How to Calculate the ROI on RFID: Deep Dive
Any industry or the market at large comprises companies linked to one another, and more so today than ever. Therefore, supply chain management has become increasingly vital for running operations.
But how can an organisation begin optimising its supply chain? Well, this is where the ROI calculation begins: defining the factors behind the investment and their potential.
RFID Solutions: The Gateway to A Robust Supply Chain
A 2015 whitepaper titled “The Digital Supply Chain: A Frontside Flip” by The Centre for Global Enterprise revealed how transformative Digital (digitised) Supply Chains (DSCs) can be. The research showed that DSCs have the potential to slash procurement and supply chain costs by 20% and 50%, respectively. DSCs can also increase revenue by a staggering 10%.
While it has been almost a decade since the whitepaper was published, the figures still point to impressive results. The fact that the study was referenced in an article published as recently as 2022 by KPMG India – “Automated environments: Scaling up digitisation for a streamlined supply chain”– shows how aspirational and relevant the results continue to be.
However, setting up a DSC is easier said than done due to its massive investment requirement. Yet, many medium and large-scale businesses can begin their DSC journey with Radio Frequency Identification (RFID) solutions/ tags as they are one of the cheaper solutions than other sensor technologies used in the supply chain and have a wide range of utility. Further, the tags and RFID readers, as per the article “RFID’s Renaissance in Retail” published by McKinsey & Company in 2021, have become about 80% and 50% cheaper, respectively, since the 2010s.
What is the Importance of Calculating the ROI of RFID Tags?
With these tags becoming an essential supply chain management tool, decision-makers in any venture need to understand how this technology has been helping them. However, comparing the expenses incurred while running and setting up the supply chain with the revenue generated can be challenging.
In this blog, we will mainly discuss the benefits of RFID implementation in the context of finished consumer goods businesses. A closer look at these benefits can help us set up a framework for calculating the ROI of the technology investment. So, let’s jump right in!
Key Things to Observe
1.Advantages of RFID Warehouse Management System
RFID tags are increasingly in demand amongst businesses that operate with warehouses as they can optimise their labour hours and enable inventory tracking within the warehouse. Here are some scenarios for us to get a concrete idea of the usefulness of the technology:
Inventory Audits: Conducting inventory audits is not just an essential part of warehouse management. The activity can also be one of the most laborious and time-consuming parts of the business process. If the products have RFID tags on them, businesses can save several precious work hours because RFID scanners can read a massive batch of items instantly and accurately. Without having to scan countless items in the inventory, a single worker potentially has a larger bandwidth to work.
In other words, RFID solutions allow businesses to run their warehouse operations with a leaner team, thus reducing the company’s workforce expenses. On the other hand, increased bandwidth per worker can also help the organisation scale up its operations. According to the McKinsey & Company study mentioned above, this technology decreases inventory-related labour hours by 10-15%.
Tracking Individual Items: In the event an individual product or product type needs to be tracked down across the different aisles, shelves, and bins in the warehouse, RFID tracking saves the day. A quick scan can swiftly reveal the details of the specific item stored in its respective tag, even if the item is in a cluster of similar or different items.
However, this level of granular information requires a bit of extra cost compared to the tags that encode data points such as item location, which is shelf-level precision in the context of warehouse management. While smaller businesses may not require this extra degree of precision, many ventures operating with large volumes of inventory or high-value inventory may find shelf-level traceability beneficial, explains the McKinsey & Company article.
At the store-level as well, RFID helps in locating inventory. A 2021 report by Accenture, A New Era for RFID in Retail, quotes a global thought leader in the technology who mentioned that a world-famous apparel company found 98% inventory accuracy and “low to mid-single digits spike in sales” in stores “where RFID is fully operational”. The thought leader added that devices such as handheld RFID readers can help store managers or owners conduct an inventory check in just 20 minutes, allowing them to even do the otherwise lengthy and cumbersome task twice a day.
