Written By Eric Fleming with an introduction by Louis Sirico

‘There is no ROI (return on investment) with RFID’.

During the past ten years, I’ve heard this statement countless times and when I’ve been given the opportunity, I’ve proven it wrong. The fact is, RFID is a technology that improves visibility and when applied properly, it can provide numerous benefits that result in a ROI for the costs associated with it. Unfortunately, many businesses do not even understand how to define ROI, yet finding a ROI on paper is often management’s deciding factor as to whether a RFID project is funded or not.

I have read at least a dozen articles on RFID ROI, all of which have reported finding positive results, but the information is too vague to be useful and people remain skeptical. I believe the ‘there is no ROI with RFID’ misconception is the single greatest barrier to companies implementing RFID and has resulted in a procrastinated approach to adoption across all industries. I'm not alone in this belief. EPCglobal provides an excellent tool to their members called the “EPC value model”, but if you don’t know how to effectively use it, it doesn't provide much value. I have written several articles on RFID ROI and taught a few classes, but this is the most in-depth examination I've seen.

I admit, the idea of breaking down such a huge psychological barrier using only a column may be a grandiose goal, but I believe in aiming high. So here goes…

This is an in-depth article devoted to achieving a ROI with RFID. I have enlisted the help of the most knowledgeable person in the industry I know: Eric Fleming. For the past 12 years, Eric has focused on cost and performance modeling of international supply chain operations, including ROI identification and quantification. I recently had the opportunity to work with Eric on an asset tracking project. Eric’s ROI model was the most insightful and impressive model I’ve ever seen.

I must give a word of caution to our readers: this article is very in-depth, and not necessarily the light reading you may expect. So without further adieu, I hand the keyboard over to Eric.

INTRODUCTION

The phrase Supply Chain is a misnomer, for the Supply Chain is not a chain at all. It is actually a series of inter-related, organic activities. Change one activity and all other activities are affected on a number of different levels. An activity can be broken down in to 4 components:

1. Time which is the caldron of process. Only in time do change, value addition, delivery and profit occur. Time can be converted to cash via unit cost and hourly wage.

2. People are the agents of change. Either by themselves, their direction, or their invention, is time effectively used to create value.

3. Objects are the creations of people either to execute a process or as a result of a process. These could be tools, finished goods, storage, forklift trucks, things, etc.

4. Space is where activity, or the results of activities, occur. Space is a combination of what is needed to create and deliver value, as well as the expression of human inefficiency. If all was perfect every item would be created as needed to only the quantity required. But forecast errors, planning inefficiency, and inability to know the future requires space to be used as a risk buffer for storage, as well as for overproduction.

All of these components are expressions of a single concept: Cost. Therefore, your ROI model must convert these components into cost.

Every business process has an input, one or more activities, and an output. Since the activities can be expressed as one of the above four components, and the components can be expressed as costs, all business processes can be expressed in terms of costs.

When looking at a typical business process, there are varying levels of complexity and customization. Some processes have evolved over time due to need, others fall into the ‘what has always been done’ category, with the reason being long since forgotten. In the end, the most simple, straightforward and generic processes are normally the best place to start looking for a ROI. Specific to supply chain, it is best to look at the following processes:

• receiving /raw materials
• WIP
• shipping

Transformation and the search for ROI have to be a methodical process. RFID as a technology is much like the internet: how much ROI existed for companies that pioneered using the internet to do business, or even email for that matter? Looking at the technology itself is no help. For example, the ROI for your corporate Local Area Network is difficult to quantify, but there is no longer any question as to whether is has enough value to pay for itself or not. If you change the paradigm from what RFID IS to what RFID DOES then you have an Industrial Engineering (IE) or Cost Engineering (CE) question, with a fairly well defined method of approach.

So what is this approach? It entails 3 categories of evaluation: process evaluation, technical evaluation, and financial evaluation. These are to be applied to every category and sub-process that you want to evaluate for RFID. This first article will take a high level look at these evaluations by asking some very pertinent questions. Later articles will explore them in much greater depth.

