Anyone who’s been through it recently will tell you that determining return on investment (ROI) is a complex, time-consuming, frustrating and often thoroughly rewarding process.
Sound like a contradiction?
It would be if all people were trying to do was cost justify a simple bolt-on application like putting bar code printers on the shipping line.
The truth is, except for companies trying to meet the newest compliance mandates, no one’s looking for automatic identification and data collection (AIDC) solutions today. Instead, companies are focusing on ways to improve their business processes. And more and more companies have realized that a single technology (even one as wonderful as AIDC) isn’t going to improve a process all by itself. And that’s where ROI calculations get both easier and far more complex.
Why easier? Because when you look at an entire process or company, there are a lot more factors that can contribute to ROI. For instance, if you don’t look just at receiving or warehousing or shipping but rather at the entire material handling process, you come away with a very different picture. Instead of activities, you see material flow, purchasing, sales, finance and personnel. In other words, you see the entire process and every place in the company that it influences.
That’s why it’s also more complex. ROI calculations may have to cross departmental borders. That’s where the frustrations may come in, and also where the benefits may be found. And some benefits may be indirect and hard to quantify at first.
Obviously, not all benefits will be available in all systems. For example, if you implement AIDC for logistics only (receiving, warehousing, shipping), you won’t necessarily realize potential savings in billing, machinery utilization, etc.
Payback
Where does one look to find payback from AIDC? Everywhere. But here are basic lists of direct and indirect benefits. Later, we’ll see how some of them apply.
Direct benefits
-- labor cost reduction (increased speed of activity, elimination of wasted time, reduction of data entry costs, logging);
-- material cost reduction (improved inventory accuracy);
-- space efficiency (reduced storage needed because of tighter inventory control);
-- equipment utilization savings (optimal routing of lift trucks, more up-time of production equipment);
-- shipping cost reduction (elimination of shipping errors and associated costs);
-- loss reduction (reduction of unreported shipping errors/overages, theft);
-- cost of money savings (reduced need for financing because of overall reduced costs); and,
-- billing error reduction (reduced costs and delays in resolving customer billing questions and resolving supplier billing issues).
Indirect benefits
-- increased responsiveness (to customer queries, order fulfillment);
-- improved confidence (inventory accuracy and forecasting, more accurate sales/shipment promises);
-- reduced customer dissatisfaction (because of late or incorrect shipments or billing errors);
-- improved quality (through process tracking and workflow monitoring); and,
-- increased security (access control ID cards).
As the list demonstrates, benefits can accrue to sales, purchasing, facilities, operations, accounting and personnel. In short, the entire company can benefit. When it works — that is, when all departments get involved and upper management backs it — this can produce good applications that provide strong ROI justification.
Calculating benefits
In many cases, it’s a relatively easy task to calculate some of the labor-saving costs. If you know, for example, that manual receiving takes n minutes per pallet and you can reduce that by half through bar code scanning, then n/2 x number of pallets = labor savings.
Elimination of wasted time, however, may be more difficult to calculate. Few companies actually track how much time employees take looking for inventory that’s not where it’s supposed to be or isn’t even there.
Calculating indirect benefits is also somewhat fuzzy. Note that “reduced customer dissatisfaction” is listed as one possible benefit. AIDC cannot ensure customer satisfaction since there are many factors other than timeliness and accuracy that affect customer satisfaction. However, AIDC can eliminate these as possible reasons customers defect to a competitor.
When you’re not sure of the dollar figure (and few companies could actually put a number to any of these indirect benefits), you can calculate many of them as a single “customer retention” benefit. How much is customer retention worth? One way to calculate it is to determine the average contribution to the bottom line of the “average” customer. Add to this the costs of getting a new customer. Even if you apply a “fudge factor,” i.e., apply only 30 percent to your calculation, then you have at least some figure to add to your ROI.