2.The Usefulness of RFID Inventory Tracking Systems for Store Management and Omnichannel Sales
E-commerce, needless to say, is likely to grow by the day as we become busier and seek more tech-enabled convenience. But is all that we know about omnichannel sales? The answer is no!
The convenience of omnichannel sales doesn’t only mean home-delivered products which were bought via an online marketplace or the brand’s website. Customers can also:
- Book their orders online and pay and collect the order at the store,
- Pay online and pick the order up from the nearby store,
- Book the order at one store (either through a self-service kiosk or at the checkout counter) and pick it up at another outlet,
- Pay at the store and have it delivered home.
To put it differently, the possibilities are endless!
By offering thorough product visibility of inventory items across the supply chain, particularly during transit, RFID tracking has made sure that the time to open one’s brand to the opportunities of omnichannel sales is here. Businesses can expand their sales volume and become more profitable using AIDC (Automatic Identification and Data Capture) solutions.
Further, a few in-store and omnichannel use cases of the RFID technology in stores, as per our industry observation and as mentioned in the McKinsey report, are listed below:
Faster Checkouts: RFID tags can lead to quicker self-checkout than UPC (Universal Product Code), which is already a sought-after barcode type, known for swift self-checkout.
Enhanced Service: With inventory checking and self-checkout made easy, employees at stores are now free to focus on other tasks, which include attending to customer queries. It goes without saying that when employees have more time to address customer requests, they add the valuable human touch more efficiently to the shopping experience than they would otherwise. It is worth mentioning that a well-known sports apparel brand, with over 16,000 outlets across 50+ counties, has seen a 3X rise in labour output using RFID tracking.
Better Stock Management: RFID solutions allow store managers to keep an eye on the inventory level to avoid stocking issues. Let’s take, stockouts, for example: every product query unfulfilled is a missed opportunity to meet sales targets. The sports apparel brand that the study mentions increased its revenue by 2.5% increase by avoiding stockouts after implementing a robust RFID infrastructure.
Additionally, these tags which contain detailed product information can also be leveraged to crunch minute customer data, making demand forecasting simpler than ever. This is how another sports clothing brand, the study reported, recovered its inventory investment in less than a year via omnichannel sales. While the implication of the inventory payback time on revenue is not mentioned in the article, the period itself suggests robust growth.
Improved Return Management: While it is true that e-commerce is an enabler of revenue success, it also has a downside. About 20% of e-commerce orders are returned, presenting a logistics challenge, especially when it comes to tracing the items. Much like when RFID solutions are disabled during check-out, when the return process is initiated the tracking capability of the tag can be activated. In this way, one can ensure two things: sellable inventory items are not lost while on their way back to the brand and the authenticity of the product returned.
Reducing Shrinkage/ Boosting Security: Improved traceability ensures fewer instances of theft and loss during transit, therefore allowing the business to sell as many items as possible and even earn the maximum profits against the procurement expenses.
3.Impact of RFID Solutions on Customer Experience & Compliance Management
When it comes to industries such as FMCG and pharmaceutical products compliance is of utmost importance as oversights or quality control failures can be harmful to the end users. A single bad instance can have a domino effect, negatively affecting the company’s profit margin via losses triggered by:
- Reputation damage
- Mass-scale returns
- Batch recalls
- Potential hefty legal expenses
This is another reason why gaining visibility of the entire supply is vital. Similarly, shelf life is also an important consideration for businesses dealing with perishables. Shelf life is related not just to customer experience and compliance management but also to sustainability – factors which are ultimately linked to profitability. These scenarios present a perfect risk mitigation opportunity via RFID tracking.
In countries such as the United States, compliance acts such as The Drug Supply Chain Security Act (DSCSA) require pharmaceutical companies to follow the Electronic Product Code Information Services (EPCIS) standard, enabling trading partners to the medicines throughout the supply chain. Likewise, the Food Safety and Standards (Labelling and Display) Regulation, 2020 implemented by FSSAI (Food Safety and Standards Authority of India) requires food labels to feature:
- Barcodes for traceability and product information
- List of essential information regarding the ingredients on the package
Implementation of RFID solutions can further help companies adhere to these compliance frameworks and even recall products in time in case of contamination or defect. Apart from reducing compliance and reputation-oriented risk, RFID tags can technically also enable vendors to track the approximate shelf life of non-packaged perishables. In this manner, business owners can manage their losses by avoiding spoilage as much as possible.
