IMPACT OF RFID ON RETAIL VALUE CHAIN: A MIXED METHOD STUDY

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IMPACT OF RFID ON RETAIL VALUE CHAIN: A MIXED METHOD STUDY

ABSTRACT

Radio Frequency Identification (RFID) mandates by large retailers and various government agencies have driven a large number of organizations to roll out the technology. Despite these commitments the business case for RFID is far from reality and is still at its infancy. This dissertation work aims at providing realistic perspective on the potentials of RFID taking business processes and value chain activities into account. The research is applied and interdisciplinary in nature and bases itself on inductive reasoning. The dissertation deals with two broad research questions. The first research question focuses on the impact of RFID on retail value chain. The second research question focuses on the factors that influence RFID adoption decision in retail organizations. To answer the research questions a mixed methodological approach that well caters to the exploratory nature of the work is used. First, formal content analysis methodology is used to analyze both academic and trade articles to come up with key issues and concepts that are developed iteratively. The results from the content analysis along with guiding theories act as the input for the Delphi study which is the second methodology that is used. The results help to develop a conceptual framework of the impact of RFID on retail value chain providing deep insights and enhancing the understanding of potential benefits, RFID applicable business processes and value chain activities, and adoption challenges. These relevant issues are classified across different adoption stages in the framework. Drawing on the extant information systems and organizational innovation literature, this dissertation also investigates the salient drivers of emerging RFID adoption in retail organizations, and develops an RFID adoption decision conceptual framework. According to this framework technological factor relative advantage, environmental factors competitive pressure and catalyst agent, and value chain factor complexity in retail value chain influence RFID adoption decisions in retail.

The findings from this research will provide a theoretical platform for future RFID research work as well as aid in drawing meaningful managerial conclusions. It will allow to better understand what RFID can deliver, what deficiencies companies reveal, what business processes can be improved, and where its application in the value chain is sensible and likely to occur. It will also aid in better understanding the RFID adoption decision process particularly for retail. The dissertation concludes by highlighting both theoretical and practical implications and suggesting directions for future research. Four recommendations have been provided to future adopters drawing from the two conceptual frameworks derived in this dissertation. The derived frameworks are envisioned to be further refined and tested for other industries to test for generalizability.

Key words: RFID, Delphi, Content analysis, Adoption

 

Chapter 1 

Introduction 

This chapter aims to provide the reader with a background on why this dissertation was initiated. It also describes the problem statement, research questions, purpose and rationale for the study, motivation, and the scope of the dissertation.

 

1.1. Background

While new technologies come and go, organizations still face the dilemma of identifying, adopting, and implementing the “right” solutions for their current and future business needs (Ward and Peppard, 2002). Particularly in times when budgets are tight and proven business cases are essential, decision makers must make informed technology adoption and implementation decisions before making substantial upfront investments (Ward and Peppard, 2002). The technology adoption decision is further complicated by various other forces such as compatibility with business strategy, integration with existing legacy systems and infrastructures, global competition, influences of suppliers, partners, and customers, etc. In a nutshell, today’s business decision makers face tremendous pressure not to miss critical business opportunities as well as not to make technology investments that fail to deliver business value and expected benefits (Barua et al., 2004).

1.1.1. The complexity of technology adoption decisions

The adoption and implementation of information systems particularly interorganizational information systems (IOS) continues to be an interesting research topic. Advances in information and communication technologies provide organizations with a plethora of potential opportunities to increase operational efficiency, reduce costs, and increase business value (Christensen, 2004; Basole and DeMillo, 2006). As technologies become an integral aspect of organizations, decision makers must understand and critically evaluate the forces and factors that shape the adoption and implementation decision. However, this decision is very complex. In today’s global and competitive business environment, executives and IT decision makers must make smart and valuejustified decisions about their technology investment and strategy (Rouse et al., 2000; Ward and Peppard, 2002). Organizations must carefully assess their current state of technology, determine potential gaps, identify opportunities, evaluate a range of alternative technology options, and select the right solution(s) that can meet their immediate needs and align with their long-term business goals. In many cases, technology adoption decisions are further complicated by competitive pressures, regulatory influences, and customer requirements. Environmental factors often shape the decisions organizations make with respect to their technology investments. The complexity of the technology decision increases even further when the technology under consideration is just emerging and its value is still not very clear (Easton, 2002; Daley,

2005). In this dissertation the complexity of technology adoption in one such case, namely Radio Frequency Identification (RFID) technology specifically for retail organizations is investigated.