Again, this list of benefits assumes that you’re looking at improving a larger process, not just trying to fix a localized problem. If you’re addressing a smaller operational issue, you’ll realize fewer benefits and may have a very straightforward ROI calculation.
While it may be frustrating and time consuming to calculate ROI to improve a known process, it’s even more of a challenge when you don’t have metrics on which to base your calculations. This is often the case when trying to implement radio frequency identification (RFID).
When it comes to cost-justifying RFID, it’s important to understand that implementing any new technology in an entirely new application is always a gamble. Why? Because in new applications, it’s likely that the process isn’t well enough understood to be able to calculate benefits with any degree of accuracy. This was true when bar codes were introduced and it will still be true when the next great technological breakthrough comes along.
Calculating costs
This may seem obvious, but it’s not. Depending on your application, costs for the AIDC component (bar code or RFID, for example) may be only a fraction of the total cost.
A full-scale supply chain management system can range from $500,000 to $20 million. The majority of those costs are software and integration fees. For more modest systems, software and implementation will still be the lion’s share of the expenses. This makes process evaluation and improvement even more important in ROI calculations.
This is a critical issue to consider, particularly for RFID. While most of the attention has focused on the mythical 5-cent tag, a business analysis will show that tag costs will initially be the smallest component of an entirely new application. Depending on the system, training may also be a significant cost — not just training of current personnel, but also of new hires as they come on board.
Maintaining the system — whether it’s routine maintenance or committing personnel to its ongoing management and care — should also be factored in. Neglecting these areas may make for a better initial ROI, but without personnel dedicated to understanding and maintaining the system (hardware, software and data), the long-term ROI will suffer.
Case histories
Let’s take a look at some sample applications and the kinds of ROI realized.
Examples 1 and 2: Wal-Mart and the Department of Defense
Both Wal-Mart and the Department of Defense (DoD) have issued sunrise dates of January 2005 for pallet level RFID tagging. Both of these organizations currently require bar codes on pallets.
Since RFID does not provide greater accuracy or data integrity than bar codes, what’s the ROI?
For Wal-Mart, the major benefit is speed, which translates directly to labor costs. That’s a fairly straightforward calculation. And, interestingly enough, it is anticipated that Wal-Mart will be using RFID to augment and eventually replace bar code. So, this is not an overall “process improvement” scenario — it’s simple efficiency.
For the DoD, the situation is similar but also very different. While we usually don’t think of the DoD as being overly concerned with labor costs, the DoD, like most companies today, is struggling to “do more with less,” particularly in terms of trained personnel. The more critical issue for the DoD, however, is “readiness.” Being able to efficiently identify, receive, store, retrieve and move materials — particularly once they leave the controlled environment of a warehouse — is a mission-critical activity. In this instance, the justification can be based less on “how much can we save?” and more on “how much better (faster, more efficiently) can we do our jobs?” This is an indirect benefit, yet one that very clearly supports the DoD’s mission. What’s the ROI? It could easily be the difference in days or weeks of conflict and, more importantly, in the lives of service personnel. That makes the justification fairly easy.
Even if you’re not involved in anything quite as directly life-threatening as military service, the lifeblood of the company may be at stake in ever-diminishing margins.
Example 3: S&Z Tool & Die
S&Z Tool & Die, a 60-year-old metal stamping company servicing the automotive industry, was losing profits by relying on manual inventory systems and production lines. With manual entry inventories up to 12 hours old, production often came to a halt as materials were located and changed.
Bar codes could have eliminated manual data entry and improved inventory accuracy but wouldn’t have done enough to improve overall efficiency.
S&Z’s solution was to use bar codes in conjunction with ruggedized mobile and fixed mount computers (manufactured by Glacier Computer) to network the entire company, including the shipping docks and production floor.
According to Mike Brueggeman, S&Z’s Director of Information Systems, “When each coil of steel arrives at the facility, a vehicle-mounted unit produces a unique serial number and bar code label for the coil (using a Datamax printer) and each piece it subsequently generates. In a climate where every second matters, the computerized label process saves 12+ hours of manual labor.” Labels are read with Symbol Technologies scanners.
