WORKING PAPER

No. 08-05 MGT October 2008

Impact of RFID Technology Utilization on Operational Performance

By

Pamela J. Zelbst Sam Houston State University

Kenneth W. Green, Jr.Sam Houston State University

Victor E. SowerSam Houston State University

Copyright by Author 2008

The Working Papers series is published periodically by the Center for Business and Economic Development at Sam Houston State University, Huntsville, Texas. The series includes papers by members of the faculty of the College of Business Administration reporting on research progress. Copies are distributed to friends of the College of Business Administration. Additional copies may be obtained by contacting the Center for Business and Economic Development.

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Impact of RFID Technology Utilization on Operational Performance

Abstract

Purpose – The impact of RFID technology utilization on operational performance is investigated. A structural model that incorporates RFID technology utilization as antecedent to operational performance is theorized and assessed. Design/methodology/approach - Data from a sample of 122 manufacturing sector organizations were collected and the model was assessed following a structural equation methodology. Findings - RFID technology utilization directly and positively impacts operational performance. Research limitations/implications –Interpretation of the results should be tempered in light of this early stage of adoption of RFID technology in the manufacturing sector. Practical implications – Manufacturing managers can expect improved operational performance to result from the implementation of RFID technology. Originality/value – The study offers empirical support for the adoption of RFID technology for the purpose of improving operational performance within the manufacturing sector.

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1. Introduction

Manufacturing organizations have begun implementing RFID technology in the hope of both

operational and supply chain performance improvement. The technology holds promise for both

improving the efficiency of operations and logistics processes and improving the effectiveness of

the organization in terms of satisfaction of both the immediate customers of the organization and

the ultimate customers of the supply chain.

As manufacturing managers consider the costs and benefits of adopting the technology,

they should consider its impact on operational, business, and supply chain performance. The

first and primary focus of operations managers is likely to be the benefits on operational

performance. Will RFID technology utilization lead to improvements in operational

performance metrics such as throughput, lead time, product cycle time, and due date

performance?

If RFID technology utilization does not lead to improved operational performance, it is

unlikely that business and supply chain performance improvements will be realized. We focus

on this most basic of relationships – the impact of RFID technology utilization on operational

performance. We theorize an RFID-performance model and test the model with data collected

from a sample of manufacturing organizations using a structural equation methodology.

A review of the literature and discussion of the study hypothesis follows in the next

section. A discussion of the methodology employed in the study is then presented followed by a

description of the scale assessment and the structural equation modeling results. Finally, a

conclusions section incorporating discussions of the contributions of the study, limitations of the

study, recommendations for future research, and managerial implications follows.

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2. Literature review and hypothesis

According to Drake and Schlachter (2007) development of technologies over the last 25 years

has changed the operational environment of organizations. Dos Santos and Smith (2008, p. 127)

state, “it is widely believed that the use of radio frequency identification (RFID) technology will

enable substantive supply chain transformations.” These authors also state that through the use

of RFID deployment firms can gain competitive advantage.

Large organizations, such as Walmart (Lee and Park, 2008) and Volvo (Holmqvist and

Stefansson, 2006), are forcing the use of the technology onto their upstream supply chain

members. This results in some of the organizations that are supply chain members focusing on

RFID technology simply as a cost of doing business (Zelbst et al., 2008). Vijayaraman and Osyk

(2006) state that many organizations in the supply chain of Walmart have no choice but to adopt

RFID technology. This focus could result in an organization not using information available to

them to increase operational performance. For the transformation identified by Dos Santos and

Smith 2008) to take place at the supply chain level, the performance outcomes at the operational

level need to be assessed.

According to Peng et al. (2008), an organization’s operational performance and strengths

need to be assessed using varied measures of operational performance such as lead time, cycle

time, operating expense, throughput, and inventory expense (Mabin and Balderstone, 2003).

This research will evaluate the impact of the utilization of RFID technology on the operational

performance of manufacturing organizations. We develop and assess an RFID performance

model that incorporates RFID technology utilization as antecedent to operational performance

with the link between the constructs being positive and significant. The model is depicted in

Figure 1.

