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Proceedings of the 2016 International Conference on Industrial Engineering and Operations Management Kuala Lumpur, Malaysia, March 8-10, 2016

Key RFID implementation factors affecting “sourcing” decision of RFID systems in supply chain

of manufacturing industry Niraj Kumar Vishvakarma

Department of Industrial and Management Engineering Indian Institute of Technology Kanpur, PIN 208016, INDIA

[email protected], [email protected]

R.R.K. Sharma Department of Industrial and Management Engineering

Indian Institute of Technology Kanpur, PIN 208016, INDIA

[email protected]

Abstract—The main aim of this study is to determine the key RFID implementation factors influencing ‘in-house’ or outsourcing decision of RFID system implementation decision. Using structural equation modeling (SEM) on empirical data, we examine the effects of technological factors, operational factors and regulatory factors on RFID implementation decision. The SEM analysis result reveals that variables within the construct and the construct itself have different effect on RFID system implementation. This study finds that technological factors have high influence on ‘in-house’ RFID implementation decision, and regulatory factor have high influence on out-sourcing implementation decision whereas operational factor have high influence on both implementation decision. The finding of this study provides invaluable theoretical and managerial implications, and contribute to the decision making process of managers in RFID system implementation. The study can be further extended to find out the relative importance of constructs on implementation decision.

Keywords: Key RFID implementation factors, Structure equation modeling (SEM), In-house, out-sourcing decisions, RFID system.

I. INTRODUCTION Supply chain management (SCM) in the manufacturing industry provides a high level of customer service to

end user by actively managing the flow of material and information within an organization. SCM deals with procurement of organizational product, logistic operations, and data management.

To increase the efficiency of the supply chain, the manufacturing industry has started implementing RFID. However the successful implementation of RFID requires substantial managerial, technical skill as well as financial expenditure. In view of these requirements organizations are bound to take decision on whether to implement RFID systems ‘in-house’ or to outsource it from an RFID vendor.

The main factor affecting the decision on outsourcing is cost reduction, but there are two other important factor as well. These are additional indirect cost and social impact of decision. Indirect costs include contract generation and procurement, contract monitoring and transaction costs [1].

Aim of outsourcing is to find out professionals to do the task better, cheaper and faster. Globalization and economic growth have motivated organizations to outsource activities to experts and professionals at economic price [2].

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The decision to build ‘in-house’ system or outsource RFID system to third party is critical in RFID implementation, because development of RFID systems requires high degree of technical, managerial and operational expertise. Based on skills vs strategic importance, a framework has been given for making or buying (sourcing) of information systems (IS) [3]. While making this decision, it is also essential that implementation requirement cost must be offset by implementation benefits [4].

The subsequent four sections of this paper are organized as follows. In section 2, we review the literature related to RFID and also identify the factors related to RFID implementation requirement and benefit analysis. In section 3, we provide the research framework and hypothesis development. In section 4, we give details about the data used and the profile of general respondents. In section 5, we conduct factor analysis and structure equation modeling (SEM). In section 6, we give an overview of research findings and its implications.

II. LITERATURE REVIEWA. RFID Technology

Radio frequency identification (RFID) is a wireless, automatic authentication and data capturing technology.The main components of RFID technology are RFID tag and an RFID reader connected with a computer system. The RFID tag is the part that collects information about object while the reader reads the information stored in RFID tag and then transmits it via radio waves.

It is a cutting-edge technology in auto-ID industry, yet it has been around for more than 50 years. The first use of RFID was in military application for identifying the military aircraft [5]. RFID has the capability to bridge information gap between the virtual world and physical word by integrating both of them [6].

RFID plays an essential role in object tracking and operational performance management. The RFID technology has wide-range of application in manufacturing and distribution of goods. It is also used in oil exploration, shipping and port operation [7] [8], pharmaceutical packaging processes [9], monitoring bank notes, automobile and transmission assembly.

B. Technology Implementation DecisionsLiterature on technology implementation gives different ways to define the technology implementation

decision. Here we focus and discuss only two basic approaches to technology implementation decisions. The first approach is based on the scale of adoption and the second is based on the development of the system.