A process evaluation must consider more than just the RFID enabled process. It has to consider the downstream, upstream, and parallel processes as well. It has to look at the ergonomics of activities as well as the methods. For example: Where does manual data capture occur? How are exceptions handled and how frequently do they occur? How is data used? What technology platform is used? What does the data drive? Is this a manual process or an automated process? What are the step by step functions of the operator setup process? Where are the visibility gaps in the process? What are the process constraints? How is inventory used or impacted by these constraints?

The questions then must escalate to the larger questions: What are the strategies of the company? Is this part of a greater technological transformation? What would the impact of a new architecture be on the system or will this be an integrated architecture? How much integration and customization is necessary? How will this affect our customer relationships and contracts? What are the inventory and purchasing strategies? Is there lead time mitigation? Is there an expansion strategy? Process evaluation must be thorough and leave no stone unturned.

The second step is to determine what, if any, technology platform can support the process changes identified during the process feasibility phase. Jumping on the RFID bandwagon for the sake of having a desire for the latest technology does a disservice to shareholder value. Instead, take a more thorough, painstaking and professional evaluation of the available technologies to see if a good solid fit can be achieved.

Finally, find the money. The most effective way to do a financial evaluation is to either measure by pain or measure by value. These are not always the same. If your pain is document tracking but your value is shipping management, it might be best to evaluate the pain for the pilot and the value for the longer term solution. The sway of stakeholder position will sway the direction of how the technology is used. Again, the goal of the ROI analysis is to identify, quantify and articulate value in the most simple, clear and concise manner to your stakeholders.

ROI has to tie out using tried and true Cost Engineering principals and calculations. This means looking at the process from an efficiency standpoint of gains such as touch point reduction, process transformation, and productivity. It also means looking at the human and asset aspects from an accounting standpoint as both direct and indirect costs. Finally, the approach should consider qualitative cost or soft cost issues that will occur as a result of employing RFID. Just remember the key phrase “Total Cost Management”.

RFID use should be a well thought out strategic decision which will have an impact on bottom line assets. The ROI is there, however it hinges upon business perspective and approach. Taken from an IE/CE perspective well defined savings and ROI / ROA can be found.

Defining your business

In this section, we will look at how these fit together to complete the first step in defining ROI: defining your business “AS-IS” using a process called "base-lining". Base-lining starts by gathering together key people from the areas that will be impacted by RFID. This normally includes knowledgeable representatives from shipping and receiving / supply chain management, operations, information technology (IT), procurement, sales-marketing, customer service, and a comptroller or accounting manager. Be sure to include a project manager in the mix since those skills will be critical as time unfolds.

1) Begin the base-line process using a whiteboard or over-head. List all the areas that are impacted-by or being considered for RFID.

2) Add the processes that directly interlace with what is listed. This is vital to understanding the parallel, upstream, and downstream processes affected by the processes that will change.

3) For each process listed, have the person responsible for that process map out each step. Obviously, this will be time consuming, but it needs to be done. Start from a high level perspective. Again, that’s most important at this stage is to identify all of the processes that will change and the related processes that will be impacted.

4) After the high-level process maps are complete, they need a reality check by conducting a Day-In-the-Life-Of study (DILO). A DILO is an informal time and ergonomic study that observes a typical day, measures how long it takes on average to perform tasks, counts the touch points, and understands how breaks and changeovers affect productivity. The importance of this step can not be over-emphasized. All the brainstorming in the world will never replace walking through the process step by step on an ordinary UNANNOUNCED production day. This is not about blame or finding issues. This is about seeing what really is done. This also includes talking with line supervisors to understand the whys and what’s involved in any process.

