These days, there’s much hype surrounding RFID. The potential to cut costs, streamline production and delivery processes while effectively monitoring the entire supply chain has companies pondering whether they should be rushing to implement RFID. While RFID has the potential to play a critical role in the future of supply chain, many questions regarding timing and returns remain. At the same time, RFID holds much greater promise than merely being a supply chain solution with substantial cost savings.

But how do you know if investing in RFID will reap rewards for your business? The high costs of RFID deployment make it hard to see an immediate return on investment. Businesses should not rush in without first knowing the best RFID adoption strategy and how they intend to measure its performance. RFID adoption must be viewed from a business standpoint, not just a technological one.
 
The challenge for manufacturers and retailers is to establish a strong business case before implementing RFID technology. Stephen Brown, a consulting senior manager who advises businesses considering RFID, has developed a framework to help organizations evaluate RFID return on investment. Here are his five steps to building the case for RFID.

1. Validate the model assumptions and gather information
First, examine your “model assumptions” — your business’s operating philosophy and strategy — to see how RFID fits in with what the company is doing today. “RFID tags have to be used in a value-added way,” says Brown. “It makes no sense to use them simply as a barcode replacement.”

Brown works with clients to conduct a financial summary to determine sales numbers, supply chain costs and available inventory. The next step is to analyze the distribution network from manufacturer to retailer. At this point, you should be able to assess if RFID implementation is the right option for your business and in which specific areas of the supply chain it may bring value.

2. Calculate the benefits and the costs
Collect specific data to help measure the potential benefits and costs for your RFID initiative. “Companies must define a strategy based on the actual deployment costs,” explains Brown. The benefit analysis calculates your company’s capability to increase sales, reduce supply chain costs and protect assets. Brown uses a financial impact assessment designed by Deloitte that examines the cost of the tags, the required hardware and software, and the time needed to integrate RFID into the production process.

3. Perform a financial and sensitivity analysis
Next, conduct a sensitivity analysis across critical inputs — such as the cost and volume of tags — to measure the project's profitability across all your company’s RFID initiatives. Using current data, you can calculate the investment return ratio (IRR), net present value (NPV) and ROI for each potential RFID investment. This analysis will help you put a value on the cumulative costs and benefits, in addition to the timing of the project costs.

4. Conduct a strategic assessment

Assess the potential impact of RFID on various drivers of your company’s enterprise value. Brown uses a tool – Deloitte’s RFID Enterprise Value Map – to grade each RFID initiative based on key enablers (such as type of tag, integration level and process transformation) that characterize the ease or complexity of implementation. Then he plots this data on a “map” or flowchart that shows the value of implementing the technology. “The larger issue is the cost of an RFID system as a whole and its associated ROI,” says Brown.

5. Tabulate the final results
Incorporate all the data into an RFID Strategic Investment Roadmap, which summarizes the qualitative and quantitative aspects of each potential RFID initiative. The roadmap consists of:

• A set of incremental solutions through various RFID-related options
• A business case that identifies the benefits and costs of each solution
• A framework for identifying sensitivities to determine their timing
• A multi-year implementation plan

“Implementing RFID does not necessarily imply a large investment if the application areas are well-circumscribed. To that extent, point solutions — such as those restricted to a warehouse or a number of specific assets — can lead to significant ROI at a low investment cost,” notes Brown. “On the other hand, ambitious end-to-end supply chain applications may prove way too complex and expensive to execute, even though the ROI may appear very interesting.”

Building your RFID business case is only one step toward successful adoption of RFID — but it’s undoubtedly the most important. Deloitte’s professionals can help you plan your course to RFID implementation. “Putting together a detailed business case is critical,” says Brown. “There’s a lot of hype surrounding RFID at the moment, and not all businesses are suited to its adoption.”