Cost of ownership model for the RFID logistics system applicable to 1.docx
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Cost of ownership model for the RFID logistics system applicable to 1.docx
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CostofownershipmodelfortheRFIDlogisticssystemapplicableto1
CostofownershipmodelfortheRFIDlogisticssystemapplicabletou-city
HongSikKima,
andSoYoungSohn
a,
aDepartmentofInformationandIndustrialEngineering,YonseiUniversity,Shinchon-dong134,Seoul120-749,RepublicofKorea
Received1February2007;
accepted10December2007.
Availableonline23December2007.
Abstract
Currently,popularareasofradiofrequencyidentification(RFID)applicationincludethedomainofubiquitouscity(u-city),whichwouldrequireveryhighinitialinfrastructurecost.Thisstudyproposesacostofownership(COO)modelforRFIDlogisticssystemapplicabletou-cityinordertosupportthedecisionmakingprocessofinfrastructureconstruction.WeapplytheproposedmodeltoacaseofRFIDlogisticssystembyestablishingpotentialscenarios.TheexpectedprofitfromtheconstructionofRFIDlogisticssystemisevaluatedforeachscenario.Wealsoconductasensitivityanalysistoconsidertheeffectofvariousparametersettings.ThisstudyisexpectedtohelpcompaniesinselectingthemostbeneficialandmostprofitableRFIDlogisticssystem.
Keywords:
Ubiquitouscity(u-city)logistics;Radiofrequencyidentification(RFID);Costofownership(COO)
ArticleOutline
1.Introduction
2.Costbenefitanalysis
2.1.Economicevaluationmethod
2.2.Costofownership
3.COOmodelfortheRFIDlogisticssystem
3.1.Costmodel
3.1.1.Infrastructureconstructioncost
3.1.2.Logisticsprocessingcost
3.1.3.Yieldlosscost
3.2.BenefitanalysisfortheRFIDlogisticssystemapplicabletou-city
4.Casestudy
4.1.Scenarioanalysis
4.2.Sensitivityanalysis
5.Conclusion
Appendix1.Questionnaire
References
1.Introduction
RFIDtechnologyhasbeendrasticallydevelopedandimprovedfordecadesandiscurrentlyapopularautomaticidentificationanddatacapture(AIDC)system.Itscapabilitytoremotelystoreandretrieveitemdatacanbeutilizedtoreplacethetraditionalapproachesforitemidentificationanddatacapture.RFIDtechnologyisappliedtovariousareassuchaspharmaceuticalindustry,heathcare,logistics,retail,andsecuritytonameafew.Amongtheseareas,theRFIDtechnologyhasbeenusedincreasinglyinsupplychainmanagement(SCM)oflogistics(Singh,2003)fortheefficientmanagementofshortshelflifegoods(Karkkainen,2003),container-transport(HengstandSol,2002),andautomateddeliverytrackingsystem(Songetal.,2005).
Recently,muchefforthasbeenputfortheconstructionoflogisticssystembasedonRFIDtechnologyapplicabletoubiquitousenvironmentasalternativestrategytoreducelogisticscost.AccordingtotheReportofKoreaTransportationInstitute(KOTI,2007),thelogisticscostaccountingfor11.9%ofGDPofKoreaisabigburden,whichishigherthanthatofJapan(8.44%)andUS(8.69%).Thiskindofhighlogisticscostcanhampercompetitivenessandneedstobereduced.IfRFIDtechnologyisappliedtologisticsindustryunderubiquitousenvironment,onecanexpectagreatdealofthereductionoflogisticscost.However,agreatinitialinvestmentininfrastructurewouldalsoberequired.Therefore,inordertoestablishmosteffectivestrategyfortheconstructionoftheRFIDlogisticssystem,aneconomicevaluationmodeliscrucial.
Therehavebeenwidelyusedmethodsforeconomicevaluationsuchasnetpresentvalue(NPV),internalrateofreturn(IRR)andpaybackperiod(PP).Butabovemethodstakeintoaccountcashflowssuchasfixedorvariablecosts,butnotexplicitlyyieldlosscostssuchasopportunitycost.Costofownership(COO)modelideallyoffersafinalstatementreflectingnotonlythecostofpurchaseorinvestmentbutallaspectsinthefurtheruseandmaintenanceoftheequipment,device,orsystemconsideredalongwithyieldlosscostwhichistypicallyaninversefunctionofpurchasecost.ThiskindofCOOmodelwouldbebeneficialonmoreaccurateeconomicevaluationforaconstructionofthesystemthatrequiresagreatinitialinvestmentsuchasRFIDlogisticssystemapplicabletou-city,whichwilleventuallyhavelongtermeffectontheyieldlosscostduringthelifetime.
Consideringthesecharacteristics,inthisstudyweproposeacostofownership(COO)modelfortheRFIDlogisticssystemapplicabletou-city,includingallprocessesinvolvingsupplychains.Theproposedmodelconsidersnotonlyinfrastructurecostbutalsologisticshandlingcost,operationcost,andyieldlosscost.
