Making the business case for RFID

Abstract

In June 2003, Wal-Mart asked its top 100 suppliers to begin using radio frequency identification (RFID) tags on pallets and
cases beginning January 2005. Since that announcement, the business value of RFID in the consumer packaged goods supply chain
has been periodically questioned.Recently, a Wall Street Journal article asserted that RFID is not living up to its hype,
and in reality is not providing the promised tangible business value throughout the supply chain. In light of such claims,
this paper examines the business value of RFID in the supply chain and presents a model of RFID assimilation which proposes
that the creation of business value is dependent upon the depth of assimilation (extent of use). The model is grounded in
industry observations of the difficulty of early adopters to fully realize the benefits of RFID assimilation. The model conceptualizes
RFID assimilation as occurring in three waves: the first wave of the model is Technology Deployment, the next wave of Data
Understanding, and, lastly, the final wave is Business Value Creation. In this paper, the first two waves of the model are
explored briefly with the emphasis placed on proven business cases and potential opportunities for RFID to provide business
value in the supply chain.

Full text

Making the Business Case for RFID
Bill Hardgrave1, Cynthia K. Riemenschneider1, Deborah J. Armstrong2
1Information Systems Department, Sam M. Walton College of Business, University of Arkansas,
United States
2Department of Management Information Systems, The College of Business, Florida State
University, United States
Abstract In June 2003, Wal-Mart asked its top 100 suppliers to begin using radio
frequency identification (RFID) tags on pallets and cases beginning January 2005.
Since that announcement, the business value of RFID in the consumer packaged
goods supply chain has been periodically questioned. Recently, a Wall Street Journal
article asserted that RFID is not living up to its hype, and in reality is not providing
the promised tangible business value throughout the supply chain. In light of such
claims, this paper examines the business value of RFID in the supply chain and
presents a model of RFID assimilation which proposes that the creation of business
value is dependent upon the depth of assimilation (extent of use). The model is
grounded in industry observations of the difficulty of early adopters to fully realize
the benefits of RFID assimilation. The model conceptualizes RFID assimilation as
occurring in three waves: the first wave of the model is Technology Deployment,
the next wave of Data Understanding, and, lastly, the final wave is Business Value
Creation. In this paper, the first two waves of the model are explored briefly with
the emphasis placed on proven business cases and potential opportunities for RFID
to provide business value in the supply chain.
1 Introduction
Radio frequency identification (RFID) is a form of automatic identification that uses
radio waves to identify products. Because of its many advantages over barcode (the
current standard for automatic identification), many retailers have begun the tran-
sition to RFID. Perhaps the most significant sign of this transformation was Wal-
Mart’s announcement in June 2003 of its intention to have top suppliers begin using
RFID tags on pallets and cases by January 2005.The Department of Defense, Target,
Albertson’s, Best Buy, and others soon followed with their own RFID initiatives.
However, the transition has not been smooth. Many in the industry question the
business value (i.e., ROI) of RFID. In a recent Wall Street Journal article (circa
February 15, 2007) entitled “Wal-Mart’s Radio-Tracked Inventory Hits Static,” the
H.-D. Haasis et al., Dynamics in Logistics 25
DOI: 10.1007/978-3-540-76862-3, © Springer 2008

