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Calculating ROI for an
RFID Asset Tracking
System
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Calculating ROI for an RFID Asset Tracking System
It can be difficult putting a credible number on the ROI for an RFID deployment, however, without it,
you’ll likely meet with a lot of resistance from the CFO when you try to get your RFID project funded. This
white paper provides the guidance on how to compute and present the ROI business case for an RFID
deployment. It discusses how to go about calculating the cost of operations for your existing processes
and how to compute the potential ROI from deploying an RFID asset tracking or inventory tracking system
to determine if one makes sense for an organization. It covers how to estimate the costs to a corporation
for not having a tracking system, based on lost assets and time usage to address the lost assets.
Radio Frequency Identification (RFID) systems hold
tremendous promise for organizations that have
trouble with properly accounting for their various
assets and/or inventory items. By placing tiny
radio transponders on the items in question, the
movement of these items can be detected; physical
inventories can be accomplished in a fraction of the
time; theft and loss can be prevented; processes
can be monitored and tracked; and critical items
can be located and utilized more efficiently. It
is no wonder then that RFID continues to gain
traction in industries such as manufacturing,
retail, healthcare, transportation, and energy.
Any company that needs to keep track of a highly
valued asset or a large volume of “things” must
certainly evaluate the merits of RFID.
Despite the intuitive benefits perceived from having greater visibility over one’s assets, companies struggle
with discerning if there is truly a financial benefit to implementing RFID and, if so, how much? Certainly
some sort of Return On Investment (ROI) calculation is in order. Yet many companies struggle with how to
properly determine this ROI due to the complex nature of their processes and, perhaps more specifically,
the un-quantified costs of their existing situation.
While several RFID ROI calculators can be found on the internet, most of them were developed for a particular
application or company in mind, mostly in the retail space. Their guiding parameters may not be applicable to
organizations with different concerns. Instead, potential users of RFID are forced to develop a calculation on
their own that properly evaluates their unique issues. But how to best do this? This paper acts as a guideline
to help answer that question and to aid those considering process improvements using RFID technology.
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Quantifying The Current Situation
The single most important aspect (and perhaps the one most challenging to ascertain) of any ROI
calculation is determining the cost implications of the existing process. This should be the first step in
any cost justification process. For example if solving the lost items issue is your objective, it is one thing
to know that items can’t be found, it is another thing to know how frequently they get lost, and yet
another to assign a realistic value to cost of finding those items when they are needed. In some cases
the cost may not be limited to the wasted human labor of the person looking for the item, there may
be impact on production efficiency or other opportunity costs. Having this information is imperative as
it becomes the baseline against which all improvements are measured.
So, how is this accomplished? Like all of the issues we will discuss in this paper, the answer depends greatly
on the unique nature of the operation or process. Every company has different processes and different
issues impacting them. The key is to discern what the most important of these are and to come up with
a definable economic impact. If someone is evaluating RFID systems they should have, at least, a general
idea of why they need one. The first step, then, is to quantify that need as best as possible. The best way
to do that is to ask a series of questions that helps ferret out the information. Some examples are:
1. What are the items that matter and require better accountability? This should be as specific as
possible. If, for example, the answer is “tools,” is it all tools or only tools of a certain value? Is it
only the tools that need to be calibrated? Is it only the tools used by a particular department or
assigned to a certain project? Is it all of the above?
2. What is the current visibility accuracy on these items? Quantify, as best as possible, the inventory
accuracy. If a recent audit has been performed, that is a good start. But other ways to address this
are to ask “How many times per day/week/month can something not be located out of all of the
times that it is needed?” Or, “How frequently are items in short supply and typically by how much?”
3. What is the Intrinsic Value of these items? The actual cost of a data tape may be $50. But the
cost of losing its sensitive information could be millions of dollars. When assigning monetary
figures to anything, ask “What would be the cost impact of losing or not being able to find this
item?” In some cases (e.g., a human life), the item may be priceless.
4. What are the current costs for managing these items? How are accountability issues handled
today? If something is missing, how is it located? What is the cost impact of this – for example, 1
person spends 10 hours per week searching for items at a cost of $X per hour. Do replacements
need to be ordered at expedited freight charges? What is that cost? Do physical audits need to
be taken routinely to maintain accountability? Factor the overall costs of these?
