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RFID's Payback Stretches Beyond 2 Years, Analyst Says

Oct 29, 2004 (11:10 AM EDT)

Read the Original Article at http://www.informationweek.com/news/showArticle.jhtml?articleID=51201630


It's inevitable that people deploying radio-frequency identification systems will see cost increases before savings roll in. Companies have to pay for the new infrastructure, after all. But some companies may not see RFID efficiencies for at least two years, says one analyst firm.

In fact, ARC Advisory Group suggests that delayed returns on investments could end up actually raising costs for retailers that are uninvolved with RFID.

ARC has issued a report that says early adopters of electronic-product-code RFID systems will wait for a return on investment longer than perhaps they'd anticipated. Some companies have deployed RFID because of Wal-Mart Stores Inc.'s tagging mandate. Steve Banker, service director for supply-chain management at ARC, says those companies may be reluctant to recoup their investments by charging Wal-Mart higher prices. So they might charge more of other retail customers instead, Banker says.

ARC says it polled 24 companies that are investing in EPC RFID and only one company said it anticipates getting an ROI in less than two years. Virtually all of the rest predicted that payback would begin after two years.

"This is still an immature technology, and until the [tag] readability and the reliability improve, which may be over two years away, suppliers are not going to be able to reduce their inventory," he says.

Banker says a company that spends $10 million on infrastructure and tags cannot earn back more than $1 million to $1.5 million a year and, therefore, will have a payback period of more than two years, he says.

RFID has a lower ROI for manufacturers and distributors selling to large retailers than for their retail customers, Banker says. Retailers run a highly automated distribution chain and they expect the manufacturers to pay for RFID tags without being reimbursed. Passing on tag costs, in fact, is the main reason retailers have a higher chance of achieving ROI in less than two years, he says.

"One of the benefits retailers talk about is better in-stock position in the store, which they say will benefit them and their suppliers, but the savings are greater for retailers than for manufacturers," he says.

Although companies participating in the ARC study say RFID has a poor ROI, those facing mandates are searching for other benefits to mitigate the costs.

In order to get benefits from RFID in their warehouses, for example, suppliers will have to move tagging out to factories, and they have to automate receiving and follow-through processes, Banker says.

"That does not make much economic sense until there's a much higher volume of goods being tagged heading out to retailers," he says. "Until you have almost perfect [tag] readability throughout the extended supply chain, you won't get those benefits."

Since Wal-Mart suppliers believe that they will not reap savings from RFID for several years, some said they might have to raise prices for Wal-Mart, Banker says. Others don't want to take a profit hit and said they will increase prices to other retailers instead.