An-investment-uation-of-supply-chain-RFID.doc

An investment evaluation of supply chain RFID technologies: A normative modeling approach In Leea, , and Byoung-Chan Leeb, a Department of Information Systems and Decision Sciences, College of Business and Technology, Western Illinois University, Stipes Hall 431, Macomb, IL 61455, USAb Department of Business Administration, Graduate School, Keimyung University, Taegu, South KoreaReceived 24 April 2009; accepted 13 February 2010. Available online 18 February 2010. AbstractAs Radio Frequency Identification (RFID) technology advances rapidly and major retailers start to push their suppliers to adopt the technology, RFID costbenefit analysis has become a subject of great focus. RFID complements or replaces barcode systems and traditional manual tracking systems to identify, retrieve, track, and store merchandise automatically. The adoption of this technology is gaining momentum rapidly as technological, societal, and competitive pressures push firms to transform and innovate themselves. Because of the potential benefits gained and high investment costs incurred by RFID, firms need to carefully assess every RFID opportunity and challenge to ensure that their resources are spent judiciously. This paper presents the Supply Chain RFID Investment Evaluation Model, and provides a basis for enhancing our understanding of RFID value creation, measurement, and ways to maximize the value of RFID technology. A future research direction is also discussed.Keywords: RFID; Supply chain; InvestmentArticle Outline1. Introduction 2. Literature review 2.1. Supply chain RFID 2.2. RFID valuation methods3. The Supply Chain RFID Investment Evaluation Model 3.1. RFID investment in the ordering efficiency 3.1.1. The minimum demand level for RFID investment in the ordering efficiency3.2. RFID investment in the JIT efficiency 3.2.1. The minimum demand level for RFID investment in the JIT efficiency3.3. RFID investment in the operating efficiency 3.3.1. The minimum demand level for RFID investment in the operating efficiency3.4. Simultaneous RFID investment decisions4. Analysis of RFID investment with an illustrative scenario 5. Conclusions References1. IntroductionGlobal competition, short product life cycle, and information technology (IT) advances have rapidly changed the ways firms operate their businesses. These changes have driven firms to cut costs, innovate their products/services, and redesign their business processes. Radio Frequency Identification (RFID) technology is one of the emerging technologies that are being used by a number of organizations such as manufacturers, retailers, logistics providers, hospitals, and libraries. The timing and magnitude of the RFID adoption and related process redesign have become more critical than before as firms strive to use RFID technology at an unprecedented rate. RFID technology shows great potential for process improvement and cost reduction related to supply chain management. The supply chain has become the central organizing unit in todays global industries (Miles and Snow, 2007). Furthermore, in todays environments in which competition is among supply chain networks rather than individual firms, firms are confronted with the need to effectively manage increasingly extending supply chain activities beyond the boundary of the firms (Patnayakuni et al., 2006). As firms extend supply chain activities beyond the boundary of the firms, the need for new inter-firm information technologies has increased significantly. RFID technology is the most advanced technology for supply chain integrity and traceability (Kumar and Budin, 2006). As evidenced by Wal-Marts recent RFID mandate to its suppliers, RFID has received significant attention as a viable supply chain management technology. RFID invested in supply chain is expected to enhance information sharing and collaboration between supply chain partners due to its automated data collection and transmission capabilities. A recent case study on a system of integrating mobile commerce and RFID applications illustrates that the RFID provides greater visibility of the operations data and improves the control processes (Ngai et al., 2007).RFID technology management is a process of evaluating RFID technology, developing RFID systems, and managing RFID infrastructure to achieve business objectives. In the evaluation stage of RFID technology, managers identify potential business processes, explore different technologies, assess the costbenefits of alternative technologies, and choose the best technology. Despite the popularity of RFID technology, the disappointingly slow return on RFID investment forced senior managers to scrutinize the investment opportunity more closely and to reshape their existing RFID initiatives. As RFID projects often compete with other IT projects for the scarce resources, the fundamental questions for RFID adoption are whether RFID technology can create a value that will justify its investment, and how the RFID value can be measured.However, despite the urgent need for a solid evaluation method in the industries, RFID valuation methods have not been fully developed, and measuring RFID value has been elusive for managers. Traditionally, accounting and financial methods have been widely used to assess the value of projects. Return on investment (ROI), net present value (NPV), and payback period methods are classic in accounting and financial literature. However, the traditional accounting and financial methods have played a limited role in justifying the RFID investment opportunities, because many of its benefits are non-quantifiable.In light of the ongoing debate on the measurement methods for RFID investment, this study provides an overview of existing evaluation studies, presents the Supply Chain RFID Investment Evaluation Model, and discusses a future direction for researchers and practitioners. The major contribution of our