A DILO is not the same as a full time-study. If you have the resources to conduct a full time study, you may find more accurate results. However, for purposes of ROI many companies do not have the budget or time to conduct a full time study. Using a DILO, you can extrapolate the savings as a percentage. It may not be exact but ROI estimates are just that: estimates.

When you conduct a DILO the following needs to be captured:

Time: what tasks are performed and how long does it take? What is the throughput rate, the cycle time for the segment and the takt time average? (Editor’s note: takt time is defined as the maximum time allowed to produce a product in order to meet demand.) Look for natural time breaks and unnatural time breaks. How much time is spent recording information, verifying information, or even in communication?

People: How many people are on shift and perform this task? How many touch points are there? How frequently is a person pulled off task to perform supporting functions such as searches or data entry? What is the turnover rate? Be sure to ask the operators what they do, how they do it. Ask them about their pain. When you ask, tell them that you are looking for ways to make their work easier and more productive, because that’s what you are doing. But there are 2 things to be aware of: 1) be aware of how culture works in your organization and how the direct interaction should be handled, and 2.) you will receive facts based upon their perception and experience, so understand it does have filters.

Objects: What sort of equipment is used in the process? What are the tools and feedback mechanisms already in existence? Do operators rely on touch screens or barcode scanners, or both? Objects have a nasty way of being costly. If you use a forklift, you have the fuel and operations cost, as well as maintenance and depreciation costs. Be acutely aware of the objects of labor.

Space: When looking at space, consider the ergonomic flow of the materials that will have RFID tags affixed to them. If this is a hot-lot based system with fast throughput you should expect small staging and small receiving spaces. If you are a make-to-stock with high seasonality, strategy and space SHOULD be related, but you may find this is not always the case.

You should interview key people in all the areas affected by an RFID deployment to ensure that the processes are well documented. There may be other hidden dependencies that were not found during the first pass of the base-line analysis. Record all observations, especially the pain and the visibility needs. Here are a few notes from experience:

• If you are looking at shipping inventories you need results of cycle counts, on-time-in-full performance rates and other warehouse / transportation data.

• If it is work-in-progress (WIP) inventory, then you need to know about KANBAN and procurement, forecasting methods, the master production schedule, resources and capacity planning.

• For receiving, you need receipts, order levels and thresholds and data pertaining to materials requirements.

This is also a good time to obtain the industrial drawings of the physical areas within the facility where the processes occur. It is just important to understand the context and environment of the workflow. Be sure to mark exception, departure, and arrival areas for all processes. This information will be required in the next stage: the technical analysis.

A big question people ask is, “what happens if I can’t get actual data?” The simple answer is to use industry best in class data. No department or division was ever offended by being considered best in class. Those that are not best in class know they are not best in class. Yet, if you can find a positive ROI with best in class key performance indicators (KPI’s) then you should not have issues finding ROI in a less efficient organization.


5) Combine the findings from the DILO with the high level process maps to create a more analysis of the processes. Here are common examples:

• Multi-layer process map (with multiple interlaced processed depicted by color)
• SIPOC (Supplier Input Process Output Customer)
• Spaghetti Diagram (which is the actual movement process you observed in the DILO)
• Process Map (traditional flowchart)
• Process Value Map (with data listed on the process map)

6) Look at the processes again against these rules of thumb:

If you are using a closed loop supply process – visibility is a relationship between information and time. So looking at ROI you have to look at Advanced Shipping Notice (ASN), production scheduling, WIP, inbound/outbound shipping, resource utilization, and the impact of lead time. In closed processes, the leveraging of time efficiencies from information will be the primary value. This is where the synergy of planning and execution in a LEAN system really surface.