5. What are the ancillary costs associated with the missing items? In addition to the direct
costs of managing the items, what are the other costs associated with losing them? What is
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the lost revenue associated with not having finished product available? What are the impacts
to manufacturing when raw materials or tooling are not available? How does lack of visibility
impact financial accountability for depreciation and Sarbanes-Oxley reporting? How does
inventory inaccuracy impact other departments? Customers?
There may be other cost factors associated with a particular situation. Be careful to consider them all.
One of the challenges in calculating a return on any technology such as RFID is that the costs are often
hard to describe monetarily. They may include items such as reduced customer satisfaction or diminished
productivity, which certainly are of value, but are hard to relate to dollars. Still, these need to be calculated
as best as possible to complete a full ROI analysis of the project. Assumptions may need to be made.
Once these answers are established, a company
can develop a basic understanding of its existing
visibility situation. On the most basic level a
calculation can be as follows where Visibility
Inaccuracy is the percentage of total items that
are lost, stolen, or cannot be found.
The Annual Cost of Status Quo figure represents
the problem’s total cost, and the potential costs
savings if the problem is 100% solved. Once this
is known, it is wise to set an improvement target.
While everyone desires a 100% reduction in
costs for any project, the reality is that the final
result will most likely be something less than
100%. How would his effect the calculation? If,
for example, inventory accuracy was improved to
98%, how would this impact the costs? Is there
a dramatic savings? How much will the cost of
management be reduced? The ancillary costs?
Run the calculation at various percentages to
determine various cost scenarios. These will be
useful when calculating the formal ROI process.
Often, there is still a tremendous cost savings
even with a less than 100% improvement.
Examining The Use Cases
With knowledge of this basic formula, we will
now examine the costs typically associated with
some of the most popular use cases for RFID.
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Number of Items
Average Intrinsic Value
x
(Can use annual depreciation value)
Total Item Value
Visibility Inaccuracy (1 - accuracy %)
Cost of Management/year
Ancillary Costs/year
Annual Cost of Status Quo
x
+
+
INTRINSIC VALUE
The actual value of a company or
an asset based on an underlying
perception of its true value
including all aspects of the
business, in terms of both tangible
and intangible factors. This value
may or may not be the same as
the current market value.
While there are many applications for the technology, at the core level most use cases typically can
be categorized into one of two broad applications: 1) Inventory Accuracy, or 2) Asset Tracking.
Inventory Accuracy
Inventory is defined here as any item that is either produced or consumed in production by a company.
Thus, this includes raw materials, finished goods, work in progress, supplies, etc. All of these items
share the following characteristics:
1. They are all transient. They all move from place to place throughout the course of normal
business operations.
2. They all have value. There is a definable cost for each item.
3. They all have a downstream process dependent on them (manufacturing, shipping, etc.)
These characteristics create an environment where valuable items are moved from one place to another.
Improper management results in not having the right things in the right place at the right time. A key
contributor to this is shrinkage – the loss or theft of a certain percentage of the inventory. Shrinkage results
in the actual quantity of items available being less than the expected quantity. There are several definable
costs associated with shrinkage that implementing an RFID solution addresses:
1. Replacement costs. When inventory items go missing they need to be replaced. Often this is at
a cost higher than the standard cost of the item as the order quantities are smaller and there are
expedited shipping fees involved. If the inventory consists of finished goods, then the replacement
cost translates into a cost of expedited sales, i.e., what are the costs of pulling inventory from a
different location and expediting shipment?
2. Lost sales/miss-ships. Typically in a retail environment, if inventory is not available on the
shelves, sales are lost as customers go elsewhere. For a manufacturer, what are the consequences
(penalties, cancelled orders, etc.) of not meeting shipping deadlines due to lack of product, or for
shipping the wrong products or quantity of product?
3. Increased downtime. Manufacturing lines are costly to run. Are machines sitting idle waiting
on materials? Are forklift drivers often waiting for items that cannot be found? Calculate the total
cost (wages, power/fuel, etc.) of waiting on needed materials. These costs can be reduced with
accurate knowledge of material status.
4. Inventory and search time. Many companies are often amazed at how much time is spent
controlling inventory accuracy. How often are physical inventories taken? How long do these take?
How many man hours are spent searching for missing inventory? Not only can RFID minimize
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the need for periodically counting inventory, it can also reduce the time to do so. Calculate the
amount of wages spent on these processes and how the time might be better spent.
