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Cents and Sensorability

Developing a performance management framework can mitigate the risks of RFID.

VentanaView™

Summary
Even though radio frequency identification (RFID) can deliver tangible benefits, choosing to deploy the technology has inherent risks. RFID standards and the systems that support them are still evolving. Pilot programs are progressing to meet compliance requirements for "big box" retailers and the U.S. Department of Defense. But wholesale adoption of any technology needs guidance, and any organization should understand the limits of a technology before investing in it. Ventana Research recommends constructing a practical roadmap built on a performance management foundation that will help maximize the benefit of current and future investments.

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The buzz surrounding radio frequency identification (RFID) is getting louder. Last week Wal-Mart announced that its initial use of radio-transmitting inventory tags has reduced out-of-stock merchandise by 16 percent at the company's stores where those tags are in use. According to Linda Dillman, Wal-Mart's chief information officer, the company is able to restock RFID-tagged items three times as fast as untagged items.

Wal-Mart is not alone. Use of RFID products is on the rise as hardware and software vendors take steps to improve their marketing strategies and conduct more pilot trials across other large retail chains such as Albertson's, METRO, Target and Tesco. Suppliers to the U.S. Department of Defense (DoD) also are using tags to comply with the department’s request to begin RFID integration. The DoD's goal is to have all 60,000 vendors comply by 2007. These pilot projects are beginning to show tangible benefits in terms of reduced inventory and fewer out-of-stock situations and are encouraging other businesses to move forward with RFID plans.

But all is not well in the land of Oz. Everything associated with RFID deployment is changing. Software, tags, readers, sensors and vendors are all in a state of flux. At the root of this flux are global standards groups that are vying for dominance. The lead player, EPCglobal Inc., the nonprofit RFID standards body, announced only last month its first software standard for RFID technology used in the supply chain. Global hardware standards have gotten a little farther, but not much. The EPCglobal standard for RFID tags and readers, called UHF Generation 2, was ratified last December. But this standard still needs approval by the International Organization for Standardization (ISO), which until recently was working on its own standard.

The impact of standards change is not small. Companies that had a brief window to learn about and deploy RFID technology to meet the compliance deadlines of retailers and the DoD will have to change when the new standards take effect. These companies already absorbed the first shock wave of spending in their initial programs. While their pilot programs did much to prove the technology, it was costly to do and took concerted effort to debug the glitches. The second wave will be costly, too. Even though prices of tags are dropping — they now sell for 10 to 30 cents on average compared with 20 to 50 cents a year earlier — the standards change will force first adopters to reconfigure software and buy new reader hardware and tags.

Assessment
Amid all this change it's hard to make a clear case for an RFID initiative. An initiative based on compliance itself is costly, but there are many areas where the application of RFID technology could considerably reduce cost, increase throughput and enhance revenue. Among the general benefits are improvement of inventory visibility (inbound, in-house and outbound), reduction of labor to track and manipulate materials and reduced theft and counterfeiting.

Your business case and roadmap for RFID adoption will depend on a well-defined plan that is clearly tied to your corporate business objectives. Ventana Research recommends that you build your RFID initiative on a performance management foundation rather than just on technology for gaining efficiency improvements. Instead of just measuring the outcome or return on investment, performance management will provide a methodology and process to analyze each piece of the technology implementation and adjust rollout plans for future implementations accordingly. Start by defining the key performance indicators (KPIs) that will serve as the yardstick by which to measure success of the subsequent steps and deployment. Without meaningful, relevant KPIs as evaluation criteria, subsequent steps likely will yield uncertain results. Your rollout plan should implement first the RFID application that your business case analysis indicates will have the highest value.

About Ventana Research
Ventana Research is the leading Performance Management research and advisory services firm. By providing expert insight and detailed guidance, Ventana Research helps clients operate their companies more efficiently and effectively. These business improvements are delivered through a top-down approach that connects people, process, information and technology. What makes Ventana Research different from other analyst firms is a focus on Performance Management for finance, operations and IT. This focus, plus research as a foundation and reach into a community of over two million corporate executives through extensive media partnerships, allows Ventana Research to deliver a high-value, low-risk method for achieving optimal business performance. To learn how Ventana Research Performance Management workshops, assessments and advisory services can impact your bottom line, visit www.ventanaresearch.com.

© 2005 Ventana Research

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