Academic journal article Journal of Theoretical and Applied Electronic Commerce Research

A Framework for Assessing the Value of RFID Implementation by Tier-One Suppliers to Major Retailers

Academic journal article Journal of Theoretical and Applied Electronic Commerce Research

A Framework for Assessing the Value of RFID Implementation by Tier-One Suppliers to Major Retailers

Article excerpt

Abstract

Radio frequency identification (RFID) is a rapidly evolving technology for automatic identification and data capture of products. One of the barriers to the adoption of RFID by organizations is difficulty in assessing the potential return on investment (ROI). Much of the research and analyses to date of ROI in implementing RFID technology have focused on the benefits to the retailer. There is a lack of a good understanding of the impact of RFID at upper echelons of the supply chain. In this paper, we present a framework and models for assessing the value of RFID implementation by tier-one suppliers to major retailers. We also discuss our real-life application of this framework to one of Wal-Mart's top 100 suppliers.

Key words: RFID, business case, ROI model

1 Introduction

Radio frequency identification (RFID) is a rapidly evolving technology for automatic identification and data capture of products. RFID is poised to fundamentally change the way companies in a supply chain track, trace and manage assets. This will have a major impact on manufacturing, transportation, distribution and retail industries.

One of the barriers to the adoption of RFID by organizations is difficulty in assessing the potential return on investment (ROI). Much of the research and analyses (such as in [6] and [15]) of ROI in implementing RFID technology have focused on the benefits to the retailer. There is a lack of a good understanding of the impact of RFID at upper echelons of the supply chain. RFID technology can greatly impact the entire supply chain, affecting the retailers and the suppliers that manufacture and distribute goods for them.

The focus of this paper is on providing a comprehensive framework for assessing the benefits of RFID implementation to tier-one suppliers (including their manufacturing and distribution operations). For tier-one suppliers, RFID can offer five primary areas of benefit: lower operating costs, increased revenue, reduced inventory capital cost, lower overhead costs, and lead time reduction (Figure 1).

RFID can enable increased efficiencies in operations which can result in lower operating costs. For example, the use of RFID within a supplier's distribution center enables a reduction in the number of incorrect manual counts, unreported stock loss, mislabeling, and inaccessible/misplaced inventory. By reducing the number of internal discrepancies, the receiving and shipping processes can be improved and the cycle counting process can be reduced or even eliminated.

An increase in revenue to the tier-one supplier can result through reduction in stock out, counterfeiting, and return incidents. At the retailer level, stocks outs occur due to cascading discrepancies upstream and unanticipated demand. RFID enables increased visibility and real-time information sharing in the supply chain and can thereby help reduce the number of stock outs that occur at the retail store due to inaccurate inventory data at the retailer level and further upstream. RFID can potentially detect irregular components entering the supply chain, catching and reducing the number of counterfeited items. Returned items can be traced by RFID and analyzed to prevent future incidents of returns in the future, saving the manufacturer the cost of potential returned items.

Overhead costs related to dispute resolution, specifically charge backs, is another area that RFID can impact and potentially improve. Charge backs create non-value added activities for both the supplier and the retailer. RFID can reduce the number and/or probability of charge back penalties through improved accuracy and visibility of inventory data throughout the supply chain processes.

A significant opportunity to reduce costs is in inventory capital. RFID allows inventory capital costs to be decreased by reducing the excess inventory or safety stock levels (while maintaining service levels) and also reducing inventory loss/shrinkage. …

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