Businesses will typically attempt to evaluate the financial effects before adopting any new technology such as Radio Frequency ID (RFID). Since the introduction of global RFID standards, many companies have attempted to deploy RFID either by choice or requirement from their customers (think Walmart, the zillion-pound retail gorilla). Unfortunately, the results are mixed, leaving some to ask, “Where’s the return on investment (ROI) for applying RFID?”
It can’t just be a technology play
Consider this true story that happened just the other day. Rich DeWaal, who co-authored this article, was working with an engineer who identified the need to pilot the application RFID technology to monitor temperatures and physical locations for critical materials through his company’s supply chain. The engineer firmly believed that this would earn quick acceptance
After a lot of effort in planning and preparing for a pilot, it turned out there was one little problem–there was no business case for justifying the project. Why? Well, our friend the engineer had been led to believe that the control of temperature for this material was a really big deal and that the lack of this ability was causing massive waste and headaches for customers. It turned out that the incidence of issues was actually very low–only a few times had this problem ever been an issue–so clearly there was not a justification to proceed based on achieving a decent ROI.
Getting the right information to build the case for an ROI is the key
This example points out the reality that most businesses often find it difficult to establish a solid and undeniable ROI to justify moving ahead with RFID technology. The main reason is due to a lack of meaningful data and information about current processes–and the true scope and value of opportunities for improvement. Most of us instinctively know that RFID can capture meaningful data that can help organizations attain a new level of performance in the accuracy and speed of information that RFID promises:
- Opportunities to reduce activity costs in manufacturing and distribution
- Reduction of data quality and data integrity problems
- Elimination of waste, caused by quality issues and delays in obtaining accurate data about the value stream
- Opportunities to reduce inventory investment (carrying) costs and attack obsolescence and other avoidable costs in the current systems
- Increased speed of information access for decision-making
RFID is a technology that can efficiently collect transaction and tracking costs within manufacturing and throughout your supply chain. Many companies still lack critical documentation and data to accurately evaluate the current state of processes and identify where additional improvement opportunities exist. This is due to the difficulties inherent in current methods used in the collection of activity costs and other data. Obtaining this critical information is impractical for many organizations using their current approaches. This leaves a significant amount of cost savings unrealized due to the inability to determine the root causes for waste. The paradox lies in the fact that it is difficult to justify implementing a technology such as RFID without this data because of the initial investment–thus, a catch-22.
Help is on the way: lean and Six Sigma together–Lean Six Sigma (LSS)
The key to unlocking ROI with RFID lies in the basic understanding of how it can be used to reduce waste and process variation–the underpinnings of LSS. ROI can be found when we are able to take full advantage of opportunities otherwise not achievable due to the inability to accurately measure and expose waste in the value stream. Most readers of the Lean Culture Department recognize LSS is a methodology that combines Lean Enterprise with Six Sigma; we will not cover those details here. Instead, we will drill into a few important aspects of LSS that help solve the foregoing issues.
LSS uses Value Stream Mapping (VSM) and Process Mapping as tools to document current state processes and the all-important critical measurements of the value stream. VSM focuses on critical process measurements, including speed, lag time, cost and number of defects. The VSM approach contains data boxes used to summarize the data and measurements we capture in studying the process based on the desired objectives. Data boxes help to reveal information relevant to critical steps within any process. For example, take all the steps to handle rolls of paper in a corrugated sheet-making factory from the receipt on the dock to the loading of the rolls on corrugators (machines used to make cardboard for boxes and containers). Each time the roll experiences a “touch,” we would create a data box to record certain key measurements (metrics) for that step. The generic elements for this kind of VSM effort should include:
- The name of this process step
- The frequency of this step occurring (usually daily)―also known as demand rate
- Identifying who performs the step, how many shifts and how many people
- Establishing the cycle time–the amount of time, on average, to conduct the work
- What equipment is used and, if applicable, its cycle time
- How much stuff is waiting for this step to occur in time or units (inventory)
- Important quality issues and probable root causes for variation at this step–with frequency of occurrences
- The kind of rework that occurs at this step–with frequency of occurrences and probable root causes identified
- Any other observations about the process that the observers may make
There are many other possible candidates for data to be captured. This depends on the organization and what products or services it provides to its customers. The trick is to identify work that is absolutely critical for the customer–the value-add steps–and work to eliminate activities that don’t add value. After the critical work processes are identified, there must be agreement on objectives and thereafter select process improvement projects.