If you are using an open loop supply process – visibility is within the space and object realm. Your visibility will be in your 4 walls and so you need to look at WIP flows, inventories, safety stock, storage, and incremental ROI savings. This is not to say that time is not affected, but ultimately you are not going to get much information upstream and the downstream information will only provide historical perspective. It helps if you have access to information in a timely manner and the means to adapt to the data. That being said there are always exceptions. If you are a supplier to Wal-mart, they have already put in place a data-rich RFID infrastructure that provides updated point-of-sale (POS) and RFID data every 30 minutes. This particular situation permits the ROI value proposition to extend through your supply chain onto the retailers shelf, either directly through vendor managed inventory (VMI) or indirectly through buyer relations.

If you make to stock – visibility will affect your finished goods stock with regards to space and people. When making to stock, managing on the increment with safety stock and min-max levels requires a mastery of visibility occur in terms of location, cycle counts and inventory management. The more SKUs you carry, the more complex the system and the greater the cost. Visibility makes labor more efficient and thus more productive since a reduction of touches reduces your per unit cost.

If you make to order – if you operate a closed loop supply chain visibility affects your WIP and raw materials receiving inventory. If you have an open supply chain then it affects your downstream WIP and finished goods, ultimately affecting your time, people and object elements. If RFID reads occur at packaging then RFID data confirms a reserved and completed order that’s ready to ship so that new scheduling can occur. However, if RFID is used with totes for KANBAN or WIP then production cycles can be managed in near-real time, making the chain available to respond to adjustments.

7) Of all of the processes, select three with the greatest pain and three more that are most likely to benefit by improved visibility. Remember, value is the elimination of cost in the forms of time, unnecessary manual work, equipment, surplus inventories, or space used that could readily be converted to value-added capacity.

For inventory assets, cost of goods sold (COGS) has a good valid reference point.

• For equipment assets, use depreciation or base cost. It would also include Maintenance, Repair, and Operating Supplies (MRO) costs which includes all supplies (disposable and non-disposable) used in a manufacturing process.
• For space, square footage calculations are best.
• View time and people based upon an average hourly wage of the labor type.

Your operations, maintenance, HR, and accounting personnel should have good estimates for you.

8) Here’s a trick: now that you have identified value areas, remove the value that can be attained right now, without RFID. Using RFID for the sake of having cutting edge technology is a disservice to stakeholders. “If you can do it better now, then better do it.” RFID is designed to make good systems great by enabling improved visibility. If you can improve your systems through traditional techniques then do it with your best business savvy. This will assure yourself and your stakeholders that RFID is part of a transformational strategy to create new ways of doing business.

9) Once you have targeted those six areas, tentatively decide if your goal is to move onto a proof-of-concept or a production-use of RFID technology. This may seem premature but there is a practical reason behind this step. If you are learning about the technology and choose the proof-of-concept only, then “pain elimination” will be the driving focus and ROI would need to cover costs and fall within your organizations Modified Internal Rate of Return (MIRR) requirements. (Editor’s note: MIRR is a financial measure used to determine the attractiveness of an investment. It is generally used as part of a capital budgeting process to rank various alternative choices.) If your organization is looking at RFID from an operational use standpoint, then you should still conduct a proof-of-concept however the driving factor behind it should be “value”. The pilot should maximize value to acquire the strongest return gains in the shortest possible timeframe.

If you have navigated through this process, congratulations; you are ready to move onto the next step: the technical assessment.

If you have not completed this entire process, don’t be deterred. ROI for any investment is normally a time consuming task and often requires other resources to help. Don’t forget, RFID is a lifestyle change for your business. Being methodical and meticulous is your best and safest approach.

TECHNOLOGY

This section will examine the technical study to transform the business, and includes determining what, if any, technology platform can support the process changes identified during the process feasibility phase. Jumping on the RFID bandwagon for the sake of having a desire for the latest technology does a disservice to shareholder value. Instead, take a more thorough, painstaking and professional evaluation of the available technologies to see if a good solid fit can be achieved.

One of the more broad and challenging aspects of an ROI assessment is the technical evaluation. At first blush this would not seem to have substantial impact upon ROI calculations, however that perception is misleading. The details of the technical decisions have significant impact on future capital decisions when considered from a cost and value perspective.

