Measuring the ROI of RFID Technology

As companies increasingly rely on technology to automate their warehouse processes, they are looking for products that have a substantial return on investment (ROI). Over the past several years, radio frequency identification (RFID) has emerged as a key player in warehouse management technology. With promises to cut costs and streamline production and delivery processes, many companies are looking to RFID to monitor their supply chains. How do you know if RFID will be worth the investment for your company?

Many companies look at the high cost of implementing RFID into their warehouses and immediately look for another warehouse management solution. Before you write off RFID completely, measure the ROI for yourself. As you are evaluating RFID software, make sure that you looking at the best RFID strategy for your company and how you plan on measuring the system’s performance. The adoption of RFID technology is not merely a technology issue; it’s a business issue.

Before you implement RFID technology, you must develop a strong business case for it. The framework below was developed to help you evaluate RFID return on investment:

1. Evaluate how the technology will fit into your company.
Before you do anything else, examine your company’s operating philosophy and strategies to see how RFID will fit in with what your company is doing today. RFID tags are designed to add value to your operations; if you plan on using them as simply a replacement for barcode labels, it is not the right technology for you.

Conduct a financial summary to determine your current sales numbers, supply chain costs and available inventory. Next, thoroughly analyze the distribution network from manufacturer to customer. At this point, you should be able to accurately assess whether or not RFID is the right option for your company and in which areas of the supply chain it will bring value.

2. Calculate the benefits and costs of implementing RFID technology.
In order to measure the potential benefits and costs of an RFID investment, you will need to collect some data. Your investment strategy must be defined based upon the actual deployment costs. To examine the best benefits RFID will bring to your company, calculate your ability to increase sales, reduce supply chain costs and protect your valuable assets. Next, determine the financial impact RFID implementation will have on your business. Make sure you consider the cost of the tags, the required hardware and software, and the time needed to integrate the new technology into your current production process.

3. Conduct a strategic assessment.
Prior to deciding whether or not RFID is the right technology for your company, you need to assess the potential impact RFID could have on various drivers of the company’s value. Grade each RFID initiative on the following key enablers (to characterize the ease or difficulty of implementation):

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  • Type of tag
  • Integration level
  • Process transformation
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Plot the data you find on a flowchart to show the value of implementing the technology. Remember, don’t just look at the price of implementing RFID technology; look at the value it can add to your business and processes.

4. Perform a financial-timing analysis.
Measure the project’s profitability across all of your company’s RFID initiatives by conducting a sensitivity test across critical inputs (such as the cost and volume of tags). Using current data, calculate the investment return ratio, the net present value and the ROI of each potential RFID investment. This will help you place a value to the cumulative costs and benefits, as well as to the timing of the project costs.

5. Present the final results to key decision-makers.
Incorporate all of the data you’ve gathered into a document that summarizes the qualitative and quantitative aspects of each potential RFID initiative. Be sure to include:

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  • A business case that identifies identifies both the benefits and costs of implementing RFID technology
  • A set of cumulative solutions through various RFID-related options
  • A framework for identifying sensitives to determine the timing of costs
  • The timeline of the implementation plan
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RFID technology does not have to be a large investment. In fact, point solutions (such as those restricted to a warehouse or a number of specified assets) can lead to a significant ROI with a substantially low investment cost.