 

1.1.2. Retailing and RFID

The retail industry represents one of the largest industries in the global economy. It is the second largest sector in terms of the number of employees as well as the number of establishments for doing business in the United States (Vargas, 2007). Increasing globalization has increased retailer competition, thus motivating companies to attain better performance (Koh et al., 2006).   Sustaining a competitive advantage is the hallmark of today’s retailing environment. Retailing is emerging to be a technology intensive industry where the key differentiator between successful and not so successful retailers is ‘the area of technology’.

Retailers see RFID technology as one potential means of staying competitive and achieving profitability both in the short as well as in the long term (Wamba et al., 2006). Major retailers in North America, Europe, and Asia acknowledge the significant opportunities in RFID technology. Wal-Mart in US was the first retailer to realize the possible cost savings that could be made possible by using RFID technology in its supply chain and distribution centers. In June 2003, Wal-Mart mandated its top 100 suppliers to use RFID tags on selected pallets and cases beginning January 2005. For Wal-Mart RFID technology provided a 16% reduction in out of stock situation and a 70% drop in the receiving time of new shipments from supplier within a year of receiving tagged products. The vast improvements arose from in-store inventory tracking capabilities provided by RFID technology.

RFID technology is not limited to suppliers and retailers in the US. In Europe, retailers like Tesco, Marks and Spencer, and Metro Group have implemented RFID technology in their supply chain. In 2004 Tesco, the largest retailer in the United Kingdom (UK) started tagging cases of non-food items at its distribution center and tracking them to their retail stores. By April 2006, 40 out of 1400 Tesco stores were equipped with RFID technology. RFID allowed for greater supply chain visibility and simpler processes for its staff resulting in improved product availability, improved service, and reduced prices for its customers (Collins, 2005a). Marks and Spencer, a major UK based retailer of clothing, food, and home products began testing with RFID in 2003. With RFID use, they were more aware of their inventory and it reduced the time it took to record inventory by seven hours per week for a single store. Additionally, constant inventory updates ensured better product availability (Collins, 2005b). The third largest retailer in the world Metro Group began using RFID in its supply chain in November 2004 to track incoming and outgoing shipments. METRO Group is reaping the time savings, labor reductions and inventory benefits from using the technology. RFID technology allowed for a 14% reduction in warehouse labor, an 11 percent improvement in stock availability, and an 18% reduction in lost goods for Metro Group (Intermec, 2007).

In Asia, most retailers expect to obtain benefit from integrating RFID practices across company lines except for China. Chinese retailers expect to use RFID within their company boundaries in transportation and on personal tagging to monitor the work place.

In contrast, Japanese retailers are using RFID tags to monitor and control distribution and sales of women’s shoes and apparel in stores (Fish and Wayne, 2007).

According to IDTechEx (2006), the retail sector will comprise 44% of the global RFID market value for systems including tags by the year 2016. On the other hand, according to a recent survey sponsored by NCR (NPN, 2006) only 9% of participating retailers have an RFID implementation timeline as compared to 44% of participating manufacturers. This indicates that the retail sector is not adopting the RFID technology as rapidly as expected.

 