The first step in the technical evaluation is an environmental analysis, which includes examining physical, ergonomic, IT and infrastructure, customer, and competitive / strategic aspects of an environment. These areas have a direct impact upon the ROI for any solution and will give your team a better understanding of what is feasible and what is likely. It will help define what solutions are desirable, what can be accomplished, and what should be accomplished. The proposition of RFID is to increase visibility and to improve efficiency, control, and execution of your processes for revenue generation / cost management.

The Physical Environment is where you intend upon employing RFID or other visibility technology. This is not limited to manufacturing lines, dock doors, or conveyors, but includes what products and assets are to be tagged. Equipment, tags, packaging, and power sources make up this portion of the analysis. Cost is found in potential changes such as packaging, branding marks, drilling or cutting, replacing of rollers, installation of power drops, etc.

The Ergonomic Environment is the point at which the process information you gathered previously is inserted into the consideration. OSHA, work space, clearance and work centers have to be considered. The cost here again is change; change in space, change in object placement, change in methods and setup processes and people's work tasks. How a solution is designed to fit ergonomically, and the change it imposes upon your labor force, will directly impact productivity so ergonomics do have a financial impact.

IT Environment and Infrastructure has a key role within the analysis. RFID and RTLS systems are visibility sensor networks that your system leverages for near-real time data. Therefore, the system falls squarely between operations and the information technology groups. Like any good information system, considerations need to take place that align to your organization's best practices and strategy. The following are considerations and cost factors that may need to be considered:

• IT System Support - What are the mechanisms and guiding operational procedures this system will fall under, and how much will it cost as it pertains to network security, information centralization, scalability, maintenance, and integration?
  
  
• IT Customer Support - Once the RFID system is part of your normal operations it is likely you will need specialized call center personnel or techs that are trained to handle the system. This cost should be considered within the IT budget.
  
  
• Licensing - What is the cash outlay for ongoing application and licensure? These fees will be recurring and contractually tied so be aware of this cost.
  
  
• Forward / Retro-compatibility - Will the RFID system cleanly integrate into legacy systems? Can the RFID software system handle an upgrade in your ERP or other interfacing systems? Installing a system purely on price only to be faced with a future expense to upgrade can be costly.
  
  
• Platform diversity - If your organization has a universal IT platform, then the answer is self-explanatory, however if you have multiple platforms will the RFID system be platform independent? Can the architecture handle Windows, Linux, Solaris, et al equally as well? The more platform independent the RFID system is, the stronger your future support position will be.
  
  
• ERP or WMS upgrades - If your organization is planning an ERP or WMS upgrade, you must decide to either integrate into the legacy system or buy a forward compatible architecture that can handle the RFID module functionality in generic ERP systems.
  
  
• EDI / ASN / External Integrations - Is your organization using EDI or some Collaborative Planning and Forecasting System (CPFR). Do you need to have ASN transmission to conduct business and how much will that cost?
  
  
• Lead Time (resource, installation) - How long will this all take and how much will your integrator, and internal resources, cost to implement?
  
  
• Standardization - Finally, can all this be standardized? If not, how much will the transition and extra intra-system translation cost? Customization in the long term may not be your organizations friend so stay with out of the box solutions where possible.

Your end Customer also needs to be considered. Consider contractual compliance and relationship direction as soft costs, but the loss of potential business or sales as hard costs. Compliance also ties out to potential new channel development costs; however these would not normally be expressed in a capital budgeting analysis.

Competitive and Strategic environment should also be part of your environmental analysis, especially if you are leveraging RFID base visibility for competitive or strategic advantage. Will RFID give your firm a competitive, technological, or efficiency advantage? Even more importantly, how will your shareholders perceive the investment? In all points the RFID deployment must be aligned with your corporate strategic goals to add sustained value.

