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Who carries the cost of RFID adoption in retail item-level RFID projects?

When starting to calculate ROI for RFID investment companies start looking at when different cost will occur and how to pay it back.

If a company wants to follow its items from manufacturing (or at least manufacturing country) all the way to the point of sale, it may well mean RFID investments in 6-10 different operations. However, this is usually not the case. To simplify things, let us take a look at the route of an item to a consumer.



Garment -life -cycle -supply -chain -Jessica

The picture above shows the main steps of a garment on its way to consumer. To understand who pays for RFID, it is important to understand: 

  1. Who takes care of the operations?
  2. Who benefits the most from RFID? 

STEP 1: MANUFACTURING

If garments are to be followed from the manufacturing onwards, such as with American Apparel, it is key to attach the RFID tag to the item at manufacturing. Many large garment distributers also mandate this to their manufacturers. 

What is the investment?

When this is done the simplest way possible - the Gerry Weber style - there will be no fixed installations at the manufacturing. The brand owner or retailer who lets the garments manufactured will supply the manufacturer with RFID enabled labels (care labels or price tags for instance). Nothing changes at the manufacturing, but typically a local tag converter would take care of supplying the tags. This cost is covered by the brand owner.

Taken it a bit further, the manufacturer OR the retailer/brand owner may invest in RFID printing facilities. This means that the manufacturer can create ready labels for the items they manufacture as they go. The cost is covered by the brand owner or the retailer, dependent on how it is agreed between the players. At this point one should ask oneself: who benefits the most from the hardware at the manufacturing estate? And the benefitor should pay.

STEP 2 / 4: TRANSPORT

Typically transport vendors, especially shipping companies invest in RFID as an answer to the request of their clients. At the simplest, all that is needed is to read RFID tag from each box that is carried by the company and report this back to the customer. This is easiest done with a mobile RFID reader, which has access to mobile phone network for data upload. The investment to the equipment is not heavy, but the challenge lies in different customers' need to receive data differently. No transport company wants to install tens of different application clients to their mobile device in order to serve different clients. Hence the sharing of this data should be somehow standardized as well. This cost is typically carried out by the transport company. However, in most cases retailers do not necessarily need this step to include RFID reads.

STEP 3: DC OPERATIONS

DC operations vary from company to company. Some use DC primarily for cross docking, others have several different functions for a DC. The more the DC does, the more benefits there may be to the DC operator from RFID. RFID can be used for goods receiving and delivery processes, picking, different registrations as well as stock control. Additionally DC's may offer their clients RFID tagging and Association services and other RFID related services as well.

Depending on what the RFID will be used for and how, the party investing in the RFID is either the Retailer / Brand owner or the DC operator. The more the DC operator will benefit, the more likely it is for them to pitch in for the cost. Especially in cases when the same DC serves several end clients.

STEP 5: Store

The investment on hardware equipment is heaviest at this end. The store also needs different applications and integration to ERP or PoS system. However, the store typically witnesses the most benefits as well. But of course, none of the benefits are sensible unless the garments are tagged before they enter the store. So either tagging at the manufacturing or tagging at the DC would be necessary. The cost of RFID equipment and applications in the store are carried by the store operator - so the distributor / retailer or brand owner.  

To finalize, the easiest way for a retailer / garment distributor to benefit from RFID is to get the different items tagged and invest in RFID equipment in the store (and potentially in own DC). For other vendors in the garment value chain, RFID is more of a must, however, many DC vendors may find ROI in DC automation and of that RFID can be a great part. 

3 comments on “Who carries the cost of RFID adoption in retail item-level RFID projects?”

  1. Posted 03 October 2013 at 03:27:39

    There are hidden costs in the South East Asian markets where import duties are imposed for both tags and readers. Malaysia, for example imposes up to 35% import duty for readers and on one occasion the customer tried to tax our tags for 300%! It was after a very heated argument and long negotiation that we settled with 50% tax in order to retrieve our incoming package. Additional cost incurred when warehousing charges were added by forwarders.

  2. Posted 10 October 2013 at 19:36:08

    The University of Arkansas did an exhaustive study on the various use cases of RFID tagging across the entire supply chain. One of the studies identified 60 use cases across the entire supply chain with apparel as the item. The top-3 impacts of RFID on ROI were noted to be use case #49 shelf replenishment, #56 inventory tracking, and #55 multi-channel inventory management. The study that was conducted concluded that the biggest ROI's were to be achieved in each of those use case zones.

    Applying the RFID tag early in the supply chain, specifically at point of source, provides for an opportunity to read that tag at each point in the chain. From there it can be determined what value is desired against the realized costs to deploy in that segment of the chain.
    While I would agree that the big ticket costs for item-level RFID projects are held down at the store level, total cost of ownership analysis should be examined across the chain and ROI's should be rolled up across each touch point to help with adoption business use justifications.

    The real ROI is in the data, for both the shipper, supplier and retailer who have their own particular area of interest. Think of it in the context of a freight train and the freight cars in the train. As each car moves through the chain there is value derived for the railroad, 3PL and Manufacturer. Same with an item moving within a supply chain, value can be derived along each point depending which use case you are in at that instant. Ultimately the biggest impacts to ROI driving adoption are having the right product at the right store at the right time meeting instantaneous consumer demand. The lift in both revenue and sales blows away the costs of the tag because you now have the visibility to the holes in your omni-channel chain and can use the data to make actionable decisions against those holes. If you see your inventory is running short at the shelf, you can take action to fill that hole faster, accelerate shipments, reposition slower turning inventory from another store or region, or even better confirm to the customer that the product is actually available and in store before they make the trip. The holy grail is in the data and once it is aggregated and shared amongst supply chain trading partners (manufacturer, distribution, retailer) the power of the ROI multiplies through the chain significantly.

  3. Posted 30 October 2013 at 15:11:48

    Hi both,

    Thank you for your comments!

    First to the import tax: I think when RFID becomes more and more common in the textile industry, the South Asian countries will no longer be able to collect this tax - the country, which has the best conditions for textile manufacturing, will be the one used by the brand owners and retailers, hence all the countries will need to consider what extra cost especially on tags will mean to their textile manufacturing industry.

    I agree with you Bill - the more parties involved in the sharing of the RFID read data - the better the result and the most benefits for all parties. The big question especially for European retailers (significantly smaller in size than their American counterparts studied by the Arkansas team) tends to be who funds the initial investment. Personally, I think everybody who runs a retail operation with more than 20 stores, RFID is a necessity, but tagging at source might not work for all. According to our experience, many retailers are looking for the benefits of RFID, but cannot force their suppliers to tag items for them. This too, I hope will soon change.

    The message I'd like to send to retailers is that as long as you invest in the tagging of the items + reading at your store (and possibly places related to online sales) - then that is enough for you. Let the SCM handlers invest in their operations if they see fit.

    BR,
    Jessica

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