Near-term ROI Lacking for EPC RFID, Study Finds

Companies project two-year-plus paybacks on investments in electronic product code radio frequency identification, but mandates loom - ARC

Companies project two-year-plus paybacks on investments in electronic product code radio frequency identification, but mandates loom  ARC

Dedham, MA — November 2, 2004 — Most companies believe that the payback on their investments in electronic product code radio frequency identification (EPC RFID) will be more than two years coming, but companies are searching for additional savings as they try to mitigate the cost of complying with RFID mandates imposed by their customers, according to a new study from technology consultancy ARC Advisory Group.

In a survey conducted for its recent "Emerging Practices in EPC RFID" study, ARC talked to 24 companies that were actively investing in EPC RFID. Only one of these companies believed it could have under a two-year payback period, while 95 percent of the respondents believed the payback period would be greater than two years.

Wal-Mart has mandated that by January 2005 its top 100 suppliers must apply passive RFID tags based on EPC-global standards to cases and pallets headed toward three specific Wal-Mart distribution centers (DCs) in Texas. Virtually all manufacturers of consumer goods will eventually be impacted by this because Wal-Mart's moves in RFID are being copied by other retailers.

Unfortunately for manufacturers and distributors selling to large retailers, RFID has a much lower return on investment (ROI) for them than for their retail customers. According to Steve Banker, service director for supply chain management at ARC Advisory Group, "The situation is made more difficult because the technology is immature and current suppliers of tags are unreliably supplying a poor quality product."

As an example, imagine a company that ships 50 million cases a year to Wal-Mart. Even at 20 cents per tag, a very optimistic assumption, that is a $10 million hit. Add $1 million in expenses to prepare the RFID infrastructure. Furthermore, labor has been added to warehouse processes, adding perhaps another $500,000 in new operating costs. This company would need to generate about $11.5 million dollars in new savings merely to break even.

Now imagine that this company's analysis of potential payback buckets shows that they might be able to generate $1 million in lower chargeback fees if Wal-Mart cooperates with them, and that the other savings buckets could come to, at most, a $500,000. This story is typical of the kind of story that ARC heard during the interview process, the consultancy said.

Even though respondents almost universally believe that EPC RFID has a poor ROI, companies facing RFID mandates are actively searching for benefit buckets to mitigate the costs of these programs, according to ARC. It is also true that a number of Wal-Mart suppliers believe that, in many cases, while certain areas have the potential for savings, they will not be able to actually reap these savings for several years.

In addition, ARC said that certain benefits of EPC RFID will not be possible until certain preconditions are met. Those preconditions include:

  • The reliability of reads improves greatly.

  • The cost of tags drops.

  • A critical mass of retailers has RFID mandates in place.

  • Finally, more efficient warehouse receiving and better management of inbound materials may have to wait until companies have been able to negotiate with their upstream suppliers to engage in more RFID tagging.
ARC said its "Emerging Practices in EPC RFID" study offers information on the status of the Wal-Mart mandate and advice on how to prepare for mandate meetings with retailers, an analysis of how companies are changing their processes to meet these mandates and the strengths and weaknesses of the various process choices, and an analysis of the three critical inflection processes when it makes sense to move from handling RFID in a certain way to doing it differently, among other information.

For more information on trends relating to RFID, see the following articles:

For more information on the use of RFID solutions in the supply chain, see "Needle in a Supply Chain Haystack," the Net Best Thing column in the January 2002 issue of iSource Business (now Supply & Demand Chain Executive) magazine.