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--------------------------------

Insert Figure 1 about here--------------------------------

2.1 RFID technology utilization

Much of the research on RFID technology has focused on its facilitation of organizations

becoming more efficient (Uckun et al., 2008). A major barrier to the utilization of RFID has

been the cost/benefit justification (Prater et al., 2005). RFID technology can enhance operational

efficiencies within organizations (Murphy-Hoye et al., 2005) and therefore promises to improve

operational performance (Angeles, 2005; Asif, 2005; Srivastava, 2004). Extrapolating from the

work of these authors, it could be that there is too much focus on initial efficiencies in relation to

the cost of implementation. There should be more focus on effectiveness and the capabilities

that accompany the technology’s utilization. For example, RFID utilization enhances the

timeliness of production information (Brandyberry et al., 1999), creates tracking ability allowing

for traceability of inventories (Green et al., 2008; Lee and Park, 2008) and increases service level

capabilities (Kincade, Vass, and Cassill, 2001) resulting in organizational growth and

profitability (Kotha and Swamidass, 2000; Byrd and Davidson, 2003). Extrapolating from these

researchers’ findings, it stands to reason that RFID technology should enhance operational

performance by disseminating the information in real-time throughout the organization.

2.2 Operational Performance

Operational performance is defined by Feng et al. (2006, p. 26) as, “the performance related to

organizations’ internal operations, such as productivity, product quality and customer

satisfactions.” Technologies such as RFID can lead to improvement in internal operations.

Mabin and Balderstone (2003) identified some measures of operational performance as

throughput, inventory, and operating expense.

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Management is involved in a constant balancing between strategic changes and

operational performance (Naranjo-Gil et al., 2008). According to Yeung et al. (2008)

technology that provides information can help to improve not only efficiency but also

effectiveness in operational performance. Extrapolating from these authors’ work and Mabin

and Balderstone’s (2003) work, throughput is related to effectiveness and inventory and

operating expense are related to efficiency. Operational performance is also dependent upon an

organization’s capabilities and technologies (Hatch, 2008). Organizations focusing on

underlying technologies find an improvement in throughput, inventory expense, and operating

expense resulting in a positive impact on operational performance (Huckman and Zinner, 2008).

Therefore:

H1: RFID technology utilization positively impacts operational performance.

3. Methodology

3.1 Data collection process

Data were collected via an on-line data service during the summer of 2008. Of the 300

individuals who accessed the survey, 122 completed the RFID technology utilization and

operational performance scales. All respondents represent the manufacturing sector. Of the

sample population 67% are in managerial or supervisory positions and 33% are in operational

positions. Respondents have been in their current positions for 6.93 years and represent

organizations from 18 different manufacturing categories.

3.2 Measurement scales

The theorized model (Figure 1) incorporates RFID technology utilization and operational

performance constructs. The RFID technology utilization scale was originally developed and

assessed for reliability and validity by Green et al. (2008). The items are designed to assess the

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degree to which manufacturing organizations have implemented and utilize RFID technology.

The eight-item operational performance scale was developed and assessed for reliability and

validity by Inman et al. (2008). Inman et al. (2008) note that the items in the scale are based on

operational performance metrics originally identified by Mabin and Balderstone (2003).

Respondents were asked to rate their organization's performance in each of eight operational

performance metrics as compared to the industry average. The study scales are presented in

Table 1.

-------------------------------Insert Table 1 about here-------------------------------

Non-response bias was assessed by comparing the responses of early and late respondents

using a common approach described by Lambert and Harrington (1990). Seventy-seven of the

study respondents were categorized as early respondents and 45 were categorized as late

respondents based on whether they responded to the initial or follow-up request to participate. A

comparison of the means of the demographic variables (years in current position and total

number of employees in organization) and for the individual item means was conducted using

one-way ANOVA. The comparisons resulted in non-significant differences indicating that the

concern related to non-response bias is minimized.

Common method bias may lead to inflated estimates of the relationships among variables

when data are collected from single respondents (Podsakoff and Organ, 1986). Taking direction

from Mossholder et al. (1998), common method bias was assessed through single factor

confirmatory factor analysis. This analysis with all items loading on one factor does not fit the

data well with a relative chi-square value of 13.25, an NNFI of .881, and a CFI of .887. This

lack of fit indicates that the concern related to common method bias is minimized.