1.2. Problem statement

Radio frequency identification (RFID) and barcodes are two examples of automatic identification technologies. The adoption of RFID is still at its infancy while barcode is ubiquitous across the retail value chain. Researchers and practitioners have raised concerns regarding the fundamental value of RFID, the distribution of cost and benefits across the value chain, and company-specific differences. According to (Sheffi, 2004), RFID technology is still not out of the fog of innovation, and the benefits of the technology are not clear in terms of the advantages over barcode technology. The expectation now is even bigger since RFID system must demonstrate to be better than barcode technology in terms of value and benefits. There is need to assess the benefits of RFID realistically based on improvement potential rather than the much hyped anecdotal cases. Due to rapidly changing market conditions that is fuelled by ever increasing global competition, high performance expectations by customers, and the presence of evolving technologies (Lin et al., 2002) retail industry is facing serious challenges that requires them to constantly improve. The industry has grown significantly in the last three decades due to technological innovations and the use of advanced supply chain management techniques that combines technologies, process engineering, quality management, and employee involvement (Fiorito et al., 1998; Ko and Kincade, 1997). There is still more need for new technologies to help the retail industry to sustain its vitality to better respond to increasing market pressure and customer demand. The industry is seeing potential in RFID technology as a possible solution to this challenge. However they are not clear about the ways to harness the potential of the technology to maximize its benefits while controlling the risks. Critics who question the fundamental value of RFID point to the fact that there is little practical experience and research that demonstrate the benefits of the technology compared to existing solutions like barcodes. Most of the earlier literature on RFID was hyped anecdotal cases pedaled by vendors or those who had interest in seeing the technology diffuse rapidly (Jones et al., 2005). Research on organizational and business implications of RFID began to increase gradually (Curtin et al., 2007). RFID and its adoption is increasingly a global concern now as retailers and their value chain partners are not always confined to a single region or even country.

Modern retail industry faces a number of critical challenges. The introduction of technologies like barcodes has not eliminated many over-arching issues such as:

  1. Out of stock: Out of stock situation is a big problem for the retail industry. According to (Gruen et al., 2002) average out-of stock level for the retail industry is 8.3%. The root causes identified for the out of stock situation are inaccurate store ordering and forecasting, upstream activities, and inadequate shelf restocking.
  2. Inventory inaccuracy: Inaccurate inventory is another problem that leads to huge losses for businesses. According to the case study results with a US based retailer Raman (2000) claimed that there was inaccurate inventory for over 70% of the stock keeping units in the store.

 

RFID is an example of automatic identification technology which is more advanced than the barcode technology and can address these issues effectively. This dissertation work deals with the usage of RFID technology in the retail value chain and the underlying RFID adoption decision process.  The basic idea of RFID technology revolutionizing the way business is conducted today is through RFID tags that uniquely identifies objects. The numbering scheme as proposed by the Auto-ID center used for unique identification is the Electronic Product Code (EPC). The current adoption of RFID is primarily at the case and pallet levels. However item level tagging is where the future is as it will allow extreme visibility. RFID adoption rolled out with large retailers such as Wal-Mart, Tesco, Albertsons, Best Buy, Marks and Spencer, Sears, Home Depot, Metro and government agencies such as DOD (US department of defense) mandating their suppliers to tag their products at a pallet or case level with the objective of streamlining their value chain processes. The widespread use of RFID could automate individual items or cases or pallets of products, as well as reusable assets throughout the value chain. Real-time visibility could be a reality with RFID which was not possible with bar-code technology.

Although businesses are performing pilot tests that in turn has helped to identify the strengths and weaknesses of the technology, they are yet to proceed to a stage where they can actually compare the value chain performance resulting from full-scale RFID implementations. Given the early stage of RFID adoption there is a lot of uncertainty regarding the actual value and return of investments (ROI) of the technology. In other words there is still a large gap between the ideal vision and the current perception of businesses regarding the value of RFID. RFID is a technology that has the potential to yield benefits to firms. However it needs to be investigated on how RFID can bring value to organizations.

This work is an attempt to delve in this area with the objective of generating a business case for RFID with a skeptical eye looking for pitfalls and challenges. This dissertation seeks to improve the practical understanding of the potential benefits of adopting RFID along with other significant issues. This is intended to be achieved by providing a comprehensive discussion of the benefits that RFID can offer, business processes that are positively influenced by the use of RFID, relevant value chain activities that could be improved by RFID usage, the challenges that must be overcome to turn this dream of conducting business in a new way, a reality, and finally critical factors that influence the decision of RFID adoption. The adaptation of Rogers’ four stage diffusion model is used to encapsulate the entire research problem and the sub-problems. The benefits or the effects of the RFID technology across the value chains is also investigated in terms of automational (automating operational processes eliminating or reducing manual intervention), informational (improved capabilities to collect, store, process, and disseminate information), and transformational (facilitating process reengineering) effects which are the primary constructs of the theory of business value of IT.