ThismodelisappliedtotheRFIDlogisticssysteminu-cityandthencomparedwiththeexistinglogisticssystemsusedbymanycompaniescurrently.Forcomparison,weconsidertwotypesoflogisticssystems:
(1)RFIDlogisticssystemapplicabletou-city,
(2)RFIDlogisticssystemwhichdoesnotconsideru-cityenvironment,and(3)conventionallogisticssystemwithoutRFIDconsideration.RFIDlogisticssystemapplicabletou-cityprocesseslogisticsusingRFIDtechnologyunderintelligenttransportationsystem(ITS)environmentinaubiquitouscity.ITSisusedtoofferoptimaltransportationroute.RFIDlogisticsSystemprocesseslogisticsusingRFIDtechnologywithoutITSconsideration.Finally,conventionallogisticssystemneitheruseRFIDtechnologynorITS.
Basedonthesescenarios,weperformsensitivityanalysistoanalyzetheimpactofchangesinvariousparametersfortheproposedCOOmodel.
Theorganizationofthispaperisasfollows.Section2reviewssomebasicmodelsofeconomicevaluationandCOOmodel.ApplyingtheCOOmodel,inSection3,weproposeamodeltoevaluatetheexpectedcostsandbenefitsoftheRFIDlogisticssystemapplicabletou-city.InSection4,weimplementtheproposedmodelwithinseveraldifferentscenariosandperformsensitivityanalysis.Finally,Section5concludesthepaper.
2.Costbenefitanalysis
2.1.Economicevaluationmethod
Thepurposeofeconomicevaluationistofigureoutwhetheritcancreatehighvaluebycomparingnewlydevelopedtechnologywithexistingone.Inordertoevaluateeconomiceffects,benefit-to-costratio(BCR),paybackperiodmethod(PPM),returnoninvestment(ROI),netpresentvalue(NPV)andinternalrateofreturn(IRR)havebeenwidelyused.
First,BCRisaratioattemptingtoidentifytherelationshipbetweenthecostsandbenefitsofaproposedproject.Thisratioisusedtomeasurebothquantitativeandqualitativefactorssincesometimesbenefitsandcostscannotbemeasuredexclusivelyinfinancialterms.Second,PPMisthesimplestmethodoflookingatoneormoreinvestmentprojectsorideas.Thismethodfocusesonrecoveringthecostofinvestments.Thepaybackperiodrepresentstheamountoftimethatittakesforacapitalbudgetingprojecttorecoveritsinitialcost.Third,ROIisaperformancemeasuremethodusedtoevaluatetheefficiencyofaninvestmentortocomparetheefficiencyofanumberofdifferentinvestments.TocalculateROI,thebenefit(return)ofaninvestmentisdividedbythecostoftheinvestment;theresultisexpressedasapercentageoraratio.Thismethodisaverypopularmetricbecauseofitsversatilityandsimplicity.Thatis,ifaninvestmentdoesnothaveapositiveROI,orifthereareotheropportunitieswithahigherROI,thentheinvestmentshouldnotbeundertaken.Fourth,NPVisthedifferencebetweenthepresentvalueofcashinflowsandthepresentvalueofcashoutflows.NPVisusedincapitalbudgetingtoanalyzetheprofitabilityofaninvestmentorproject.NPVanalysisissensitivetothereliabilityoffuturecashinflowsthataninvestmentorprojectwillyield.Finally,IRRisacapitalbudgetingmethodusedbyfirmstodecidewhethertheyshouldmakelongterminvestments.TheIRRisdefinedastheinterestratethat,whenusedtodiscountallthecashinflowsoroutflowsbacktotime = 0,resultsinanetpresentvalueofzero.
Thecost-benefitanalysismethodsmentionedabovehavelimitationsinthattheyconsideronlytangiblecashflowsuchasfixedorvariablecosts,butnotyieldlosscostssuchasopportunitycost.Thus,inthispaper,wesuggestacostofownershipmodelwhichconsidersnotonlyfixedandvariablecostsbutalsoyieldlosscostssuchasopportunitycost.
2.2.Costofownership
Thedecision-makingprocessoftheequipmentorsystempurchaseisusuallyinfluencedbytheinitialpurchasecostinsteadoftheeffectofoperationcostandutilizationoverthelifetime.Thecostofownership(COO)modelisproposedfortheinvestmentdecisionofthesystemwhichrequireshighinitialpurchasecostbuteventuallygivesfewerburdensontheoperationalcostoverthelifetime.ThisapproachhasbeenappliedtobothmanufacturingandITsystems.Inthecaseofmanufacturingsystems,semi-conductorindustriesinitiateddevelopmentoftheCOOmodelforwaferfabricationequipmentin1990asmanufacturingsystempurchasecostsincreased.SEMATECHdefinedCOOastheannualcostpergoodunitproducedasfollows:
(1)
whereCFisthefixedcost,CVthevariablecost,CYtheyieldlosscost,TPTthethroughput,Ythecompositeyield,andUistheutilization.
Basedon
(1),Danceetal.(1996)developedaCOOmodelforassemblyandinspection.TheCOOmodelproposedbyDanceetal.(1996)considerednotonlytheoperationandpurchasingcostofequipmentbutalsotheopportunitycostduetoinspectionerror.However,theCOOmodelproposedbyDanceetal.(1996)canonlybeappliedtoinspectionequipmentforasinglequalitycharacteristicandconsidersonlymechanicalthroughputyield.(SohnandMoon,2003a)and(SohnandMoon,2003b)proposedanextendedrevisedCOOmodelfortheeconomicevaluationoftheinspectionequipmentthatcanaccommodatesmultiplequalitycharacteristics.
Asmentionedabove,theCOOmodel
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