Managing Shrink October 2012 WIS Share Forum KPMG LLP Inventory Accuracy and Shrink Identification quantification and remediation of shrink is a challenge Shrink in on the rise Requires ID: 401574
Download Presentation The PPT/PDF document "Measuring and" is the property of its rightful owner. Permission is granted to download and print the materials on this web site for personal, non-commercial use only, and to display it on your personal computer provided you do not modify the materials and that you retain all copyright notices contained in the materials. By downloading content from our website, you accept the terms of this agreement.
Slide1
Measuring andManaging ShrinkOctober 2012WIS Share Forum
KPMG LLPSlide2
Inventory Accuracy and ShrinkIdentification, quantification and remediation of shrink is a challenge
Shrink
in on the
rise
Requires
a holistic approach
Traditional tools and focus
are
not enough
Growing
percentage of shrink is not associated with physical
loss
Limited shrink
reporting
Root
causes
of shrink
are not well understood
Framework to identify, quantify and remediate shrinkSlide3
Shrink is on the Rise
Rising inventories
SKU proliferation
Method of inventory valuation
Master data issues
Definition of cost
Misaligned processes and systems
Major system replacement or upgradesSlide4
Requires a Holistic Approach
Shrink
Physical Shrink
Paper Shrink
Stores
In-transit
Distribution Center
Warehouse
Vendor
Systems
Processes
Accounting
Transaction Processing
Interfaces
Conversions
Global Imports
DC, Cross Docks and Stores
Returns
Master Data
Inventory Management
Account Payables
Inventory Accounting
Inventory ControlSlide5
Traditional tools while effective are not enough Examples of Shrink Tools
ILLUSTRATIVE
Deter
Human Resource Program
Integrity Screening
Background Checks
Loss Prevention
Shrink Binder
Newsletters/Videos
Detect
Monitoring Program
Mgmt/Compliance Reporting and Score carding
Daily Transaction Reports
Cash Handling
Refunds, Voids, etc.
Shrink Management Tool – Store Profile
Control
High Risk Product Program
Improve Supply Chain Processes
(DCs, Receiving, Storage, Handling, etc.)
In-store display
Anti-theft Fixture
Source Tagging
Pre-Employment
Screening
Training/Job Aides
Employee Awareness
Shrink Mgmt Tool
Exception Reporting
Compliance Reporting
HRP Identification
High Risk Stores
Risk Analysis ModelSlide6
Inventory Accuracy and ShrinkGrowing percentage of shrink is not associated with physical loss
Reported shrink
(known shrink) is understated and a significant cause of controllable shrink.
Inventory valuation
is subject to volatility in reporting based on the cost compliment calculation, retail valuation for center store and cost based valuation for perishables
Master Data
– often retailers do not have a single item master database which drives several issues contributing to shrink including item setup errors, system update errors, and late cost changes
Receiving Accuracy
- Receipt accuracy is likely contributing to shrink and out of period adjustments Slide7
Process Shrink How effective are your physical inventory processes?
Do you see significant margin or inventory valuation swings in your fresh
departments
Do you have detailed process maps related to inventory movement?
Are your processes, controls and systems in synch?Slide8
Strengthening basic fundamentals
Accurate Receiving and Payables
PO Controls
ASN Accuracy
Manual Receiving Controls
Vendor Compliance
Next Steps
Implementation timeframe: 6 months or less
Vendors do not oversship against the purchase order quantity
Vendor sends accurate ASN’s
Verify receipt to the PO quantity
Input accurate receiving information on a timely basis
Pay for what you receive – order
Balance direct import GL inventory and liability accounts
Company X translates EDI transactions accurately into the ASN tables
Improve and govern ASN compliance with vendors and ODP systems
Minimize changes to
PO
quantities
Close out old purchase orders in warehouse system
Receive shipments accurately against the purchase order
Minimize key strokes
Receive against the purchase order
Match net receipt transactions with purchase order and invoice (3 way match)
Automation of journal entries in direct import accounting
Reengineer financial controls for vendor settlements, store receipt adjustments and returns
Implementation timeframe: 6 months or greaterSlide9
System Shrink Have you recently implemented any new systems?
Does you organization have a current systems Map?
Are automated balancing routines established between systems?
Who is responsible and are error logs worked daily?
Do business owners have to sign off on all system design changes?