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4. Results

4.1 Measurement scale assessment

Garver and Mentzer (1999) recommend computing Cronbach's coefficient alpha to assess scale

reliability, with alpha values greater than or equal to 0.70 indicating sufficient reliability. Alpha

scores for both the RFID technology utilization (alpha = .986) and operational performance

(alpha = .970) scales exceed the .70 level. Both scales exhibit sufficient reliability with

coefficient alpha values greater than the .80 criterion recommended by Nunnally and Bernstein

(1994) for basic research.

Garver and Mentzer (1999) recommend reviewing the magnitude of the parameter

estimates for the individual measurement items to assess convergent validity, with a strong

condition of validity indicated when the estimates are statistically significant and greater than or

equal to .70. All nine estimates for the RFID technology utilization scale are statistically

significant and exceed the recommended .70 level. All eight estimates for the operational

performance scale are statistically significant and exceed the recommended .70 level. Figure 2

incorporates the parameter estimates and accompanying t-values.

--------------------------------Insert Figure 2 about here--------------------------------

Discriminant validity was assessed using a chi-square difference test as recommended by

Garver and Mentzer (1999). A statistically significant difference in chi-squares indicates

sufficient discriminant validity (Garver and Mentzer, 1999; Ahire, Golhar, and Waller, 1996;

Gerbing and Anderson, 1988). The computed chi-square difference is 1,361.12 and is significant

at the .01 level.

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Koufteros (1999) recommends that the individual scales be incorporated together in a

measurement model and that this model be subjected to an additional confirmatory factor

analysis and that relative chi-square, non-normed fit index (NNFI), and comparative fit index

(CFI) values be used to assess fit when the sample size is relatively small. Relative chi-square

values of less than 2.00 and NNFI and CFI values greater than .90 indicate reasonable fit

(Koufteros, 1999). Results of the analysis indicate that the measurement model fits the data

relatively well with a relative chi-square value of 1.830, an NNFI of .986, and a CFI of .988.

The measurement model is illustrated in Figure 2.

The individual measurement scales are sufficiently valid and reliable to support further

analysis. Additionally, the measurement model fits the data sufficiently well to support further

analysis.

4.2 Descriptive statistics and correlations

Scale item values were averaged to obtain summary variables for RFID technology utilization

and operational performance. Descriptive statistics and correlations for the summary variables

are presented in Table 2. Summary variable means for RFID technology utilization and

operational performance are 3.04 and 4.07, respectively. The relatively low mean for RFID

technology utilization reflects the relatively early stage of adoption of the technology in the

manufacturing sector. RFID technology utilization is positively related to operational

performance with a correlation coefficient of .48 significant at the .01 level.

-------------------------------Insert Table 2 about here-------------------------------

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4.3 Structural equation modeling results

The structural model is displayed in Figure 3. The model fits the data relatively well with a

relative chi-square of 1.83, RMSEA of 0.08, NNFI of 0.99, and CFI of .99. The path from RFID

technology utilization to operational performance (hypotheses 1) is significant at the .01 level

with a standardized coefficient of .56 and an associated t-value of 6.09. Hypothesis one is

supported. RFID technology utilization directly impacts operational performance.

-------------------------------Insert Figure 3 about here-------------------------------

The results support the general proposition that implementation of RFID technology in

the manufacturing sector will yield improved operational performance. Even at this early stage

of adoption, manufacturers can expect improvements in terms of efficiency metrics such as

inventory levels, operating expense, and inventory expense and effectiveness metrics such as

throughput and due date performance.

5. Conclusions

We theorize a model in which an organization’s degree of RFID technology utilization directly

enhances operational performance. Findings indicate that RFID technology utilization does

directly impact operational performance as hypothesized. The adoption of RFID technology

leads to improvements in an organization’s operational performance.