Even if a new technology is known to be a better way of performing certain tasks getting people to collectively agree to adopt the new technology is a challenging task (Rogers, 1995). It is even more complex to get organizations that are linked together through a value chain to adopt an innovation. Although RFID has a special significance in the value chain due to its ability to improve visibility, its adoption has been slower than predicted (Fergusen, 2007). Businesses particularly retailers are keen about knowing which antecedents have a strong impact on RFID adoption. Adoption of emerging technologies with distinct characteristics is still vaguely understood despite extensive adoption and diffusion of innovation research (Rogers, 1995). There have been numerous instances where existing diffusion theory generalizations could not directly be applied (Sharma and Citurs, 2005). Various models have been developed in information systems and inter-organizational system (IOS) adoption literature to identify antecedents that drive adoption decisions. However, an integrative adoption model incorporating factors from various studies with tested predictive power is still needed for any emerging technology.

The real-time data capture capabilities offered by RFID distinguish it from other technologies such as internet and EDI (Curtin et al., 2007). This warrants research around RFID adoption specifically. Also, most of the literature on technology adoption is dominated by studies that have individuals as the unit of analysis. Thus theories such as technology acceptance model (TAM) and perceived characteristics of innovation have been applied (Plouffe et al., 2001). However for an innovation like RFID that is adopted by firms rather than individuals, these theories are not appropriate since they do not take into account key organizational and environmental factors that influence adoption (Gallivan, 2001). Thus theoretical frameworks relevant for studies on organizational adoption of technology are used (Premkumar and Roberts, 1999; Teo et al., 2004). These frameworks have mostly been drawn from the work of (Tornatzky and Fleischer, 1990) who grouped factors influencing organizational adoption of technology into three main contexts – technological, organizational, and environmental. Orlikowski (1993) affirmed these three contexts as being important to adoption of innovations in organizations using grounded theory development approach.

Rogers’ theory of innovation diffusion (Rogers, 1995) is one of the most widely applied theories in the prediction of organizational level technology adoption. According to Rogers’ theory there are five technological characteristics that are antecedents to any adoption decision. These characteristics are relative advantage, compatibility, complexity, trialability, and observability. He also emphasized on leader characteristics, internal characteristics of organizations, and external characteristics of organizations as the three groups of predictors of adoption predictors.

Technological factors in the TOE framework that is studied in this dissertation research are referred to as innovation characteristics and include relative advantage, compatibility, complexity, and cost (Premkumar and Roberts, 1999; Ranganathan and Jha, 2005; Sharma and Citurs, 2005). Organizational factors include top management support, IT expertise, organizational size, and organizational readiness that are deemed to be influencing the technology adoption process (Orlikowski, 1993; Premkumar and

Roberts, 1999; Ranganathan and Jha, 2005; Sharma and Citurs, 2005; Asif and Madviwalla, 2005). Finally, environmental factors refer to the role of external environment in the technology adoption process. These factors include competitive pressure, external support level, and the existence of change agents (Premkumar and Roberts, 1999; Ranganathan and Jha, 2005; Sharma and Citurs, 2005). The adaptation of the TOE framework is used to study the RFID adoption process in this dissertation.

The technological characteristics identified by Rogers clearly relate to the technological context. The leader characteristic can be viewed as organizational and the external characteristics refer to the environmental context of the TOE framework. Thus we can say that Rogers’ theory of innovation diffusion is consistent with the TOE framework (Zhu et al., 2006a; Zhu et al., 2006b).

To summarize, this dissertation provides an improved understanding of the potential of RFID technology and the RFID adoption decision making process in retail organizations. Key RFID adoption factors that influence technology adoption decision making process at the firm level are identified and discussed. The RFID adoption process in light of the potential benefits and values of the technology situated in the context of specific business processes and value chain activities will be of value for researchers and practitioners. The dissertation thus intends to spread the knowledge about RFID technology, its potentials and challenges, and the critical factors influencing the RFID adoption decision making process. This is an area that is currently under-researched and deserves much needed attention and is thus of immense practical considerations.