Based on the scale of implementation, there are three major ways of implementation of IT system in an organization: the big bang adoption, phased adoption and parallel adoption.

i. Big bang/Bold implementation: - this implementation approach requires an entire shift from theold system to full functioning of the new system within a specified time table [10].

ii. Incremental/Phased implementation (also known as gradual conversion): - it involvesimplementing the new system in phases, which allows different section of the organization tofollow different time table.

iii. Parallel implementation: - this implementation approach allows for simultaneous functioning ofboth the new and the old systems. The old system gets terminated once the performance of thenew system is confirmed.

Based on the system development perspective, there are two major ways of implementation of IT system in an organization. The ‘in-house’ development and outsourcing.

In-house development means developing RFID system with one’s own human, technological and other resources. Outsourced development means developing RFID system with help or contract the whole service with a third party. In this research we have taken the implementation decision based on the system development perspective.

C. Technology OutsourcingOutsourcing is the provision by an enterprise to transfer their own work/activities to outside enterprise of

product and/or services to implement functions or activates in the user enterprise [11]. Information technology (IT) outsourcing is one of outsourcing type. The decision of IT outsourcing is a straightforward business choice, but the



implementation for any enterprise is complex. The actual practice of outsourcing requires identification of activities to be outsourced, finding external supplier, and calculating cost-benefit analysis.

Historically, manufacturing outsourcing was more prevalent in late 1980s and 1990s [12] [13]. Today attention has been shifted towards outsourcing customer services, professional services and information & telecommunication. The impact of professional service outsourcing is more subtle and insidious than manufacturing outsourcing [14] [15].

III. RESEARCH FRAMEWORKA. Research modelThe conceptual research model is shown in the Fig. 1. There are two dependent constructs: ‘outsourcing’ and

‘in-house’. The independent constructs are technological, operational and regulatory factors. These constructs are measured through different indicators which are given in the Fig 1. The research model proposes that there is significant relationship with these constructs. The relationship is shown in the form of hypothesis in the model given in fig. 1.

There are the three main factors that affect the make or buy decision of information systems: technological, operational and environmental.

The decision of outsourcing is also known as decision of ‘making’ or ‘buy’. The research model shows that the decision of making or buying depends on implementation requirements and implementation benefits. Requirements includes financial, technological, managerial, security & political and other requirements, whereas implementation benefits includes product visibility, accurate and real time information, sustainable competitive advantage, and managing inventory across entire supply chain.

Fig. 1. Conceptual model for RFID sourcing in organization

Technological Factors

• T1- Hardware• T2- Software• T3- IT system integration• T4- Data cleaning and storing• T5- Data throughput and system

maintenance

Regulatory Factors

• R1- Security Issue• R2- Patents and copyright regulation • R3- Environmental

Operational Factors

• OP1- Product visibility• OP2- Accurate and real time data• OP3- Sustainable competitive advantage

Out-source

In-house

Implementation Requirement

Implementation Benefit

H1

H3

H2



B. Hypothesis development In this section we discuss our hypothesis that relate the implementation success factors with sourcing

decisions.

• Technological factor Hardware, software, IT system integration, data cleaning and storing, data throughput and system maintenance

are specified within the technological factor. Selection of suitable hardware and software remains a key in the successful implementation of RFID system as it reduces the chances of system collision and interference [16]. In recent years, the cost of RFID reader and tag has reduced significantly, but it is still considered as a major thread in RFID implementation decision [17]. IT integration complexity is defined as, the effort needed to integrate RFID system with existing IT systems (ERP, MRP-I, MRP-II) [18]. RFID tag have limited data storage capacity, thus it requires efficient mechanism to optimize data storage capacity and security.

The technology influences the implementation decision (‘in-house or out sourcing) of RFID system. It might have relatively more impact on ‘in-house’ than sourcing decision. This is because when the organization finds itself less compatible with technological expertise then it find that it is better to outsource.

H1: Technological factor is positively related to RFID implementation decisions (‘in-house’ or outsource), but its impact is higher on ‘in-house’ than outsourcing. • Operational factor The attributes of operational factors are product visibility, accurate and real time data, and sustainable

competitiveness. The competitive pressure faced by industry has forced many firms to adopt RFID [19]. The implementation of RFID will enable better inventory management, increase product visibility in manufacturing process and supply chain, and accurate and real time data [19].

These operational factors are important for almost all organizations strategy types. Zhu et al., [20] have found that competition will positively affect the adoption of information technology. Therefore we hypothesize that.