research is that we have identified three supply chain RFID investment factors and developed analytical procedures to derive optimal RFID investment levels for these factors. Our paper proceeds with literature review in Section 2, the evaluation model in Section 3, an analysis of the investment model with an illustrative scenario in Section 4, and the conclusion in Section 5.2. Literature reviewAccording to the latest market data from ABI Research (2009), total revenue earned from RFID transponders, readers, software and services will amount to more than $5.6 billion in 2009. The growth prospect of RFID industry is noteworthy in the IT industry. The global industry for RFID technology has been growing steadily and is expected to grow rapidly before stabilizing and settling on a steady growth path. The RFID market is forecasted to grow at a moderate compound annual growth rate (CAGR) of around 20.7% during 20082016 (RNCOS Group, 2007). These statistics suggest that RFID has become one of the most important IT investment opportunities for firms, and thus RFID investment deserves special attention from management. Reasons for the growth of RFID investment include cost savings, reduction of production costs of RFID tags, and mandatory policies of some mega retail chains such as Wal-Mart, Tesco, and Target, to name a few.Like other IT value measures, RFID business value includes lead time reduction, productivity improvement, cost reduction, increased revenue, customer satisfaction, competitive advantage, inventory reduction, and other metrics of performance (Michael and McCathie, 2005, Angeles, 2007 and Veeramani et al., 2008). Dutta et al. (2007) examined three dimensions of the value proposition of RFID as an initial roadmap to ongoing research: the generic architecture of RFID implementations and the drivers of value, measurement issues, and incentives for achieving diffusion.Large organizations such as the US Department of Defense, Wal-Mart, Tesco, and Target have driven the adoption of RFID technology by their mandate for their major suppliers to tag their merchandises. However, a recent survey shows that the cost of the tags and hardware, and the availability of these components are the main issues hampering the widespread adoption of the technology by suppliers (Vijayaraman and Osyk, 2006). Many organizations take a “wait and see” stance and hope to learn more from the early adopters, since the suggested benefits of RFID are still uncertain while RFID technology requires significant up-front investment (Reyes and Jaska, 2007). While most of the RFID work has focused on logistics and inventory management applications, the potential of RFID in other areas of operations, such as manufacturing, after-sales service support, and total product life cycle management, is also great (Lee and Ozer, 2007).2.1. Supply chain RFIDSupply chain RFID is an emerging application that has attracted a lot of attention from researchers and practitioners in the US, Europe, and Asia (Soon and Gutirrez, 2008). RFID allows automatic identification and data capture using radio waves, a tag, and a reader. The tag can store more product data than traditional barcodes (Jones et al., 2004). The tag contains product data in the form of Electronic Product Code (EPC), a global RFID-based item identification system developed by the Auto-ID Center. Product data the RFID tag stores include product ID, production location, production date, and shipping container ID. A number of studies view information sharing as one of the major supply chain management activities (Min and Mentzer, 2004, Morton et al., 2006 and Krause et al., 2007). RFID technology enables supply chains to easily and inexpensively collect and share information, thus enhancing supply chain visibility. The enhanced supply chain visibility leads to reduced stock-out, lower labor costs, reduced transaction costs, and improved inventory management in their supply chains (Twist, 2005).In addition to the above-mentioned data storage and information sharing capability, RFID improves information quality significantly. Managers may not use information provided from supply chain partners if they do not have confidence in information quality, and furthermore will not share their own information with their partners. While RFID technology is known to provide more accurate, current, and reliable information to supply chain partners than the traditional barcode technology, which leads to a better collaboration among supply chain partners, challenges such as false read, data overload, real-time acquisition of data, data security, and privacy must be dealt with (Bose and Lam, 2008).2.2. RFID valuation methodsAs RFID research is relatively new and there is a growing body of RFID evaluation studies, we first review existing IT evaluation methods and attempt to link these studies to the RFID evaluation. Many studies have focused on the ex post evaluation of IT value and theory building based on empirical data. Our review focuses on the ex ante IT evaluation methods which are used to predict IT value before investment occurs, since the ex ante IT project evaluation methods are of greater practical use to IT managers.Most IT justification studies point out the limitations of traditional capital budgeting methods in measuring the true value of IT (Clemons, 1991 and Kumar, 2004). Consequently, many IT investments are based upon “gut feelings” or “intuition,” rather than quantifiable criteria (Dos Santos, 1991). However, given the financial impacts of IT investments and tight budgetary constraints, it is essential for IT managers to clearly understand whether their investments are financially justifiable, and likely to yield sufficient benefits or fail. Managers need to take into account such factors as tangible and intangible benefits and the costs of undertaking the program, the risks of proceeding with the program, the expected competitive impact, and