26 B. Hardgrave, C.K. Riemenschneider, D.J. Armstrong
reporter paints a rather dismal picture of RFID: grumbling suppliers, high costs,
no return on investment, and reluctant retailers (McWilliams, 2007). In a similar
article in Computerworld (June 15, 2006) the author states, “A few years ago, the
IT industry was abuzz with the wonders of radio frequency ID technology. It was
set to revolutionize everything about business process management. But in the past
year, there have been few advances in RFID that would put it center stage” (Gittlen,
2006). If we are to believe the popular press, it would appear then, that the use of
RFID is losing traction due to a lack of proven business value creation.
Contrary to these negative reports on RFID, we believe there is a business case
for RFID. The use of RFID throughout the supply chain can provide manufacturers,
suppliers and retailers unprecedented visibility. This newfound visibility provides
many real and potential benefits, such as reducing out of stocks, properly execut-
ing promotions, and reducing theft. In this paper, we propose a model of RFID
assimilation which suggests that the creation of business value is dependent upon
the depth of assimilation (extent of use). The model conceptualizes RFID assimila-
tion as occurring in three waves: the first wave of the model is Technology Deploy-
ment, the next wave of Data Understanding, and, lastly, the final wave is Business
Value Creation.
2 Model of RFID Assimilation
The three phases of RFID assimilation include technology deployment, data ana-
lytics, and business value (see Fig. 1). The first phase involves creating an RFID-
enabled environment, which includes the equipment, such as the readers, antennae,
and tags. Deploying RFID technology alone will not produce business value. In-
stead, the technology producesdata that, with proper analysis, produces information
and insight that can produce business value. As we learn more about the data that
is needed, the technology deployment can be improved; the more we learn about
the business value that is being produced, the better idea we have about the data
needed. Thus, the feedback loops in the model illustrate the need to update the tech-
nology deployment and data analytics, as necessary. In this paper, we focus on the
last phase – Business Value – but keep in mind that one cannot get to the business
value phase without passing through the two earlier phases (briefly described in the
next sections).
Fig. 1 RFID Model of Assimilation

Making the Business Case for RFID 27
2.1 Phase 1: Technology Deployment
Unlike other common automatic identification technologies, such as barcodes, RFID
uses radio waves to communicate. Compared to barcodes, this offers several ad-
vantages, such as: (1) RFID tags are not constrained by a need for line-of-sight;
(2) many RFID tags can be read simultaneously; (3) RFID tags can store informa-
tion regarding the individual item; (4) RFID works well in a dirty environment; and
(5) RFID tags can potentially be written multiple times, making them reusable data
containers (Raza et al., 1999 and Shepard, 2005).
In its simplest form, an RFID system consists of a tag (attached to the product
to be identified), an interrogator (i.e., reader), one or more antennae attached to the
reader, and a computer (to control the reader and capture the data). At present, the
retail supply chain has primarily been interested in using passive RFID tags. Passive
tags receive energy from the electromagnetic field created by the interrogator (e.g.,
a reader) and backscatter information only when requested for it. The passive tag
will remain energized only while it is within the interrogator’smagnetic field. Unlike
passive tags, active tags have a battery on board to energize the tag. Because active
tags have their own power source, they don’tneed a reader to energize them; instead
they can initiate the data transmission process. On the positive side, active tags have
a longer read range, better accuracy, more complex re-writable information storage,
and richer processing capabilities (Moradpour and Bhuptani, 2005). On the negative
side, due to the battery, active tags have limited lifetime, are larger in size and are
more expensive than passive tags.
Companies currently have several options when implementing RFID. They can
use static RFID portals which create a set read field at discrete choke points such
as a dock door or sales floor door. Companies may also use mobile devices such
as forklift readers or handheld readers. The choice of technology is dictated by the
type of data one wants to capture.
2.2 Phase 2: Data Analytics
What RFID data does a company need to create business value? The current deploy-
ment of RFID includes only a small portion of the overallsupply chain (specifically,
retailer distribution center and store backrooms) using static portals. Trends, how-
ever, suggest infusion across the entire supply chain and a move to more mobile
devices and fewer static portals.
Given the current deployment, it is important to understand what data is available.
A typical retailer distribution center would contain readers at the receiving doors, on
the conveyor, and at the shipping doors (see Fig. 2). Read points in a generic store
include receiving doors, sales floor doors, backroom, and box crushers (see Fig. 3).
An RFID tag contains an Electronic Product Code (EPC) which is a family of
product codes, including such things as the serialized global trade identification

28 B. Hardgrave, C.K. Riemenschneider, D.J. Armstrong
Fig. 2 Case Movement through a Distribution Center
Fig. 3 Case Movement through a Store
number (SGTIN) and the serialized shipper container code (SSCC), among others.
SGTIN is the standard identifier for cases of products and allows each case to be
uniquely identified with a serial number. In contrast, the typical Universal Product
Code (UPC) only provides information about the product but does not uniquely
identify each case.
An example SGTIN is 0038010.150853.203. The first seven digits represent the
manager number or company prefix. The next six digits represent the item number
or object class. The number following the second period is the serial number. In this
example it is only three digits, but the serial number can be up to 12 digits.