5.1 Limitations of the study

Data for the study were collected during the summer of 2008. At this time, RFID technology

utilization is in the relatively early stages of the technology utilization life cycle. Interpretation

of the results should be tempered in light of this early of adoption. The scope of this study is

limited only to the operational level benefits of RFID technology utilization. We do not assess

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the impact of the technology on business and supply chain level performance. Our limited focus

is designed to investigate the impact of the technology at the most basic level.

5.2 Future research

Because RFID technology utilization is in the early stages of adoption, continued investigation

into the impact of the technology on firm and supply chain performance is necessary as the RFID

story unfolds. As RFID technology utilization becomes more pervasive, it will be important to

investigate its impact on both large and small businesses and throughout multiple sectors. The

primary focus of the technology has been on improving efficiencies related to the production and

tracking of goods. It is important also to assess the impact of the technology within the services

and governmental sectors. RFID technology has the potential not only to improve the “bottom

line” for adopters based on its ability to reduce costs but to enhance firm and supply chain

performance from a marketing perspective. Additional research focused on the ability of RFID

technology to generate sales is also necessary.

5.3 Managerial implications

Within the manufacturing sector, the implementation of RFID technology can lead to improved

operational performance. The technology is linked to improved throughput, lead times, product

cycle times, due date performance, and cash flow. It is also linked to reductions in operating and

inventory expenses and reduced inventory levels. While this is not the only potential for

improved performance, it is the most basic. This research indicates that RFID utilization should

not be seen by the practitioner simply as a cost of doing business but rather as a way to improve

efficiency and effectiveness which ultimately will lead to increased profits.

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Table 1Measurement scales

RFID utilization (alpha = .986) Please indicate the extent to which agree or disagree with each statement (1= strongly disagree, 7 = strongly agree).

1. We currently use RFID technology to manage inventory flows through our manufacturing processes.

2. Our suppliers are required to provide products to us that facilitate RFID tracking.3. Our customers require us to provide products to them that facilitate RFID tracking.4. We use RFID technology to manage raw material inventory levels.5. We use RFID technology to manage WIP inventory levels.6. We use RFID technology to manage FG inventory levels.7. Our current RFID technology facilitates tracking at the item level.8. Our current RFID technology facilitates tracking at the bulk (i.e. pallet) level.9. We plan to expand the use of RFID technology over the next several years to manage

inventory flows through our manufacturing processes.

Operational Performance (alpha = .970)

Please rate your organization's performance in each of the following areas as compared to the industry average. (1=well below industry average; 7=well above industry average)

1. Throughput

2. Inventory expense

3. Operating expense

4. Lead time

5. Product cycle time (throughput time)

6. Due date performance

7. Inventory levels

8. Cash flow

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Table 2 Descriptive Statistics and Correlation Matrix

Panel A – Descriptive StatisticsVariable Mean Std. Dev.RFID Utilization 3.04 1.83Operational Performance 4.07 1.42

Panel B - Correlation MatrixVariable UTIL OPPERFRFID Utilization (RFID) 1Operational Performance (OPPERF) .484** 1

Note: All coefficients significant at the 0.01 level (2-tailed).

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RFIDTechnology

OperationalPerformance

H1: (+)

Figure 1RFID Technology Performance Model

with Hypothesis

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RFIDTechnology

Operational Performance

.56 (8.43)

RFID1

RFID2

RFID3

RFID4

RFID5

RFID6

RFID7

RFID8

RFID9

OPPERF1

OPPERF2

OPPERF3

OPPERF4

OPPERF5

OPPERF6

OPPERF7

OPPERF8

.90 (12.79)

.91 (12.95)

.91 (13.12)

.92 (13.31)

.92 (13.27)

.93 (13.50)

.94 (13.75)

.92 (13.31)

.83 (11.30)

Figure 2Measurement Model

with standardized coefficients and (t-values)Relative Chi-Square = 1.83; NNFI = 0.99; CFI = .99

.86 (11.79)

.83 (11.10)

.84 (11.27)

.86 (11.70)

.86 (11.74)

.82 (10.99)

.86 (11.86)

.85 (11.57)

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RFIDTechnology

OperationalPerformance

.56 (6.09)

Figure 3RFID Technology Performance Model

with standardized coefficient and (t-value)Relative Chi-Square = 1.83; NNFI = 0.99; CFI = .99