After the environmental evaluation is complete, it is time to evaluate the technology, physics, performance, and hardware-software combinations. Regardless of marketing statements, the technology will work only as well as it is designed within the limits your unique environment. Since not all capabilities are equal and since all environments are different, there can be a dramatic difference in what you will need to make your system work. How this ties to cost is that additional infrastructure or peripherals may be needed to make the system work correctly, which adds immediate cost in equipment and ongoing costs in maintenance.

Evaluation should be performed by an experienced integrator who knows the idiosyncrasies of the technology, as well as having well defined and established industry relationships. In this way they will know what is really happening in the RFID world, and will separate hype from reality for you. Additionally, proper laboratory and site testing should use standardized and accepted methodology. Anything else will result in less than ideal data. Since you are making very tangible financial decisions, data should be as clean, thorough and accurate is possible, so this type of evaluation should be left to professionals who do it on a regular basis.

Since the RFID space is still relatively new, there are considerations to evaluate hardware, software and tags within the marketplace. These are some critical questions to ask vendors and integrators since their answers will dramatically alter your long term costs. This list is not exhaustive.

• What levels of customization for hardware and software will be required?
• Are there legacy integration capabilities and for what cost if required?
• What level of firmware upgrades and life-cycle support exist?
• What are some of the licensing and recurring costs?
• Are there maintenance provisions in service contracts?
• Define past issues and performance based upon previous engagements?
• What are the physical integration design and cost?
• What level of scalability of the design and system exists?
• What types of process and system change will be required and will training and support be provided?
• How will the system handle changes in technology maturity? Will the system put in today be obsolete in 2 years?

A technical evaluation is very challenging, and it is highly recommended that you engage an experienced enterprise level integrator to help your organization develop its strategy and process design. Because of the idiosyncrasies of RFID, such an integrator should not only come with glowing client references but with a strategy to teach your people how to maintain and expand the RFID system. After all, RFID is a system investment into your productivity and it has definitive costs. The integrator will help you understand the costs of the technology, while your own audit will reveal any hidden enterprise or ongoing organizational costs.

RFID may still be relatively new, however solid accounting practice is not, and an organization with its eyes open and a fair and balanced perspective of the costs will make solid business decisions.

EVALUATION

Process sets the stage of “what IS being done” today within your organization. The technical data is “what CAN be done” to enhance your businesses with the technology in real, tangible terms. While this information is valuable, there is a point in which it needs to be converted from abstract observations into a valid set of financial measures. This is fundamental difference between TODAY and TOMORROW. To do this properly, ROI cannot merely be considered from a pure accounting approach. There needs to be a way to account for the broader financial costs and savings of the project from a very pragmatic approach. From a Financial standpoint, when conducting a Benefit-Cost-Risk analysis, ask two key questions:

1. Does the ROI provide the required yield relative to the internal rate of return (IRR) for my organization?
2. Does the ROI provide the required yield relative to the risk undertaken by the project?

No matter how high the benefit, if the risk is unnecessarily high then questions will arise if the project was a good investment or just a lucky gamble.

BENEFITS

Consider that benefits are expressed as both hard and soft categories:

Hard benefits represent true cash inflow and true cash savings. Hard benefits will be seen directly on company financials (income, balance, and cash-flow sheets).

Soft benefits are those that are not tied directly to cash flow but may alter cash flow (i.e. monies that could have been spent but were not.) Soft benefits typically affect the operations budget.

So what are the hard benefits? Let’s go back to the very first article. There are 4 elements that were listed as critical in measurement: Time, People (labor), Objects (assets), and Space. Here are a few methods of modeling these elements to define benefits from a financial perspective:

Time usage is directly associated with all forms of productivity and throughput. It is absolutely critical to take a holistic view of a transformed system in its TO-BE state. Looking at how task time or cycle time improvement benefits may be translated in one or more different ways:

1) Increased output which may be expressed as reducing Cost of Goods Sold (COGS).
2) Equipment utilization (expressed in Units of Production depreciation savings).
3) Touch point time savings per unit cost (expressed in Activity Based Costing per unit contributions, or by per unit of labor hourly wage).