1.3. Research questions

Analyzing the potential effects of RFID on retail value chain is of high practical as well as scientific significance. Analyzing the value and benefits will not be complete without understanding the critical factors that influence the RFID adoption decisions. This dissertation aims to improve the understanding of the value of RFID and the adoption process for retailers by addressing the following research questions. Primary reason for choosing retail industry as the research object is retailers’ association with the value chain. Typically retail industry does not function stand alone and is heavily dependent on its value chain partners. Since RFID could significantly impact the value chain operations for retail sector we can see business case for RFID adoption.

The scope of this dissertation is to understand and investigate the impact of RFID specifically for the retail end of the value chain. The impact of the technology on other entities across the value chains are envisioned as future research problems. The rationale for this is to go in-depth into the retail end of the value chain.

A conceptual value chain perspective is used to study the retail value chain where the value chain is considered as a whole system. From this perspective this research focuses on the interaction of the retail entity with other value chain partners starting from the product filling point at the manufacturer’s end where the product is merged with the primary packaging, via distribution centers, and eventually to the point of sales at the retail outlets, where the products are sold to end consumers. Figure 1-1 shows the value chain perspective that is used in this research. The two broad research questions that this dissertation investigates are as follows:

Research Question (R.Q) 1: What is the impact of RFID on retail value chain?

In order to address the borad research question, the following sub-questions are considered:

R.Q.1.1: What are the key benefits of RFID adoption for retail end of the value chain?

R.Q.1.1.1:     Are     these     benefits     automational,     informational,      or

transformational in nature?

R.Q.1.2: Which retail business processes are influenced by RFID?

R.Q.1.3: Which retail value chain activities are influenced by RFID?

R.Q.1.4: What are the key challenges of RFID adoption for retail end of the value chain?

R.Q.1.4.1: Are these challenges technological, organizational, or environmental in nature?

 

Research Question (R.Q) 2: What are the determinants of retail adoption of

RFID technology?

R.Q.2.1: Can the set of antecedents: relative advantage, cost, complexity, compatibility, top management support, organizational size, IT expertise, competitive pressure, external support, catalyst agent, value chain information intensity, and value chain complexity predict the adoption of RFID in retail organizations?

Transport                                               Point of Sale

 

Figure 1-1: Retail value chain

 

1.4. Purpose of the study

The purpose of this dissertation work is manifold. The most important objectives to be accomplished are as follows:

  1. To identify existing work regarding impact of RFID throughout the literature to create a succinct list of previously identified potentials and concerns and to evaluate the extent to which these known issues arise in

the literature.

  1. To critically analyze these results through frequency analysis and narrative analysis of those analyses.
  2. To identify and critically analyze determinants of RFID adoption decision in retail organization.
  3. To develop conceptual frameworks on RFID impact and adoption

resulting from a comprehensive content analysis of the existing literature and data collected from Delphi technique that will guide future research and enable drawing meaningful insights.

1.5. Rationale for the study

The rationale for conducting this study originates both from the practical and scientific concerns. From a practical standpoint RFID in general is a topic that deems investigation considering the ever-increasing interest in the technology in current times be it due to the mandates from large retailers and government agencies or due to the potentials benefits that it can create upon usage. It is a topic that is creating current debate throughout the business and academic world. A lot of companies are still in the early stages of adopting RFID and there seems to be a lack of knowledge on the actual value of the technology and how it is likely to affect their operational and value chain processes. An indicator in support of this argument is the increasing number of conferences and special issues of journals on various topics of RFID. This dissertation seeks to make an attempt to improve the practical understanding of the potential benefits of RFID and other overarching issues that directly or indirectly influence those benefits along with improved understanding of the determinants of RFID adoption in retail.