After we have a handle on the data, we look to Six Sigma for analytical methods to gain understanding about the nature of the issues we begin to uncover–the critical information we need. It is useful to diagram (using Pareto analysis) the few issues that make up the bulk of the problems identified by the data collected. Other statistical tools may be appropriate, including scatter diagramming, trend analysis and others, which may be appropriate on a case-by-case basis.
RFID as an enabler to real-time VSM data
All of the foregoing is well and good, but there remains a significant issue that faces all types of organizations: how can we gather all this process data and measurements in a timely and cost-effective manner? All too often, manual methods to capture “snapshot” data are simply not good enough. For example, snapshot data are not very helpful in understanding the statistical significance of variance of a process step–say, variation in retrieval times for a roll of paper for a waiting machine.
This is all too often the number one roadblock that stops us cold: the lack of reliable methods to quickly and accurately capture statistical data to understand and manage our value streams and observe, on a near real-time basis, how the process is performing.
Once we understand the possibilities for financial gain by having the ability to collect timely and accurate data, investing in RFID technology often becomes pretty obvious. RFID can be used to obtain data many never thought possible while being cost effective at the same time. RFID has the ability to uniquely identify parts, raw materials, assets, finished products and people who are involved at various stages throughout your organization and supply chain on a near real-time basis. By using RFID with LSS to measure added value (the essential work that should be done) and compare this with your current value stream performance (current actual activities), you will probably find 20% or more of system costs are being wasted today. This is systemic waste that can be eliminated through attacking very specific, prioritized root causes that are readily measured. Much of what can be eliminated can be converted into hard dollars. Here’s a sample of where waste will most likely be found and converted to impact the bottom line:
- Staffing and capital equipment costs (leasing/maintenance)
- Reprocessing waste (returns and rework of defective results)
- Inventory investment; average inventory on-hand, buffer stock levels due to current system constraints
- Wasteful labor touches (moving or picking up items)
- Accounting and inventory transaction costs; movements, audits, re-inventory, cycle counting, searching, dealing with out-of-stock issues, unplanned lag in replenishment
- Distribution costs; scanning, packing/banding/kitting waste, errors (under/over/misses) in shipments, forward and reverse logistics costs.
Making sure you really deliver an ROI is the key
RFID solutions need to be expertly planned, designed and installed. The “big bang” approach is not necessarily a good strategy. Often deployment can be methodically staged in a series of proof-of-concept pilots with the possibility of leveraging current investments in intrastate.
The core use of RFID should be to measure data at “problem points” to better track and attack issues when they occur. It should serve as a way to find the source of systemic waste that can lead to meaningful ROI.
Generating meaningful results with RFID does have a track record. For example, UPS has begun to recognize how RFID and LSS can be leveraged together. Their adoption is a sign of this next wave of RFID implementation. They recognize the key in unlocking inaccessible data to measure and justify Six Sigma improvements, and have published a white paper outlining this strategy: Six Sigma and RFID – Enabling Process Improvement by Michael Sullivan, 2005.
By strategically using RFID to gather data for the value stream, an organization can continually achieve significant ROI. The constant flow of data and analysis can continually provide clues to hidden waste and significant opportunities. This hidden waste is where much of the previously unreachable ROI can be found. Many of these opportunities can provide a competitive advantage by:
- Increased customer satisfaction through consistent product reliability and delivery
- Reduced activity costs for transactions
- Reduced inventories–because we really know what we have and the status of everything in real time
- Enabling pull systems–consumption-based replenishment of inventory
- Identifying where quality concerns are happening in near-real time for corrective action
- Collecting otherwise inaccessible data throughout your manufacturing and supply chain value stream.