Making the Business Case for RFID 29
Tab l e 1 Sample RFID Data
Facility EPC Date/time Reader
DC 123 0038010.150853.203 08-04-07 23:15 inbound
DC 123 0038010.150853.203 08-09-07 7:54 conveyor
DC 123 0038010.150853.203 08-09-07 8:23 outbound
ST 987 0038010.150853.203 08-09-07 20:31 inbound
ST 987 0038010.150853.203 08-10-07 1:12 backroom
ST 987 0038010.150853.203 08-11-07 15:01 sales floor
ST 987 0038010.150853.203 08-11-07 15:47 sales floor
ST 987 0038010.150853.203 08-11-07 15:49 box crusher
When the data is initially received, it will not necessarily be in a user friendly
form. The first step of the data analytics is to filter and cleanse the data. The data
may show many different reads for one case or pallet of product. Once the data has
been filtered and cleansed, it should be integrated with the existing systems of the
organization and then interpreted to decipher what the data means. Once the data
is interpreted and understood, then actions may be taken that lead to the business
value phase. An example of cleansed data with the four key elements of a read –
EPC, facility, date/time of read, and reader location – is shown in Table 1.
2.3 Phase 3: Business Value – Proven
Ultimately, the true test for RFID is whether or not it creates business value. As
described, the technology must be deployed and the data captured as precursors
to creating business value. Although initial deployments are limited (partial supply
chain, not all suppliers, not all products, etc.), benefits are already being found.
Additionally, there are several potential benefits waiting to be tested. The real and
potential benefits of RFID for the major supply chain participants – retail stores,
distribution centers, and manufacturers – are summarized in Table 2 and examined
Tab l e 2 Business Value for RFID: Real and Potential
Retailer Distribution Center Manufacturer
Proven
business
value
• out of stocks
• manual orders
• promotion execution
• receiving
• electronic proof
of delivery
• asset management
• product life cycle
tracking
Potential
benefits
• shrinkage
• inventory accuracy
• product rotation
• recall management
• recall management
• product rotation
• shipping accuracy
• recall management
• shipping accuracy
• reusable containers
•targeteduse
of merchandisers

30 B. Hardgrave, C.K. Riemenschneider, D.J. Armstrong
in the following sections. As the realized benefits have been segment specific, there
is potential for future benefits to cross multiple segments of the supply chain. The
realized benefits are presented by major supply chain participant category while the
potential benefits are discussed more holistically.
Retailer: Out of Stocks
Out of stocks is a major problem for retailers, suppliers, and consumers. Nationally,
the average out of stock rate is about 8% (Corsten and Gruen, 2003), which means
that about 1 out of every 12 items on a consumer’s shopping list is not on the shelf.
The result: lost sales and unhappy customers. Although retailers have tried to im-
prove out of stocks for years, the 8% rate has remained relatively stable (Corsten
and Gruen, 2003). One of the anticipated benefits of RFID was the reduction in out
of stocks. To examine this benefit, in 2005, the University of Arkansas conducted
the largest out of stocks study ever. The study included thousands of products in
24 stores of various Wal-Mart formats over a 6-month period. The initial results,
released late 2005 (see Hardgrave, Waller, and Miller, 2005), were both positive
and extremely encouraging. In the test stores (those that were RFID-enabled), out
of stocks dropped 26% during the study period. A follow-up analysis based on the
velocity of sales (i.e., daily sales per item) indicated that for those items that sold be-
tween 0.1 and 15 units per day, RFID was responsible for a 30% reduction in out of
stocks (Hardgrave, Waller, and Miller, 2006). In some categories, such as those sell-
ing between 7 and 15 units per day, out of stocks were reduced by more than 60%!
Ultimately, this translates into about a 1% sales lift for the retailer and 0.8% sales
lift for the supplier. Is 1% important? Last year, Wal-Mart gross sales were $344.6
billion.
Retailer: Manual Orders
In retail stores, store associates will often create a manual order for a product if it
cannot be found in the backroom (although it may be there). Unnecessary manual
orders affect perpetual inventory accuracy (as the product inventory count is often
set to zero before placing a manual order). Unnecessary orders also send false sig-
nals up the supply chain about the current demand for product, thus creating the
bullwhip effect(Lee, Padmanabhan, and Whang, 1997). The bullwhip effect hasad-
verse effects on both the supplier and the retailer. With RFID, Wal-Mart has reduced
the number of unnecessary manual orders by 10% (Sullivan, 2005).
Retailer: Promotion Execution
RFID has proven to be an effective tool for improving promotions (Collins, 2006;
Murphy, 2005). In February 2006, Procter & Gamble launched a new product and