Earning customer’s trust is an important aspect of business success. With rising health consciousness amongst consumers, increasingly people want to know about the supply chain that their food has gone through. Details such as ingredient list, cruelty-free facilities, carbon footprint of logistics, and adherence to health and safety standards can be important to many buyers. In this regard, RFID tracking can play an important for upholding transparency vis-à-vis the set of product information that matters to the target audience of the company. At the same time, with improved transparency, companies can avoid legal battles if they are accused of false advertising.
4.Maturity of the RFID Infrastructure & Readiness for Other Cutting-Edge Technologies
As per the Accenture study (A New Era for RFID in Retail), “Retailers that have fully adopted RFID are reporting more than 10% [in 2021] ROI compared to 9.2% in 2018.” It also suggested that the more the use cases of the RFID solutions in a business, the higher the ROI likely to be observed over time.
On a different note, the study mentioned that due to the COVID-19 pandemic, businesses have also begun to implement advanced technologies such as the Internet of Things, Blockchain, and sensors/cameras for supply chain management. Interestingly, 82% of the respondents surveyed said that to make use of these frontier technologies, an RFID-enabled infrastructure is needed, and 83% of the respondents think that RFID can enhance the impact of these technologies.
Important Factors in ROI Calculation
Here are the main considerations behind ROI calculation that we can deduce from the blog so far:
- The impact of reduced effective labour cost, i.e., improved productivity per hour per employee + decreased employee expenses due to automation
- The impact of reduced shrinkage and spoilage
- Implementation and maintenance cost of the RFID Infrastructure
- Sales figures after RFID implementation
- Depreciation cost of the inventory and infrastructure
- Impact of Customer Data Insights
RFID ROI Calculator: Is There a Single Way?
In this blog, we have tried to explore various factors that one should consider before investing in RFID solutions and the impact such solutions have had across companies. Determining the net impact of these factors leads to a multivariable calculation. This approach is ideal and possibly there are many more factors to be considered. However, the calculation process can become complicated very quickly and depends on the quality of business data collected, the accuracy of the industry data the business has access to, and the competence of its data-processing capabilities.
To make matters simple, we will only consider a surface-level approach to arrive at the ROI figure.
From a layperson’s perspective, the ROI of an RFID project can be calculated in this manner:
ROI=(Net Benefits−Total Costs/Total Costs)×100
If the ROI is positive, then the investment is successful.
Another, important thing to consider is the payback period, which means the time taken to recover the investment amount. It is calculated by the following formula:
Payback Period=Initial Costs/Annual Net Benefits
The sooner the investment is recovered the better it is considered.
Let’s Extrapolate: Different Industry, Different Technology, Similar Observations?
As mentioned earlier, we have limited the scope of this blog to creating a mere framework for ROI calculation of a stereotypical finished consumer good company RFID infrastructure. Analysing productivity enhancement made by any technology investment in any venture, regardless of the sector it belongs to, would require the same process:
- Listing all the improvements (direct and indirect) observed in the operations after the technology is implemented
- Measuring the improvement in each metric due to the technology
- Noting the increase in revenue over time
Maximising RFID ROI with Quinta
We at Quinta strive to procure some of the most in-demand and robust RFID readers in the industry that can help you leverage your RFID infrastructure to its fullest. Apart from assisting you in selecting the most suitable hardware, we are responsible for identifying and integrating the best-performing software that serves the use cases of RFID solutions in your organisation.
Our experts have a solid track-record of aiding several companies undergo RFID-enabled Digital Transformation, including players in competitive sectors such as retail, manufacturing, pharmaceutical, F&B, and hospitality, among others.
Curious to know more about the end-to-end solutions we offer?
Contact us today and take your success story a notch higher!