All of these costs should be factored into the basic calculation we looked at above. Not all inventory
has the same shrinkage rate, so the items with the highest tendency for inaccuracy should be
evaluated first. What is the accuracy of that inventory? Then quantify and add the related costs
discussed here to complete the calculation.
Example 1: An automotive supplies manufacturer loses 3% of finished parts inventory each year.
This results in a periodic need to rush manufacturing and expedite shipments.
Number of Items
50,000 / year
Visibility Inaccuracy
0.03
Missing Inventory
1,500 / year
Average Intrinsic Cost
x
$100
Lost Items Value
$150,000 / year
Cost of Management/year
- Incremental replacement costs ($10 more / item) +
$15,000
- Expedited shipping fees ($5 each replacement)
+
$7,500
- Search/audit costs (2 hrs./wk. @ $20) x52
+
$2,080 / year
Ancillary Costs/year
- Penalties / Lost orders
+
$12,000
- Annual Inventory (80 man hours @ $20/hr.)
+
$1,600
Total Costs:$188,180
This reflects the current cost of operations. In comparison, examine the same scenario where an RFID system
cuts shrinkage by two thirds (a conservative estimate) to 1% and eliminates the need for an annual inventory:
Number of Items
50,000 / year
Visibility Inaccuracy
x
0.01
Missing Inventory
500 / year
Average Intrinsic Cost
x
$100
Lost Items Value
$50,000 / year
Cost of Management/year
- Incremental replacement costs ($10 more / item) +
$5,000
- Expedited shipping fees ($5 each replacement)
+
$2,500
- Search/audit costs (1 hr./wk. @ $20/hr.)
+
$1,040 / year
Ancillary Costs/year
- Penalties / Lost orders
+
$6,000
Total Costs:$64,540
An annual savings of over $120,000, exclusive of the RFID system costs (which will be discussed later).
The company can now determine if this cost savings is relevant enough to pursue an evaluation of RFID.
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Asset Tracking:
Assets differ from inventory in that they are permanently owned items that are used in the production or
transit of inventory, or for the general running of the company. These could include tooling, containers,
computers, molds, pallets, or files. They share the following characteristics:
1. They are capital items, often with a depreciation value.
2. Though they may move, they ultimately have a defined home location.
3. Their existence is essential for the running of the business.
Although there are many types of fixed assets, those of particular concern are the ones with a high
intrinsic value. These often need to be located for repeated use, and the inability to locate them or to
determine where they have been can have serious production and financial impacts. Tools may need
to be calibrated. A missing mold can halt production. A missing container can delay shipment. Missing
computers and files may contain highly sensitive information. Among the definable costs:
1. Search costs: Since assets need to be utilized, they often need to be transported to various
locations. Despite workers’ best intentions, asset movements are often not recorded, and even large
assets can go missing – especially assets that have not been used for some time. The time spent
searching for these items can be lengthy and may often be done by highly paid staff. Hospital nurses
often spend 20% of their time searching for needed equipment. Manufacturing engineers can spend
hours locating a particular tool.
2. Replacement Costs: Items that are never located need to be replaced, often at a higher cost as
expedite fees are incurred. The old assets must be depreciated in full in accordance with Sarbanes
Oxley rules, and the new assets acquired must be valued based on proper accounting requirements.
3. Increased downtime: As mentioned, manufacturing lines are costly to run. Are machines sitting
idle waiting on proper tooling? Are shipments being delayed due to lack of shipping containers? It
is important to calculate the total cost (wages, power/fuel, etc.) of waiting on needed items. These
costs can be reduced with accurate knowledge of material status.
With some fixed assets valued in excess of $1,000, the loss of even a few becomes costly. To determine
if this is an issue, assess the assets 1) that have high intrinsic value, 2) that have high loss rates, and
3) that have the greatest impact on production cycles. Aggregating these will determine which assets
have the highest associated cost.
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Example 2: A manufacturer often spends hours searching for high value tools that are shared among
various departments.
Number of Tools
500
Average Intrinsic Costs
x
$1,000
Total Asset Value
$500,000
Number of Items Permanently Lost / yr.
10
Number of man hours searching / week
20
Lost Items Replacement Costs
$10,000 / year
Cost of Management/year
- Incremental replacement /expedite costs +
$2,000
- Search/audit costs (20 man hrs./wk. @ $50/hr.) x52
+
$52,000 / year
Ancillary Costs/year
- Production Idle Costs
+
$20,000
- Capital write off of lost assets (assume %20)
+
$ 2,000
Total Costs:$78,000 / year
Now, if the searches and lost items were reduced by 80% we would get…
Number of Tools
500
Average Intrinsic Costs
x
$1,000
Total Asset Value
$500,000
Number of Items Permanently Lost / yr.