Making the Business Case for RFID 31
promotional campaign for the Gillette Fusion razor. As a part of the promotional
campaign, Procter & Gamble tagged the Fusion promotional displays in addition to
tagging the cases and pallets. They were able to determine if the retailer had placed
the promotional display on the floor in a timely manner to correspond to the pro-
motional launch. Additionally, they could assess whether a store had restocked the
razors on the sales floor. By having this information, Procter & Gamble was able
to either send their own personnel to the retailer or prompt the retailer to restock or
put the promotional display on the sales floor. According to Collins (2006), “. . . im-
proving promotions proved to be an even greater ‘sweet spot’ for the technology
within the company.”
Distribution Center: Receiving
Early evidence suggests that RFID can reduce the amount of time to receive product
at a warehouse (Katz, 2006). Instead of scanning each case of product individually
with a barcode scanner, RFID tagged product can be read automatically at a dock
door portal. Gillette reported a reduction from 20 seconds to 5 seconds in pallet
receiving at their distribution center due to RFID (Katz, 2006). The process of re-
ceiving was not drastically changed (i.e., forklifts unloaded the product as before).
The only change was eliminating the need to manually scan the product. Thus, the
process became more efficient.
Distribution Center: Electronic Proof of Delivery
RFID can reduce the errors in receiving (in addition to increasing the speed of re-
ceiving as previously discussed) via the RFID-enabled process referred to as elec-
tronic proof-of-delivery (or ePod) (Mason et al., 2006). With barcode, mistakes are
made by misidentifying the quantity and type of product. For example, a pallet of
48 cases of shampoo consisting of 24 regular and 24 scented may be received at the
distribution center. The receiving clerk mistakenly identifies the pallet as 48 cases of
scented shampoo. Thus, the inaccurate receiving creates an inventory inaccuracy for
the receiving company and a perceived overage/underage situation for the supplier.
Manufacturer: Asset Management
With RFID, manufacturers have the ability to better manage their movable assets,
such as forklifts, equipment, expensive tools, etc. For example,the University Med-
ical Center in Tucson, Arizona has implemented an RFID asset tracking system for
all 2,300 pieces of mobile medical equipment. The location of each piece of equip-
ment within the 8-story hospital is transmitted wirelessly and can be displayed on
a virtual map (Philips Launches ..., 2006). Now, equipment can be found anytime
anywhere; thus, avoiding time loss in locating equipment in emergency situations,