H2: Operational factor is positively related to RFID implementation decisions (‘in-house’ or outsource), but there is no significant difference in impact on RFID implementation decisions (outsourcing or in-house). • Regulatory factors Regulatory factor is one of the most important factor in RFID system implementation decision [21]. In this

research, regulatory factor includes security related issues, patents and copyrights and environmental factors. Security is one of the main concern areas in wireless and mobile technology for any firm planning to

implement RFID technology. For example, product information is stored in RFID tag, and transmission of such information on wireless network is susceptible to eavesdropping by hackers [22].

There are different guidelines from industry and government to ensure customer privacy and civil liberty. There are governmental regulations to use frequency range. Virtually there is no common frequency available for RFID. This means that the same RFID system can’t work in all countries. This hinders the global adoption of RFID. The other regulatory issue is a high licensing fee for use of patent and copyright information that makes RIFD adoption costly.

Based on the discussion the following hypothesis is proposed.

H3: Regulatory factor is positively related to RFID implementation decisions (‘in-house’ or outsource), but its impact is higher on outsourcing than ‘in-house’.

IV. DATA COLLECTION A research questionnaire has been designed and circulated via email and social networking sites with a targeted

population of 2000 forms who have implemented RFID by self or through sourcing. Total 135 responses have been received from the respondent and after data cleaning it reduced to 111 valid responses.



This survey was conducted during the period from November-2014 to June-2015. The target respondents in this survey were top managers, including general managers, vice general managers, project heads, senior technical engineers and senior logistic and purchase executives. In this research the response rate was 6.25 %, which is small, but it is satisfactory considering the length of questionnaire and confidentiality of data.

The variables used in this survey were taken from previous studies, but were modified to include the RFID implementation decision [4]. The sample questionnaire is shown in the Appendix. Five point Likert scale has been used throughout the research to measure the variables ranging from 1- Not at all important to 5- Extremely important.

To test the reliability of survey items cronbach’s alpha (α) was applied [23]. Table 1 presents Cronbach’s alpha (α) coefficient for the items in this research. The cronbach’s alpha (α) coefficients in table 2 are greater than 0.70 that indicates the items are to be reliable [24], [25].

TABLE 1: SCALE RELIABILITY

Variables Cronbach’s alpha (α) Technological factors 0.837 Operational factors 0.70 Regulatory factors 0.717 Implementation requirement 0.839 Implementation benefits 0.855

V. DATA ANALYSIS

In this research we have used two techniques for data analysis: factors analysis and structural equation modeling. Factor analysis has been used for grouping the implementation critical success factors into three dimensions (technological, operational and environmental). The structural equation modeling has been used for test the impact of the factors on RFID sourcing decision.

C. Factor Analysis A confirmatory factor analysis (CFA) was performed to check the validity of the construct. The model is

shown in figure 2 and result shown in table 2. The output shows that GFI (.923), CIF (.964) are both above the 0.9 levels, and RMSEA is 0.06. These result

shows that there is the unidimensionality in the factors [26], hence the factor are well classified. Default and standardized model regression estimates are given in the table 2.

In the Fig. 2, given below, ovals represents the constructs that are not directly measurable (latent variable) and also these variable are not measured with certainty. The rectangular boxes represents the indicators and they are directly measurable with certainty. The constructs are measured with help of indicators. The double headed lines represent covariance between the constructs and single headed arrow represents association of latent variable with indicators. The numbers on double headed arrow represent the level of covariance between construct and the numbers on single headed arrow represent the weights of construct in measurement of constructs.



Fig. 2. Confirmatory factor analysis



Table 2 shows the latent variables which are associated with the constructs. Standardized weights give the relative importance of indicators on the construct. The p values represent the level of significance at which these indicators are associated with the constructs. In this research, all the latent variables are significant at the level of 0.001(p<0.001). This means that the indicators are well associated with constructs.