People (or labor) are similar to time savings so be cautious not to double-count. Generally, labor savings can be expressed by factors such as:

1) Time-on-task increases (time multiplied by labor hourly wage).
2) Labor savings by non-expansion of personnel (which is equal to the fully allocated yearly wage * a time period of 3 to 5 years).
3) Decrease of non-value added tasks (which is expressed as a margin percentage of COGS per unit).

In seasonal businesses, temporary personnel are brought in due to the increase of WIP associated with demand. If there is an increase of productivity, you can create more with less and do not need as many temporary personnel. When the season drops off, you then do not need to layoff as many people. Two very important considerations are retention of personnel and the elimination of temporary personnel for tasks during peak seasons which is expressed as (contractual rates * time length of employ) + contractual riders. Note that labor productivity factors should only be included if included in costing as well. Also factor in both the administrative and managerial costs associated with hiring and terminating temporary personnel.

Objects (assets) are most likely found in but not limited to the inventory types listed in the first article: raw materials, work in progress (WIP), and finished goods.

• The first area to look at is in days holding of raw materials vs. total cycle time for production (for reduction of purchase quantities) expressed as the cost of materials with discount applied. It is best to look at this as an average number of days holding. This area not only permits the actual cost of units, but also all holding costs associated with the increment no longer necessary due to TO-BE efficiency.
• Work in Progress (WIP) reduction is harder to measure due to its status in the process; however a rule of thumb is WIP reduction = COGS – downstream transportation costs - distribution costs – holding costs. WIP inventory affects the dependent MRO inventories of components. As your throughput increases, your WIP and dependent MRO inventory will both decrease. Unless your plant scraps units, reworks saved can translate into huge savings if they can be transformed into finished inventory. (A note from Louis Sirico: Using RFID to reduce the number of reworks yielded millions of dollars a year in savings for one company. It also provided better visibility of what units are being re-worked saving time to locate units.)
  • Finished goods inventory measurement is expressed as capital savings in the form of :

- Day’s safety stock reduction.
- Holding costs reduction including insurance, storage, taxes, etc.
- Velocity increase would be expressed as the difference between previous velocity and new velocity multiplied by COGS.
- Inventory shrink loss reductions which are also computed using COGS.

Space measurement is tied directly to Capacity utilization and performance. This may be expressed in 2 ways:

• The first way is the interest recovered over a time period for avoidance of capital expansion. Use it only if another capital project is planned and RFID positively delays the need for investment due to efficiency gains. Remember, these are not the capital funds themselves, only the interest of holding on to the funds without expenditure for a variable length of time. Again, this only applies to a committed alternate capital project impacted by RFID based enhancements.
• The second way is to measure the improvement of space utilization by cost per square foot per year or by the difference in capacity performance between similar facilities, one that is RFID enabled and the other non-RFID enabled. This is expressed between the financial differences between plants as measured by the Capacity Factor Method of Estimation. The difference between actual cost and target cost of the RFID facility are capacity savings due to improved utilization. (If you need the formula, then this factor states that the target cost of the RFID facility should be equal to [the 2nd similar facility’s cost * (The capacity of the measured facility divided by the capacity of the similar facility)e ] where e is an exponent factor weight within the range 0.5 and 0.85. )

Soft benefits can also be defined in this analysis however, there is no guarantee that they will be considered by management. Such soft benefits involve the savings of increased sales relative to channel investment costs. It is soft because there is no clear proof that RFID will be responsible for ALL the sales increases. However RFID will reduce stock-outs. The portion of stock-outs eliminated as a percentage of sales (multiplied by COGS) can be used. Use COGS because it eliminates issues related to discounts and promotions.