32 B. Hardgrave, C.K. Riemenschneider, D.J. Armstrong
for example. Obviously, similar projects in other industries, such as tracking fork-
lifts in a warehouse, are feasible and potentially valuable.
Manufacturer: Product Life Cycle Tracking
An example of product life cycle tracking is the use by Michelin to keep track of
large industrial tires to know when they need to be retreaded (Murphy, 2005). RFID
can be used to monitor the life cycle of the product, thus improving safety for the
truck drivers and enhancing the relationship with the customer.
2.4 Phase 3: Business Value – Potential
Recall Management
With barcode, retailers have no idea where (i.e., which stores) the recalled productis
located. Thus, they are forced to look at each store and perhaps pull the product from
the shelves at each store. With RFID, cases could be tracked to particular stores.
Similar to retail stores, distribution centers and manufacturers would be able to track
product at the case level with RFID. A recent occurrence was the pinpointing of the
tainted raw material product shipment from China to manufacturing plants which
produced poisonous dog and cat food. As recent as April 19, 2007, the Food and
Drug Administration has expanded the recall of pet foods due to the tainted wheat
gluten and rice protein concentrate imported from China (Pet food recall, 2007).
Product Rotation
RFID data can provide the visibility needed to know whether or not productis being
rotated properly (using the first-in-first-out (FIFO) method, for example). Consider
the wide variety of products that have expiration dates or are perishable. This in-
sight can, thus, help ensure proper rotation in both the retail store and the distribu-
tion center to get the product which expires/perishes the soonest, to the front of the
shelf/display.
Shipping Accuracy
Distribution centers and manufacturers often make mistakes by loading product on
the wrong truck. With RFID, the system could send an alert (visible, audible, etc.) to
the person loading the truck that a mistake was made. This alert could save a com-
pany money from shipping and reshipping the same items as well as enhance inven-
tory control.

Making the Business Case for RFID 33
Inventory Accuracy
The key to good forecasting and replenishment models for the retailer is accurate
inventory. Unfortunately, inventory counts (commonly called perpetual inventory)
which are calculated by subtracting point of sale from the amount of product re-
ceived, are inherently wrong. A recent study (Raman, DeHoratius, and Ton, 2001)
found that as much as 65% of all perpetual inventory counts are wrong. Thus, fore-
casting and replenishment models are based on data that is wrong 65% of the time!
RFID could provide much better data to determine accurate inventory counts.
Shrinkage
Shrinkage is any loss of product as it goes through the supply chain whether through
damage, spoilage, loss or theft. Although RFID cannot eliminate all shrinkage, it
can help reduce it with the visibility it provides. For example, a company may know
what 5% of its product is disappearing in the supply chain, but have no idea where
(retail store or distribution center). RFID would provide the insight into where it was
last seen so that a company could determine (for example) that the product made it
to the store but never to the shelf (which may suggest that employees were stealing
the product). Another example could be of a manufacturer of a seasonal product that
shipped 10 cases of the product, but only 9 cases appeared at the store. With bar code
tagging, once the product leaves the manufacturer the location of the product within
the supply chain is unknown. However,with RFID, quick identification and location
of the lost product could provide time and cost savings and ultimately business
value.
Reusable Containers
Many manufacturers ship their products in reusable containers, such as milk crates,
reusable totes, bins, rolling shelves, etc. Unfortunately, these containers have a ten-
dency to disappear. Each container could be tagged with RFID, thus similar to the
shrinkage discussion the manufacturer would know where the container was last
seen.
Targeted Use of Merchandisers
Many suppliers send merchandisers to retail stores to bring product from the back-
room to the sales floor. Currently, merchandisers methodically work from store to
store (perhaps having responsibility for 20 or more stores). Some stores will have
merchandise in the backroom and a need to work it to the shelf, others will not.
Visits to those stores that do not need it represent a waste of time for the merchan-
diser. With RFID, the merchandiser could remotely determine (from their home