2
Number of man hours searching / week
4
Lost Items Replacement Costs
$2,000 / year
Cost of Management/year
- Incremental replacement /expedite costs +
$400
- Search/audit costs (4 man hrs./wk. @ $50/hr.) x52
+
$10,400 / year
Ancillary Costs/year
- Production Idle Costs
+
$4,000
- Capital write off of lost assets (assume %20)
+
$400
Total Costs:$15,200 / year
In this example, a savings of over $60,000 per year. Again, while this does not include the RFID system
costs, the proposed annual savings appear to be relevant.
Examining RFID System Costs
Once the cost savings are identified, it is time to calculate the cost of the proposed solution. RFID systems
can vary greatly in configuration, but all are comprised of four primary components: Tags, Hardware,
Software and Services. Likely, anyone considering an RFID system will seek out a specific price quotation
from a qualified System Integrator, but we will examine the basic costs here to assist with ROI calculations.
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RFID Tags:
RFID tags and labels come in numerous varieties depending on their shape, size, and construction material. While
the internal microchip may be the same, the different costs relate primarily to how the tag will be affixed to the
items that need to be tracked. There are two major classifications of tags: peel and stick labels, and durable tags.
Peel and stick labels are ideal for items where there is a flat, clean, non-metallic surface. Cardboard
shipping cases and paper file folders are good examples. RFID labels are the most inexpensive form of
RFID tag, with prices typically well under a dollar. Costs will vary by size and order quantity, but estimating
a price of $0.15 - $0.40 each is certainly realistic even for modest quantities.
Durable tags are designed for permanent mounting on metal and on items where the chip needs to be
protected (tools, electronics, vehicles, high heat, etc.). Due to the specialized nature of the packaging
materials these tags are more costly. Expect prices to vary between $1.00 and $5.00 per tag. And though
a $5.00 tag may sound expensive, if it is tracking a $10,000 item the cost may be easily justified.
RFID Hardware:
There are three major hardware pieces to consider depending on the project: 1) fixed RFID readers/portals, 2)
handheld or mobile RFID readers, and 3) RFID label printers. The exact mixture of these devices will depend
upon your particular application. If you are using durable tags, you will likely not need a printer at all, as these
tags either come pre-encoded or are encoded manually. Peel and stick labels typically go through a printer, and
while there are units as low as $1,000, expect to pay between $3,000 and $5,000 for an industrial grade device.
Fixed RFID readers are used to record tagged
objects that pass by them and are typically used
in doorways, on conveyor lines, or at other “choke
points” where materials tend to travel. The typical
reader can be mounted on a wall or ceiling and
often supports 4-8 antennas. Free standing portals
combine all of these elements into a single box
which can often save deployment time and money.
Their installation is much simpler due to the lack
of antenna cables and installation of mounting
brackets in walls, etc. In either case, one must also
account for the cost of running an Ethernet cable
to the reader location (and also power if the device
does not support Power Over Ethernet). All told,
it is reasonable to estimate each “choke point” to
cost between $2,000 and $4,000.
TCO BREAKDOWN
Cost distribution over 3 year timeframe.
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Handheld RFID readers have typically been developed as handheld computers complete with keypad, display,
Wi-Fi connectivity, and an integrated RFID reader. Various form factors exist with costs ranging from $2,500
- $5,000. However, newer “reader only” handhelds are now emerging that contain no display or keypad and
use Bluetooth to connect to a host device. These devices cost between $1,000 and $2,000. Which you choose
will depend on your application, but make sure you factor in recharger and additional battery costs as well.
RFID Software:
The largest price variance comes with RFID software. Software solutions vary from as low as $5,000 to
$150,000 depending on the functionality and complexity of the application, and the level of integration
with your other business applications. While this may make calculating an ROI challenging without getting
more precise information, there are some guidelines that can be followed.
First, consider the system’s scope. If this new system is to be deployed Enterprise-wide with multiple read points
and components, then surely it will require an investment approaching or even exceeding $100,000. Many
software providers require a license for every fixed and portable reader in the system, so that may provide some
aspect of scale. Interfacing with legacy systems (ERP, MES, WMS, etc.) typically carries a significant cost as well.