On the production floor, touch screens and custom software link the machine operator to a lift truck operator. By pressing a button on the screen, the press operator can alert a lift truck operator that he’s almost ready for a refill coil. This saves 15-20 minutes the operator used to waste finding the lift truck operator, giving him the job information and then waiting for the coil to be delivered and loaded onto the press. Terminals are used to clock in and out of work and display productivity, production and even past customer quality problems right where it can be put to immediate use. According to Brueggeman, “The total project cost was more than $300,000. Since implementing the system, we have seen a more than $150,000 return per year, from manpower to equipment. We have also seen a tremendous improvement in the accuracy of our inventory control, which equates to increased efficiency.”
Because S&Z looked at improving its entire business process, no single department was forced to justify the full cost of the system. Returns were calculated for overall efficiency increases because benefits and costs could be assigned to different parts of the process.
Example 4: Woolworth
For an example of a leap of faith, we can look at Woolworth in the United Kingdom. Here, problems were known, but metrics were simply not available. This is also an application where multiple technologies were used in an integrated system. While the company did not have any real metrics to develop its ROI, it did have some basis on which to base its calculation. (Note: Woolworth’s final analysis was scheduled to be released November 14 and 15, 2003.)
A Footsie 250-listed retailer focused on home, family and entertainment products, Woolworth PLC has nearly 5,000 stores in the group with 2002 sales of 4.5 billion pounds (just over 5 billion USD). Company officials believe that there is an annual loss to shrinkage (or “theft”) of as much as 40 million pounds ($45 million). They do know, however, that each one percent increase in merchandise availability corresponds to one-quarter percent increase in sales. If nearly 10 percent of the inventory (usually higher ticket items) is lost to theft, there is an additional loss of at least 2.5 percent of sales revenue. In total, that represents nearly 10 percent of sales.
Therefore, for Woolworth, the single most important issue was product visibility.
Woolworth calculated that improved product visibility could reduce loss to theft by 5-10 percent. This is a modest figure but, by setting a reasonably low figure (as with the “fudge factor” noted earlier), it did not run the risk of overselling potential benefits.
Woolworth employed bar codes, RFID, global positioning system (GPS) and wide area wireless land area networks (WWLANs) to track goods from warehouses into the retail outlets. One of the significant accomplishments of implementation was breaking down communications barriers between operating units within the company.
In the Woolworth system, goods are scanned as they’re loaded into bar-coded totes. Totes are scanned as they’re loaded onto dollies that are also bar code-labeled. Dollies are in turn scanned as they’re loaded into transport cages with RFID tags on them. The transport cages are what gets loaded onto trucks. RFID was used for transport cages to eliminate any need for employee interaction and to communicate with an RFID reader in the truck (to identify any product diversion).
The system also employs GPS and WWLANs to track and communicate with the trucks. To minimize software and integration costs, the system built upon the company’s existing IT infrastructure to the greatest extent possible.
Although system cost isn’t available, the anticipated ROI of between 2.25 and 4.5 million pounds (about $2.5-5 million) would seem to justify going ahead. But, in many ways, it was a leap of faith.
Conclusion
If your company is staring into the glare of the “Sunrise 2005” mandate from Wal-Mart or the DoD, justifying RFID pallet labels is simple: “Do it or else.”
For other applications, the message is almost as simple: “There is strength in numbers.” And those numbers come when all departments share the benefits — and costs.
Photos courtesy of the Material Handling Multimedia Bank, (http://w3.centor.ulaval.ca/MHMultimediaBank), an affiliate of Material Handling Industry of America and the College-Industry Council on Material Handling Education.
For more information:
Glacier Computer (www.glaciercomputer.com)
Datamax (www.datamaxcorp.com)
Symbol Technologies (www.symbol.com)