34 B. Hardgrave, C.K. Riemenschneider, D.J. Armstrong
office, for example) if product was in the backroom and if it needed to be placed on
the sales floor shelf.
3Conclusion
This paper has identified threestages of RFID assimilation: technologydeployment,
data analytics, and business value. The primary focus of the paper was to illustrate
proven business value and potential value that companies could glean from using
RFID. We have demonstrated the proven business value of RFID by giving spe-
cific examples for retailers, distribution centers, and manufacturers that have pre-
viously been experienced. Additionally, we identified seven potential benefits for
the retailer, distribution center, manufacturer or some combination of the three that
is possible with RFID. Some business value from RFID used to improve promo-
tion execution, asset management and electronic proof of delivery has already been
achieved by many companies (e.g., Wal-Mart, Gillette, Michelin, and Procter &
Gamble). We assert that the identified and unidentified (due to future technology
improvements not yet available) potential benefits will expand the business value
companies throughout the supply chain receive from RFID.
References
Collins, J., 2006, “P&G Finds RFID ‘Sweet Spot’,” RFID Journal, May 3. Available at:
http://www.rfidjournal.com/article/articleview/2312/1/1/
Corsten, D., and Gruen, T., 2003, “Desperately Seeking Shelf Availability: An Examination of the
Extent, the Causes, and the Efforts to Address Retail Out-of-Stocks,” International Journal of
Retail & Distribution Management, 31 (11/12), 605–617.
Gittlen, S., 2006, “The Failure of RFID,” Computerworld, June 15. Available at:
http://www.computerworld.com/action/article.do?command=viewArticleBasic&
articleId=9001194&taxonomyId=16
Hardgrave, B., Waller, M. and Miller, R., 2005, “Does RFID Reduce Out of Stocks? A Preliminary
Analysis,” White Paper, Information Technology Research Institute, Sam M. Walton College
of Business, University of Arkansas. Available at: http://itrc.uark.edu/research/display.asp?
article=ITRI-WP058-1105
Hardgrave, B., Waller, M. and Miller, R., 2006, “RFID’s Impact on Out of Stocks: A Sales Velocity
Analysis,” White Paper, Information Technology Research Institute, Sam M. Walton College
of Business, University of Arkansas. Available at: http://itrc.uark.edu/research/display.asp?
article=ITRI-WP068-0606
Lee, H.L., Padmanabhan, V., and Whang, S., 1997, “The Bullwhip Effect in Supply Chains,” Sloan
Management Review, 38 (3), 93–102.
Katz, J., 2006, “Reaching the ROI on RFID,” IndustryWeek, February 1. Available at:
http://www.industryweek.com/ReadArticle.aspx?ArticleID=11346
Mason, M., Langford, S., Supple, J., Spears, M., Lee, R., Dubash, J., Roth, L., Subirana, B.,
Sarma, S., and Ferguson, C. “Electronic Proof of Delivery,” 2006, EPCglobal, Available at:
http://www.epcglobalinc.org/news/EPODVignetteApprovedV2.pdf

Making the Business Case for RFID 35
McWilliams, G. Wal-Mart’s Radio-Tracked Inventory Hits Static. The Wall Street Journal,Febru-
ary, 15, 2007, B1.
Murphy, C., 2005, “Real-World RFID: Wal-Mart, Gillette, and Others Share What They’re Learn-
ing,” InformationWeek, May 25. Available at:http://informationweek.com/story/
showArticle.jhtml?articleID=163700955& loopback=1
“Pet-food recall expanded, Chemical turns up in second ingredient,” Richmond Times Dispatch,
April 19, 2007, Available at: http://www.timesdispatch.com/servlet/Satellite?pagename=
RTD/MGArticle/RTD BasicArticle&c=MGArticle&cid=1173350832895
“Phillips Launches RFID Asset-Tracking for Hospitals,” Medical Technology Business – Europe,
December 14, 2006. Available at: http://www.mtbeurope.info/news/2006/612024.htm
Raman, A., DeHoratius, N., and Ton,Z. 2001, “Execution: The Missing Link in Retail Operations,”
California Management Review, 43 (3), 136–152.
Sullivan, L., 2005, “Wal-Mart RFID Trial Shows 16% Reduction In Product Stock-Outs.” Infor-
mation Week, October 14. Available at: http://informationweek.com/story/
showArticle.jhtml?articleID=172301246