Also, there is limited academic research that deals with the impact of RFID on business process performance. There is abundant literature on the technology behind the devices, the encryption methods, and the endless possibilities with the technology. However, there is substantially less literature on the impact of the technology on operational and business processes. Some of these articles are in-depth and give a very good explanation of the issue, but most are concerned about a single aspect. Other articles that refer more than one issue do so very briefly. Throughout the literature, there is a constant gap that is apparent. Many articles have been written on the topic; however they have either done it very briefly or have delved deep into a single issue. No author has yet taken the vital step of linking together important issues raised by the prevailing articles in order to provide a comprehensive narrative discussion of the relevant issues that in turn can clarify many of the inherent uncertainties associated with the technology. To the best of my knowledge there are no studies that discussed a comprehensive content analysis on the topic of the impact of the RFID technology on operational and business processes for retail industries. Also RFID being an emerging technology it is extremely important to understand the RFID technology adoption process. It can be achieved by indentifying the determinants that influence the RFID adoption decisions particularly in retail organizations. This dissertation thus intends to fill the gap in the literature and open new avenues of research in this area. The main argument for exploring this research at this point in time is the high practical relevance of the topic.

 

1.6. Motivation

The motivation for this dissertation derives from the practical challenge of a lack of understanding on how and why RFID technology can be applied by the industries. A thorough understanding of the potential benefits and limitations of the technology is a necessary step before wide spread RFID adoption by companies will turn into a reality.

Also it is important to identify the determinants that influence the adoption process. Additionally this dissertation aims to provide a theoretical framework that applied researchers may use to get a better understanding of the value of the RFID technology in different contexts and thereby improve the quality of their recommendations to companies.

 

1.7. Scope and delimitations of the dissertation

This dissertation specifically studies the impact of RFID on the retail end of the value chain with respect to operational and value chain processes. The focus is retail end of the value chain.  Retail industries hugely depend on the effectiveness of the value chain that could be dramatically be streamlined by implementing RFID. The impact of RFID on entities other than retail end of the value chain is beyond the scope of this dissertation. The unit of analysis in this research work is the impact of the RFID technology on the value chain in terms of the different issues under consideration with organizational level of analysis. RFID technology is considered from a business perspective rather than a consumer perspective. The focus is on the flow of finished products or parts and information in the value chain through upstream and downstream linkages in different processes and activities that produce value in the form of finished goods and services in the hands of the consumer. The primary reason for choosing retail industry as a research object is that retailers have a lot of experience with the barcode technology. This allows observing the incremental advantages of RFID over barcodes which is another means of automatic identification. Additionally there is a focus on value chain management in retail industries that allow the investigation of the potential impact of RFID in value chain management. Finally, retail industries are big proponents of RFID technology that contributes to data availability and thus provides the means to conduct this research. So the decision for choosing retail industries as research objects is somewhat opportunistic as well.

 

1.8. Dissertation outline

This section provides an overview of the structure of this dissertation. The dissertation is organized as follows:

  1. Chapter 1: Introduction

This chapter aims to explain why this dissertation work was carried out, its purpose, motivation, scope and delimitations as well as introduce the research questions that are studied.

  1. Chapter 2: Literature review

In this chapter the theories that are important for analyzing and understanding the areas of investigation are presented. It also lays out a detailed discussion of RFID studies that serve as the motivation for this research.

  1. Chapter 3: Research design and methodology

This chapter provides the reader with information about how this dissertation was carried out. The overall research approach as well as process used throughout this dissertation is presented. It also includes a discussion about the data collection techniques and the validity and reliability of the study.

  1. Chapter 4: Data analysis and discussion: A conceptual framework of the impact of RFID

This chapter derives a conceptual framework of the impact of RFID from the combined results of content analysis and Delphi study. It aims to put the findings into a theoretical perspective.

  1. Chapter 5: Data analysis and discussion: A conceptual framework on RFID adoption

 

This chapter derives a conceptual framework of RFID adoption based on Tortantzky and Fleischer’s (1990) technology-organization-environment (TOE) framework. TOE framework is tested and extended for RFID technology adoption in

retail.

  1. Chapter 6: Conclusions and contribution

This chapter contains a summary of the key findings, presents the theoretical, industrial, and academic contributions along with research limitations, and introduces future research directions.

IMPACT OF RFID ON RETAIL VALUE CHAIN: A MIXED METHOD STUDY

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