TABLE 2: STANDARDIZED AND DEFAULT REGRESSION WEIGHTS OF THE INDICATORS

Standardized regression weight

Default model Estimate

S.E. C.R. P

T1 <--- Tech 0.829 1 T2 <--- Tech 0.808 0.954 0.111 8.594 *** T3 <--- Tech 0.782 0.915 0.134 6.816 *** T4 <--- Tech 0.785 0.797 0.122 6.551 *** T5 <--- Tech 0.779 0.962 0.134 7.159 *** R1 <--- Regulation 0.72 1 R2 <--- Regulation 0.734 0.954 0.186 5.126 *** R3 <--- Regulation 0.655 0.928 0.197 4.71 *** OP1 <--- Operational 0.643 1 OP2 <--- Operational 0.862 1.262 0.254 4.964 *** OP3 <--- Operational 0.573 0.827 0.187 4.429 ***

Notes: *** indicates significance at p<0.001

B. Structural equation modeling result

For this type of research where emphasis is on overall variance-covariance matrix and model fit is important, structural equation modeling (SEM) is considered an appropriate data analysis technique [20]. SEM has been applied using AMOS software to test the hypothesis. AMOS gives the various model fit test such as CFI, GFI, Adjusted GFI (AGFI), normalized fit index (NFI) and RMSEA which are recommended by Hair et al.,[26] and Lin and Lee [27]. Bagozzi, R. P. & Yi, Y., have recommended that for a good SEM model � square/ DF should be less than 3 [28]. According to Ramanathan, U., & Muyldermans, L., a good SEM model should have GFI, CFI, and AGFI values more than 0.90 and RMSEA less than 0.10 [29]. In our research mostly GFI and CFI values are close to 0.90 or more than 0.90 and RMSEA values around 0.1. Table 3 and Table 4 are showing result from SEM analysis.

In our analysis, most of the model fit indicators are meeting the criteria which are defined by the researchers for good SEM model.

TABLE 3: STRUCTURE EQUATION MODELING ANALYSIS RESULT FOR ‘IN-HOUSE’

SN. β-value GFI CFI CMIN/DF RMSEA P 1 Technological 0.59 0.862 0.934 2.343 0.164 0.005 2 Regulatory 0.55 0.928 .925 3.5 .224 0.15 3 Operational 0.67 0.985 1.00 0.469 0.000 0.758



TABLE 4 STRUCTURE EQUATION MODELING ANALYSIS RESULT FOR OUTSOURCING

SN. β-value GFI CFI CMIN/DF RMSEA P 1 Technological 0.54 0.875 0.963 2.392 .154 0.004 2 Regulatory 0.87 0.956 0.967 2.199 0.143 0.086 3 Operational 0.68 0.981 1.00 0.725 0.000 0.575

• Technological factor results

The analysis result shows that model fit indexes are acceptable limits and β-value is 0.59 and 0.54 in the case of in-house and outsourcing decision of RFID technology. This means that there is significant impact of technological factors on both implementation decisions of RFID implementation decisions. The higher β-value for in-house decision shows that relative impact of technological factor is more for in-house implementation than outsourcing. Therefore H1 is accepted.

The order of importance of indicators of technological factors in the case of in-house implementation is hardware, software, data throughput and system maintenance, IT system integration, and data cleaning and storing. In the case of outsourcing this order is software, data throughput and system maintenance, IT system integration, hardware, and data cleaning and storing.

• Regulatory factor results

Regulatory factor is found to have a positive and significant relationship with RFID implementation decisions (‘in-house’ or outsourcing). Regulatory factor have greater effect in the case of outsourcing (β-value =0.87) decision as compare to in-house (β-value =0.55). Therefore hypothesis H3 is accepted. In the case of outsourcing decision the order of influence of three indicators are patent and copyright regulations, environmental pressure, and security issues are fund to have much impact and in the case of in-house development decision the order of influence of indicators are security issues, environmental pressure and patents and copyright regulations.

Patent and copyright regulation makes imitation difficult thus organization have to find other innovative way to perform the task or pay high licensing fee to use the copyright information or skill. These things sometimes force the organization not to develop system in-house, but instead outsource it to those who have expertise. Other important issue in the case of outsourcing is to share their private information with vendors that may cause security issue to the firm so when firm go for outsourcing decision it does the proper homework on these issues.

• Operational factor results

The result shows that operational factors have significant impact on outsourcing as well in-house development decision. The β-value is 0.68 for outsourcing and 0.67 for in-house development decisions. These values show that there is no significant difference between the β-value of two RFID implementation decisions. The β-values are quite high in both cases but the differences are not significant, so the regulatory factor is impacting both the implementation decisions, but it is not discriminating factor for implementation decision. The order of influence of indicators on operational factor in the case of in-house development decision is accurate and real time data, product visibility and sustainable competitive advantage, and in the case of outsourcing decision the order is product visibility and sustainable competitive advantage and accurate and real time data. Order and weight are almost similar in both RFID implementation decisions. Therefore H2 is accepted.