Other soft benefits include brand equity, inventory accuracy, and the increased accuracy of forecasts in make-to-stock manufacturing systems. The less the absolute error from the actual forecast, the more efficient your production and operations system will be at cutting your per unit costs. Unfortunately, a sound night’s sleep for your Planner, Comptroller, or Traffic Manager does not count as an ROI benefit although it is most certainly a plus.

COSTS

Now that benefits are defined, costs must be measured. Cost comes in 2 flavors: conceptual and deterministic.

Conceptual costs are usually done as an early “rough estimate”, which can be determined using a couple different methods. The easy method includes estimating based on the historical costs of expansion. The more complex method is a parametric method involving data aggregation utilizing various parameters, constraints, correlation analysis, and various forms of regression analysis. The curve that best fits the data with a strong confidence interval (R2) is generally the curve used for the estimate. Parametric data analysis is not easy but if done correctly it will give you a strong estimate as to what costs and unknowns to expect. It is important to note that estimation accuracy will change as the project matures.

Deterministic costing method is, in very simple terms, the Line-By-Line cost estimates as close as possible, down to the nuts and bolts of the system. Within this are 4-sub-categories: Direct fixed, direct variable, indirect fixed, and indirect variable. They must all be accounted for. Examples are below:

• Direct fixed – Readers and RFID hardware, and other costs that are directly part of the projects such as applicators, antennas, and peripheral sensors.
• Direct variable – Tags and media. Cost is dependent upon how much you use, however the project requires that they exist.
• Indirect fixed – This may be conduit, power or network drops. They can be used for other functions however they are required to support the project and they do not fluctuate in cost by use.
• Indirect variable – Training and support provided by staff, such as maintenance, or IT training. Although needed to help the project succeed, these costs do shift.

When looking at your overall costs, it is best to separate out the RFID costs from the internal organizational costs. There are various reasons for doing this such as varying depreciation methods, capital budgeting methods, and functional cost management. Complete cost line-by-line lists are actually quite extensive. Due to the uniqueness of each deployment and environment, they are not included in this article. An experienced integrator working with your RFID team and financial personnel should be able to define all of these costs.

RISKS

Various risk methodologies exist such as Failure Modes and Effects Analysis (FMEA), multi-voting, algorithmic, heuristic, etc. There are many models, simple and complex but in order to get to the number you need, it is suggested that 4 basic components are necessary:

• • Severity estimated value: How severe is the problem on a percentage scale 1% - 100%
• Identification estimated value: How easily can it be identified on a percentage scale 1% - 100%
• Mitigation estimated value: How easily can it be fixed, on a percentage scale 1% - 100%
• Cost: How much would such a risk cost the organization in monetary terms

The estimated values are assigned by the company and can vary over time. The formula is very simple: ((severity * identification) / Mitigation) * Cost. Now sum the results of this formula for all risk lines and you have the cost of your total risk exposure. Remember that in risk analysis a risk such as customer loss would need to be added at FULL value to benefit as a savings. Evaluate risks to ensure that those representing benefit opportunities are counted on both the benefit and risk sides of the analysis.

ROI

Finally, what is your ROI? Recall these questions: Does the ROI provide the required yield relative to the internal rate of return (IRR), and does the ROI provide the required yield relative to the risk undertaken by the project? If it fails either test, then another opportunity needs to be defined for investment, RFID or otherwise. Therefore:

• ((Benefit – Total Costs) / Total Costs) must be >= internal rate of return or modified internal rate of return
• ((Benefit – Total Risk Exposure) / Total Risks Exposure) should be a ratio of at least 3: 1 to be considered reasonably viable.

CONCLUSION

In conclusion, ROI does exist for RFID as it does for a network or IT investment simply because it is much broader in reach and impact. You must understand your supply chain and the transformative impact of RFID technology before trying to quantify a project. RFID is not a magic bullet but when leveraged properly it will bring value to most supply chains. And diligence does pay off for those companies that take the time and consider the process, technical and financial components of an ROI analysis.

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