Manufacturers and retailers should stop focusing on low-cost solutions and look at long-term benefits like partner collaboration.
Posted Aug 23, 2005
Manufacturing organizations need to rethink the business value of RFID technologies when considering ROI strategies, according to Manufacturing Insights' report, "RFID Investment: Cost of Compliance or Strategic Business Benefit?" The cost of RFID tags is the short-term concern for executives, but long-term issues include integration, process, and technology. "Waiting for RFID to become 100 percent proven, understood, and standardized may seem to be a safe decision on the surface, but it's a losing strategy," says Mike Witty, program director of demand management strategies for Manufacturing Insights and author of the report. "In general companies have focused too much on the cost of compliance and not enough on the business value of RFID."
When retailers come out with various mandates, Witty says most manufacturers set up a secondary "slap-and-stick" process in which they essentially slap the RFID information on at the last minute to satisfy the customers. They are thinking about what they can do at the lowest cost with the lowest disruption, according to Witty. Forward-looking companies understand this provides them with no value, and instead think about how they can incorporate that tracking information into their overall supply chain and use that information in collaboration with their retail partners. "Manufacturers and retailers are better off thinking more forward and putting solutions in place that allow them to take initial pilots they can integrate forward or backward in the supply chain, rather than using a throwaway solution. They need to buy something today based on what the value will be tomorrow. My value proposition is better a little bit down the road if I take a little bit of a risk today."
The report suggests implementing three basic processes to successfully manage IT projects under what Manufacturing Insights dubs an options thinking model, instead of a traditional ROI strategy:
Recognize and create options for RFID investment: A needs-focused analysis of business processes, systems architecture, and resource capabilities will identify where the opportunities lie within an organization and allow companies to identify the available investment options for implementing the RFID strategy. It is also important to identify the risk factors or uncertainties that exist in the current environment and how they should be evaluated before exercising an option.
Value the options: Formal option-pricing models like Black-Scholes are becoming more widely accepted, but if the use of them proves to be a barrier, a more systemic decision-tree approach is a process for defining value, and often is more easily accepted by an organization.
Extract value from IT project options: Clear checkpoints need to be established at specific times throughout the project. At each checkpoint management reviews the value realized on previous and current options, updates the status of identified risk factors, adjusts the value of future options, and decides whether to exercise or defer future options. It also allows management to terminate the project if it is determined that the cost is greater than its value.
"If RFID is leveraged to its full potential over the next three to five years, it will force companies to redefine the rules of engagement for collaboration: specifically, how supply chain data is exchanged and utilized, increasing operational visibility and providing a clearer picture of available options," the report states. "Organizations that develop a comprehensive RFID strategy extending beyond mandate compliance will be poised to gain a competitive advantage once the dust settles on the early pilot projects."
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