Has your organization completed transaction testing?Slide10
Inventory System Interface Diagram
WMS – Distribution Centers
Vendor Portal
Auto
Replenishment Program
PO Modeling
POM
GSS
WDTS
Store Inventory System Web Front-End
RCC System
Store Inventory System (SIV)
RTV System
COS/Sector Routing System
Message Queue
Paid
Integral A/P
Dashboard
Retek
RMS
RDF
Oracle
Non-Code Item Data
License Plate Data
Store Receipts, Transfers, Adjustments
RTV Data
WMS – Cross Docks
Warehouse Inventory System (WIV)
PO/Item Data
Receipts/Shipment Data
Customer Orders
Receipts & Adjustment Data
POS
Item Data
STS
Sales/Returns
Customer Orders
Sales/Returns Data
G\L Data
PeopleSoft G/L
Receipt J/Es
PeopleSoft A/P
Non-Code Item Data
Non-Code Item Data
Reporting Data
New Item Data, Cost Changes, Forecasts
SKU/PO Activity, Alerts
Manual SKU Strategy Settings
PeopleSoft
Mainframe
PO Updates
Global PO Updates
Order Fulfillment Data
Item Maintenance Systems
Customer Sales/Returns Systems
Data Transfer
Systems
Procurement Systems
Pay Systems
DB2 Table
Receive/Ship/
Transfer Systems
General Ledger System
Real-Time Data Interface
Batch Job Data Interface
RTV Data
Legend
Sales/
Returns
Sales/Returns Data
Auto PO Creation from RDF Data
Manual PO Creation
DB2
SITran
Item Cost and List Price Data
Item Data, DC On-hand Qs
Sales/Returns
Vendor Payment Data
AOPS
Sales Accounting System
Non-Receipt/Sale Transaction Data
Vendor Receipts/Rec’t Adjustment DataSlide11
Accounting Shrink How is your inventory valued?
How is cost of goods calculated?
Effectiveness of physical inventory’s reconciliation?
Has your organization trace transactions to the GL account?
How many manual accounting processes are in place?
Are all AP processes reconciled on a regular basis?Slide12
Summary Findings
Key Influencers:
Changes in receiving , production and shipping policy at the cross docks due to new scanning technology
Increased volume of non-flow through freight not designed to support cross dock business rules
Split shipments (Batch v. flow)
Vendor consolidation
Packaging
Multi-cross dock deconsolidation
Increased volume of global imports managed by a broken global accounting process
Markouts without Receipt Adj.
# of occurrences
False Overages
# of occurrences
Receipt Adj. after AP match
# of occurrencesSlide13
Shrink ReportingShrink reporting lacks consistency in the method that it is collected, posted and reported
How
effective is your reporting related to:
What
accounting method do you use to report shrink
Know shrink and waste
Inventory adjustments
PO, receipt, invoice & payments
ASN exception reporting and receiving accuracy
Vendor compliance
Non-match reporting (RTV, PO Order Qty, Receipts, Wrong or missing PO)Slide14
Shrink ReportingImproving Shrink reporting:
SKU based information
Tracking unit variance history vs. dollars
Tracking unit history over larger periods
Track and monitor inventory movement
Track all product leaving the building POS, Backroom, trash compactor
Monitor accuracy of price fileSlide15
ACCOUNTING
PROCESSES
SYSTEMS
PHYSICAL
Inventory Shrink Roadmap
Executive Presentations
Framing the issue
What gets better
Fundamentals
Strategic roadmaps
Implementation roadmap
Activities
Milestones
Timelines
Resources
Cost
Impact on the bottom line
Issue
I
dentification
Data Analysis
Process& system reviews
Root cause identification
Quantify Identified Issues
Observations & Recommendations
Steering committee
Working committee & project resources
Shrink workshop
Review current findings
Identify Organizational Timeline
Review key process, system & accounting
changes
Outputs
High Level Systems Overview
High Level Data Flow
Map PI Process Flow
Develop preliminary list root causes
Develop high level project plan
Discovery
Remediation
Root Cause AnalysisSlide16
DiscoverySteering committee
Working committee & project resources
Shrink workshop
Review current findings
Identify Organizational Timelines
Review key process, system & accounting changes
Outputs
High Level Systems Overview
High Level Data Flow
Map PI Process Flow
Develop preliminary list root causes
Develop high level project planSlide17
Discovery
Review and document key processes, systems, accounting and reporting to assist with the identification of gaps and to provide observations and recommendations
Set up cross functional meetings to discuss key business processes
Document current state process flows, systems, accounting
Review procure to pay processes, systems, and accounting
Root cause analysisSlide18
Process, System and Accounting MapsSlide19
Example Deliverables – Detailed Process Mapping Slide20
Discovery
Review the accuracy of the current retail or cost method of accounting
Assess the retail or cost method of accounting
Test cost compliment calculation or definition of cost
Provide a summary of recommendations related to key themes (Definition of cost, inventory adjustments, cycle counting, master data management, etc)Slide21
Discovery
Complete a reporting impact analysis
