

Build the Team. Organizations must recognize that adopting and deploying RFID technologies affect more than the IT department. Virtually all parts of the organization could be impacted, as well as suppliers and customers. Accordingly, organizations need to build their teams to include all stakeholders. C-level participation is mandatory, because a failed RFID implementation has the potential to disrupt supplier or customer relationships and may risk an organization’s brand itself (as consumer privacy groups have shown in the case of Tesco).

Educate. This is a key component of the RFID strategy and is an ongoing program, particularly because technology and standards are changing rapidly, and affecting the ways in which RFID can be used. An RFID education plan should include not only the basics of the technology (e.g., components, terminology, uses) to establish a common understanding, but also training on aspects of privacy and consumer perception. Such issues remain hot topics in the public eye, and any future RFID plans must include an impact analysis in these areas.

Identify Opportunities. Supported by RFID education, team members need to brainstorm ideas surrounding possible RFID use in their areas. This is not the time to eliminate ideas because of the current state of the technology or standards. Rather, the goal is to develop a catalog of possible RFID deployments (e.g., asset management, supply chain, manufacturing, security, inventory management, material tracking).

Evaluate Benefits, Link to Business Drivers, and Prioritize. This exercise helps to prioritize the scenarios in preparation for selecting the most promising for the final business cases. RFID scenarios may differ in their benefits (e.g., visibility, control, customer service). Each opportunity should be linked to a business driver (e.g., price, cost, customer satisfaction, product performance) that is measurable and contributes to the organization’s mission (e.g., low-cost leader, innovator, customer intimacy). ROI is just one consideration in the go/no-go decision. Evaluating an RFID deployment based solely on ROI is limiting, at best, and ignores the greater contribution to the organization’s mission.

Identify Candidates and Analyze. With scenarios prioritized based on their contribution to corporate value, it is time to analyze them with respect to feasibility and cost. The feasibility analysis examines what is achievable from technology, process, and organizational standpoints, while the cost analysis examines current and future costs based on market trends and economies of scale. ROI is also included in this step, but it is very important that organizations differentiate between investments that are run the business (RTB), grow the business (GTB), and transform the business (TTB), because investments in these categories are managed differently. Applying RTB investment management principles (e.g., reducing costs) to a TTB investment - where the venture is high risk/high reward - could kill a organization’s strategic advantage. Not every RFID project will have (or must have) a short payback period or high ROI.

Examine Financial Impact. This step moves beyond cost analysis and studies the quantitative benefits from the scenario. Cost reduction (e.g., from inventory optimization), cost avoidance (e.g., from improved maintenance processes), revenue increases (e.g., from fewer stock-outs), operational efficiencies (e.g., from streamlined production processes) all contribute to the financial impact. For scenarios that involve trading partners (suppliers or customers), this analysis can become cumbersome and, if not done correctly, can obscure the real benefits. Organizations should consider using specific tools for this analysis (e.g., SAS Institute’s Value Chain Analyzer).

Create the Blueprint. The blueprint incorporates the results of the completed analyses into a proposed plan of action. This is a high-level program plan that sequences the most suitable implementations, taking into account the priorities, the resources needed, the investment plan, and partner timing. At this point, milestones and key metrics should be defined and plans made to measure and act on the information. This completes the business-case phase and sets the stage for the project phase.

Although some organizations build the business case on their own, we recommend that organizations partner with an experienced consulting firm or systems integrator (e.g., BearingPoint, IBM Global Services, Accenture) when building the initial business case. An increasing number of small consulting firms are appearing in the market that also offer similar services, but as the focus should be on creating an enterprise strategy, it is wise to examine such organizations carefully. Some are focused solely on meeting the Wal-Mart mandate, and others are technology-driven with very little business-process insight. Organizations should ensure that consulting partners have more than just RFID technology expertise. RFID projects affect applications, infrastructure, business processes, and personnel. Project management, change management, business process analysis, knowledge transfer, and other core consulting skills should be closely examined to ensure that prospective partners can deliver full business solutions rather than pieces of technology.

Bottom Line: Organizations should develop a comprehensive business case for RFID that goes beyond compliance with mandates, taking into account the state of the technology, the type of investment, and the organization’s own value drivers.

Business Impact: Organizations that develop a strategic plan for deployment of RFID technology are poised to gain competitive advantage as the technology matures and new applications arise.

META Group originally published this article on 25 February 2004.

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