the possible need for partnership with competitors (Clemons, 1991). The involvement of the relevant business functions in translating non-quantifiable benefits into monetary value is also recommended (Tiernan and Peppard, 2004).A recent study of 130 senior executives from large companies that spend an average of $230 million annually reported that 51% of respondents have no process to evaluate IT investments against business strategy; 68% do not compare their IT projects benefits to original targets; 74% do not track financial metrics after making an investment decision; and 80% lack the necessary financial skills (Chabrow, 2003). The lack of necessary measurement and analysis skills by the senior executives potentially leads to misalignment of IT and business strategies, over- or underinvestment, inopportune investment, and eventually the lowered productivity and decreased IT investments. The implications of this survey results are significant as the executives are the ultimate sponsor and champion of IT projects. In light of the significant lack of IT valuation knowledge by the senior executives, it is urgent that IT researchers and professionals develop an education program to deliver executives the needed knowledge and skill sets.A wide range of other IT pre-investment justification methodologies have been developed by researchers and practitioners including: index and ranking methods (Sethi et al., 1993), business process simulation (Lee, 2004), option theory (Bardhan et al., 2004, Dixit and Pindyck, 1995 and Dos Santos, 1991), analytical hierarchical process (AHP) (Goh, 1997), balanced scorecard (Kaplan and Norton, 1992), IT portfolio management (Bardhan et al., 2004 and Jeffery and Leliveld, 2004), business case (Ross and Breath, 2002), game theory (Zhu and Weyant, 2003), technology road-mapping (Groenveld, 1997), Activity Based Costing method (Peacock and Tanniru, 2005), and total value of ownership (Luftman and Muller, 2005). The challenge for IT managers is that the success of the translation of non-quantifiable benefits into financial metrics often depends on the choice of justification methods and the validity of the assumptions made.Relatively new to the field, the RFID evaluation methodologies have been a focus of a number of studies. However, there have been no instruments for an accurate and fast feasibility study that takes into account the critical variables for the application of the RFID technology (Ngai et al., 2008). As in many other IT projects, one of the barriers to the adoption of RFID by organizations is the difficulty in assessing the potential ROI (Veeramani et al., 2008). Much of the research and analyses of ROI in implementing RFID technology have focused on the benefits to the retailer (Rekik et al., 2008). Practitioner-oriented guides for calculating ROI for RFID investment illustrate the risk, cost, and benefits of RFID investments using two hypothetical companies and an investment scenario (RFID Wizards Inc., 2009).Doerr et al. (2006) report on an analysis of the costs and benefits of fielding Radio Frequency Identification/MicroElectroMechanical System (RFID/MEMS) technology for the management of ordnance inventory. They combine a multi-criteria tool for the valuation of qualitative factors with a Monte-Carlo simulation of anticipated financial factors. Analytic Hierarchy Process (AHP) methodology is also employed as a decision analysis mechanism to analyze the RFID adoption decision processes of both RFID expert and industry evaluators and to assist organizations to judge if they are suitable to adopt the RFID systems (Lin and Lin, 2007). An analytical approach was also attempted for the RFID evaluation. An exact analytical expression was applied to derive for the break-even prices of an RFID tag, considering both the shrinkage fraction and the impact of RFID technology (de Kok et al., 2008). The analysis shows that the break-even prices are highly related with the value of the items that are lost, the shrinkage fraction and the remaining shrinkage after implementing RFID.A number of simulation studies were conducted to assess the impacts of RFID on the supply chain (Wang et al., 2007, Bottani and Rizzi, 2008, zelkan and Galambosi, 2008, Ustundag and Tanyas, 2009 and Bse et al., 2009). A simulation of an integrated RFID system on a three-echelon supply chain shows that increasing product value increases the total supply chain cost savings, and the increased demand uncertainty decreases the supply chain cost savings (Ustundag and Tanyas, 2009). The results indicated that each member of the supply chain does not benefit equally from RFID integration, the retailer has the highest cost savings, and increasing lead time decreases the total supply chain cost savings of the retailer. Since commonly used financial methods such as Discounted Cash Flow (DCF) and NPV calculations are too limited to make RFID investment decisions, a real option approach was proposed as an alternative method for valuing RFID investments (Patil, 2004). The real options approach may build a strong business case for RFID investments due to the fact that the value of RFID adoption would change over time because of the future uncertainty involving IT. The RFID system should be flexibly designed to tap new opportunities that may arise, and to avoid the risk of heavy up-front investment in the technology.To assess the impact of RFID technology on the tier-one suppliers, Veeramani et al. (2008) present a framework and models which measure five benefit areas: lower operating costs, increase in revenue, lower overhead costs, reduced inventory capital cost, and lead time reduction. In order to address the discrepancy between expected and realized benefits of RFID investment, potential benefits and risks are also explored (Michael and McCathie, 2005).Business Process Reengineering (BPR) has been investigated in line with the use of RFID technology. Business va