Study finds EPC RFID ROI is MIA

01/13/2005

he results of ARC Advisory Group Emerging Practices study, which surveyed 24 companies actively investing in Electronic Product Code Radio Frequency Identification (EPC RFID), found that only one company believed it could achieve a less than two-year payback on its investment. A full 95% of the respondents believed the payback period would take more than two years.

The study imagines a company that ships 50 million cases a year to Wal-Mart. Even at 20 cents/tag—a very optimistic assumption—that represents a $10 million hit. Add to that a million dollars in expenses to prepare the RFID infrastructure, says the report, and perhaps another half a million dollars in new labor costs. This company would therefore need to generate about $11.5 million dollars in new savings merely to break even.

The study further imagines that this company’s analysis of potential payback buckets shows they might generate a million dollars in lower chargeback fees, if Wal-Mart cooperates with them, and that the other savings buckets could come to, at most, a half a million dollars. The analysts say this story is typical of the kind of story they heard during their interview process.

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 distribution centers in Texas. Those companies affected are unlikely to try passing along these costs to Wal-Mart. It’s more likely they’ll try to raise prices to their retail customers instead.

The study, mirroring industry reactions, states that 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 ROI for them than for their retail customers. According to Steve Banker, ARC service director for supply chain management, “The situation is made more difficult because the technology is immature and current suppliers of tags are unreliably supplying a poor quality product.”

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

The industry is in wide agreement that certain conditions have to be realized:
1.  The reliability of reads needs to improve greatly
2.  The cost of tags has to drop
3.  A critical mass of retailers have to act on RFID mandates

Another factor, says the report is that 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.

---

MAIN POTENTIAL BENEFITS FROM EPC RFID
Warehouse Eficiencies -- 45%
Less Inventory -- 27%
Deductions -- 27%
Traceability/Recalls -- 23%
In Stock Position -- 18%
Improved Service -- 9%
Shipping Costs -- 9%
Supplier Management -- 5%