Second, determine if the need is for a point solution or a platform. If the project is small and limited in
scope, then a lower end system focused on that one task may suffice. In most cases, however, firms tend
to grow their use of RFID and require that their RFID software grow with it. This lends itself to a platform
based approach where multiple applications can work together, often sharing the same database and
control software. A single software platform solution can do both inventory and asset tracking as described
above. In some case, new business logic may need to be created as requirements change, but a platform
based approach provides the flexibility to adapt as usage grows.
Finally, it is important to understand if the software in question is pre-built or customized. Pre-built, off
the shelf, software often is less expensive initially but may be more expensive if and when changes need
to be made. In some cases, the vendor may even refuse to make changes or do customization which may
require the installation of a different package altogether for the new requirements. This duplicative effort
may, in turn, create more internal cost and resources affecting the ROI. A pre-built system may also require
you to alter your process to work within its framework. Custom built software can be costly up-front, but
it is tailor made to the customer’s requirements and may be less expensive to operate in the long haul.
Recently, over the past year or two, software that is a combination of these two approaches has become
popular. This software may be 80% pre-built, with much of the core functionality already in place. The
last 20% is then customized or personalized to meet your current processes and needed requirements.
RFID Services:
The final component deals with the costs associated with developing and installing the RFID system.
These costs will vary, of course, based on the complexity of the system. The costs will also vary based on
if they are performed in-house or by a System Integrator. The specific services you require may include
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a formal site survey to assess the facility and to determine the proper placement of readers, antennas,
etc. Tag evaluation services may be needed to determine the ideal tag and its best placement on the
various items. Process re-engineering may be needed to ensure the optimal workflow for the system.
And installation services to properly install and deploy the needed hardware and software components is
a given. In most cases these are charged out on a daily basis at rates between $2,000 and $7,000 per day.
Other service fees typical to large IT projects may also be incurred, such as, pilot management, system
design, system training, project management, system warranties, consulting and the like. One should also
factor in the man hours associated with internal staff planning and delivering the system.
Determining The Proper ROI Calculation
Once armed with the likely costs, the final question is to determine the proper ROI calculation to use.
There are over a dozen accounting formulas that are used to quantify a certain return on an investment,
and each has a unique value in its perspective.
Briggs and Trigos in Analytics discussed various ROI calculations and how well they work with RFID technology.
Their conclusion was that Net Present Value (NPV) was the best formula to use, being the most precise.
NPV is defined as “the difference between the present value of cash inflows and the present value of cash
outflows. NPV is used in capital budgeting to analyze the profitability of an investment or project.” The formula is:
Where
– the time period you want to evaluate (the life of the project)
– the interest rate that could be earned on an investment in the financial markets with similar risk.)
– the net cash flow i.e. cash inflow – cash outflow, at time .
In short, it is a calculation where you determine if the projected financial benefits outweigh the projected
costs. A positive result is favorable; a negative one is not. Determining the projected costs is rather simple.
These include the depreciated costs of the hardware and software plus reoccurring costs such as tags,
etc. as described above. The projected benefits equal the cost savings detailed in the previous Use Cases
calculations – the difference between today’s costs and the anticipated future cost.
If we use the asset tracking scenario in Example 2 above as our case study, we will make the following assumptions:
• The cost of the required hardware, software, and services is $150,000 and fully depreciated evenly
over five years ($30,000/yr.)
• Reoccurring tag costs equal $5,000 per year.
• Market interest rate is projected to average 7% over the 5 year project life.
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Then the calculation would be:
(The annual cost savings) – (The yearly system costs) x five years divided by the interest rate, or as follows:
NPV =
(($78,000 - $16,200) - $35,000) x 5
(1 + 0.07)
5
= $95,540
Thus, this project would have a positive benefit to the company, saving them $95,540 over five
years (assuming the interest rate stays at 7%). This investment can then be compared against other
investments to determine relative worth.
Conclusion
Calculating the value of an RFID system is not difficult as long as a true and clear understanding of the
existing process costs can be determined. To accomplish this, the potential user must be open and
honest about what their true current costs are and not oversell the value of the new RFID solution. Once
existing costs are established and proposed costs savings can be estimated, it is a simple mathematical
formula to determine the overall merit of the system and how it may positively or negatively impact
the overall operation.
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