Analyzing Benefits

Benefits of an RFID deployment can be categorized based on time (short-term versus long-term benefits) or tangibility (direct versus indirect). In some cases, such as tagging of cattle or item-level tagging in an end-to-end supply chain application, a network effect may also be present; the value of an RFID deployment may be minimal when only a few participants (cattle producers or suppliers) deploy RFID. However, the value increases significantly when the majority of the participants (including upstream and downstream producers in some cases) deploy RFID and the data is shared among the participants.

Types of Benefits

We classify the benefits of RFID deployment in a matrix in Figure 7.1. For each quadrant of the matrix, a sample list of applications that fit the characteristics of that quadrant is also provided. Some applications may provide both types of benefits: direct and indirect, or long term and short term. Some applications may even move from one quadrant to another based on changes in regulatory, competitive, or other drivers. For example, in the United States, federal subsidies for cattle owners to tag their cattle will move the cattle tagging applications' benefit realization from the long-term timeframe to the short-term.

Figure 7.1. Benefits of an RFID Deployment

From Figure 7.1, you might deduce that the place to be is the left-hand side of the matrix (direct benefits), preferably the lower-left quadrant where the benefits are immediately monetized. However, many RFID deployments do not fall in this area. Some that are long term or exhibit indirect benefit will, over time, move to the lower-left quadrant. In this scenario, it is not advisable to rule out a project just because it doesn't provide short-term direct benefits.

However, the question remains: How would a company correctly evaluate what level of overall benefits justify their deployment? To answer this, you need to evaluate additional factors, described in the following section.

Finding the Right Benefit Level

In addition to looking at the type of RFID application and its benefits, a company also needs to look at its business environment and its organizational readiness for innovation to make the right cost-benefit decision. Because the specifics of these two factors vary from company to company, we have provided examples to further clarify this point.

A company that is under pressure from its customers or regulatory bodies to comply with a certain mandate may have to deploy RFID in its operations, or risk losing business or face a penalty. Many of Wal-Mart and DoD suppliers fall in this area. Such companies derive indirect benefits from the deployment. Companies in this situation should work with customers and suppliers to figure out how to use the data collected from such deployments in other business operations to gain direct benefits. For example, a cereal manufacturer could use the inventory data coming back from Wal-Mart to make its upstream purchase decisions. A cattle manufacturer responding to an RFID tag law (see the Michigan Department of Agriculture case study in Appendix A) for the cattle may use the audited pedigree data to break into new markets, selling "traceable" meat and thereby minimizing the consumers' health concerns. Such deployment can benefit the industry as a whole as well, because the overall quality of the food supply is enhanced.

A company whose organizational readiness for innovation is high can use RFID to gain competitive advantage, even if the benefits of the specific application are not short term. Wal-Mart is a good example. It has a history of using technology (for example, barcode) to improve its operations and gain competitive advantage. Naturally, it is also one of the early adopters of RFID technology.

In some situations, a company may decide to deploy RFID even if the benefits are indirect or long term. RFID use in healthcare organizations to deliver the right medicine to the right patient fits in this category. On the surface, the direct benefits of improved productivity seem to be minor. However, the indirect benefits seem pretty compelling considering that the wrong medicine can potentially kill a patient. It is estimated that more than 7,000 patients die every year in hospitals due to medication errors,^[1] and many more suffer adverse reactions. If RFID deployment can curtail this number, not to mention reduction in lawsuits against the hospitals, the cost-benefit trade-off may be worthwhile for a healthcare organization, even though the benefits are indirect and long term.

^[1] "To Err is Human: Building a Safer Health System," Institute of Medicine, November 1999.

A company that can reap direct benefits from RFID deployment in the short term may have a different consideration. In this case, the reason to deploy RFID is straightforward, but the time to deployment may be a factor. If such a company wants to delay the deployment due to its IT readiness, it may have to rethink that decision because of competitive pressure. A 3PL (third-party logistics) company that distributes goods to retailers is a good example. It can use RFID in place of barcode scanners to reap direct benefits in labor cost and accuracy. Barcodes on various pallets at such facilities are usually scanned manually. If a pallet is not oriented correctly, a physical move may be required to read the code. A forklift equipped with an RFID reader can read all such pallets. This not only saves time, but also adds accuracy. Strategically placed readers can detect the movement of pallets throughout the warehouse, significantly reducing the number of items that are lost due to misplacement or shrinkage. The 3PL provider may have to invest in the RFID gear, but if it doesn't make the investment, one of its competitors might. Such pressure will likely force these organizations to deploy RFID.

Calculation of the benefits due to RFID deployment requires looking at savings across the overall business process and not just one part of it. Many times, proper calculation requires breaking down the result into its components. The Smart & Secure Tradelanes case study in Appendix A provides a good example. In this case, the benefits from tracking containers as they travel across the sea come from better supply chain visibility (in addition to indirect benefits such as security and compliance with regulations). However, to calculate the benefits, you need to break "better supply chain visibility" into its components such as reduction in safety stock (benefit equivalent to 0.25% to 0.30% of the cost of goods), reduction in (inventory) pipeline (0.13% to 0.16%), reduction in service charges (0.08% to 0.10%), administrative savings (0.04% to 0.05%), and reduction in pilferage/loss (0.04% to 0.05%). The combined benefits: a savings reaching 0.54% to 0.66% of the cost of the goods in an average container.

It is important to keep in mind, though, that benefits address only one aspect of the RFID deployment decision. The other aspect is cost. Although the benefit levels mentioned in the preceding example implicitly address costs, it is important for a decision maker to do the next level of cost analysis.