In general, organizations implement RFID to enhance the product visibility, accurate and real time data, and sustainable competitive advantage.

VI. CONCLUSIONS AND IMPLICATIONS



Now-a-days, a large number of organizations are implementing RFID technology for their business operations. This study tries to empirically investigate the factors that affect implementation decision of RFID. This study reports several important findings. The most important factors that discriminate RFID implementation decision are the regulatory issues which includes patent and copyright issues, security issues, and environmental pressure. The patent and copyright regulatory issue force the firms to outsource those skills which they do not have. The second important concern in RFID implementation decision is ease of sharing private data with RFID vendors. The third important issue in RFID implementation decision is environmental pressure, as the ultimate aim of outsourcing is cost reduction, decrease in time spending and increase in the quality of output.

In this study we have considered three factors: technological, operational, and managerial. Technological factors (eg. Hardware, software, IT system integration complexity, data cleaning and storing, and data throughput and system maintenance) have positive influence on sourcing decision. The organizations which are developing RFID system in-house are more influenced by technological factors than the organizations which outsourced RFID system from vendors, because these were handled by these organizations themselves whereas in the case of outsourcing decision these factors are handled by the expert organizations (RFID vendors). Information security, throughput and maintenance are consider be big challenge in implementation decision as RFID is a wireless technology. RFID system integration with existing information system is another challenge in RFID implementation decision.

Regulatory factors (eg. security issues, patent and copyright regulation, and environmental pressure) have positive and more significant effect on outsourcing decision than in-house development decision). Security issue is found to be most significant regulatory factor during outsourcing decision. At the time of outsourcing, organizations have to share their business process with RFID vendors as a result data theft happen and/or organizations lose their core competency.

The operational factors (eg. product visibility, accurate and real time information, sustainable competitive advantage) have significant and almost equal impact on both implementation decisions, because the final aim the RFID system implementation is to gain the operation benefits from implementation. Manufacturing organizations implement RFID in their supply chain for product visibility, accurate and real time information.

There are the several implications of this study for RFID outsourcing companies and RFID vendors. Firstly, for the relationship between outsourcing decision and implementation factors, the outsourcing firm should pay attention to the technological complexity, regulatory legislation, and implementation cost and benefit trade-off. Secondly, it will help the CEO and top management in technology sourcing decision.

VII. LIMITATIONS This study has several limitations and opportunity for further study. Firstly, the sample size in this study is

relatively small. The result may slightly vary for large data size. Secondly, this research assumes that all the ‘sourcing requirement’ indicators have the same weights, and ‘sourcing benefit’ indicators have also same weight. Future study can be conducted to challenge this assumption. Thirdly, due to small sample size, the relative strength of impact of the constructs (Technological, Operational and Regulatory) on RFID implementation decision (Outsourcing and In-house) is not conclusive. It can be done in the future with large sample size.

VIII. REFERENCES

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Appendix: Questionnaire

On the scale of 1-5, please rate the following items from 1 (Not at all important) – 5 (Extremely important).

SN Particulars A. Hardware and software requirements

1 RFID implementation decision making cost of Hardware 2 RFID implementation decision making cost of Software 3 RFID implementation decision making cost of RFID tags

B. IT integration requirements 4 RFID implementation decision making cost of network integration 5 RFID implementation decision making throughput and maintenance cost 6 RFID implementation decision making cost of data cleansing and storing 7 RFID implementation decision making training and implementation cost

C. Implementation benefits 8 Inventory cost including stock-out and holding cost



9 Enhanced product visibility along the supply chain 10 Improved information accuracy 11 Improved productivity by generating faster and accurate data 12 Accurate forecasting due to availability of real-time data 13 Sustainable competitive advantage

D. Customer satisfaction and other14 Enhanced customer satisfaction 15 RFID implementation decision making environmental factors 16 RFID implementation decision making regulatory concerns 17 RFID implementation decision making security issues

BIOGRAPHY Prof. R. R. K. Sharma, is Doctoral fellow from IIM, Ahmedabad India. He is HAG Scale Full Professor and Sanjay Mittal Chair Professor at the dept. of IME IIT KANPUR. He has published more than 120 articles in all areas of management nationally and internationally.

Mr. Niraj Kumar Vishvakarma, is a Ph.D. scholar at the Department of Industrial and Management Engineering, IIT, Kanpur, India. He has published 5 research papers in international journals.


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