Document key current operational and financial reporting related to margin, shrink and inventory adjustments
Importance of establishing one source of truth for reporting
Assess master data clean-up and maintenance
Assess shrink and waste calculations
Assess inventory adjustments, cost adjustments, and other top level adjustments impacting margin, shrink and inventory adjustmentsSlide22
$95 Million Trend (200x)
Unexplained Shrink
Resets
Theft
Drop Ships at Stores
Vendor Contracts
Over Production
Auto-distro’s
R-claims
Markdowns
Etc
Issues
Validate and Categorize
Quantify
Systematically research, identify, and resolve Inventory Variances and Shrink
Bucket 1
Bucket 2
Bucket 3
Bucket 4
Component 1
Component 2
Component 3
Component 4
Bucket 5Slide23
Categorize
Based on our analysis the top ten contributors to shrink in 200X are:
Reported Shrink (Thrown Away) - $26.9 Million
Shoplifting – $19.3 Million
Under Reported Thrown Away - $15.1 Million
Cost Compliment Variance - $ 9.2 Million
Unknown – $4.9 Million
Under Reporting (Thrown Away Weight Estimate Error) – $4.9 Million
DC Pick Errors – $4.6 Million
Cost Changes - $3.4 Million
Retail Price Changes - $2.6 Million
R-Claim – $2.3 MillionSlide24
CategorizeMisaligned business rules across operations and general ledger processes
Markouts without receipt adjustments
Receipt adjustments after AP match
Lack of controls with global accounting process relative to changes to purchase orders and receipt
Systems deficiencies with PO and ASN information
POM not updating GSS quantities
Duplication of ASN quantities
Flexible receiving policies
Ability to receive shipments against any purchase order
Ability to change purchase orders once they have transacted with accounting
Assumed receipt information posting to the general ledger without verification at the cross docks
Inaccurate information provided by third party
K&N providing inaccurate ASN information
$86M
$24M
$56M
2006-07
Preliminary Inventory Shrink
Results incl. known loss
Reclassified (balance sheet items) as InventoryInaccuracy at the Cross Docks
2006-07Reserve-Inventory Shrink plus known loss
Period covering May 1,
20xx
– April 28,
20xx
$6M
Final Inventory Adjustments
Final
20xx-xx
Inventory Shrink ($62M)
$45M
$11M
-Known Loss
-Shrink ReserveSlide25
RemediationSelling shrink projects to your executive suiteDeveloping Executive presentations
Frame the Issue
Setting the Priorities
Business Case DevelopmentSlide26
Frame the Issue - Example
Focus Areas
Business Value
Difficulty
Estimated
Savings/Benefit
1) Improve reported shrink tracking and management reports
High
Med
$29-$36 Million
2) Distribution operational and financial reporting changes
High
Low
$8-$11 Million
3) Improve the preciseness of inventory valuation
High
High
$10-$14 Million
4) Master data clean-up and maintance
High
Low
$3-$5 Million
5) Store Detail receive all DSD shipments
Med
Low
$1-$2 Million
6) Theft Reduction
Med
Low
$2-$4 MillionSlide27
Setting The Priorities
Realizing sustainable shrink improvement hinges upon setting clear priorities which consider business value and level of difficulty.
Focus Areas
Difficult but Rewarding
Gems
Quick Wins
Back Burner
Low
High
Low
High
Business Value
Difficulty
6
1
3
2
5
4
Improve Shrink Tracking
Distribution Operations
Inventory Valuation
Master Data
Detail Receiving
Theft ReductionSlide28
1 – Improve Reported Shrink TrackingObservations
Shrink reporting should be standardized using cost or retail and should include all product removed from the store using a single process. Shrink allowances & R-claim should be systematically tracked by vendor and included in management reports. Stores should be rewarded for accuracy of shrink reporting and improvement, not based on a rate.
Recommended Actions
Assign a cross functional team with representatives from stores, distribution, buyers and finance to standardize, simplify and develop the business requirements
including:
Enable the stores using the handheld's to track the root cause and amount of reported shrink including:
Damaged, code dates, resets, production, force outs, and excess inventory
Scan all items removed from the store (ensure all item have UPC/PLU’s)
Track items used for production and include in cost of goods sold rather than shrink
The RMS system should direct the stores related to disposition of the product and record the shrink into the correct bucket automatically
Use bar codes on each r-claim box for improved reconciliation
Establish guidelines for tracking other key information to assist in developing new reporting related to on-going diagnostic and trend information including:
Late cost changes, Production tracking, RMS flag accuracy, R-claim variance reportingAssign IT resources to scope, develop detailed design and cost estimates to support business requirementsBusiness Value
Reduce current reported shrink from $49 Million to $13-$20 MillionMeasure and understand the root causes of reported shrink
Monitor the appropriateness of shrink allowancesImproved R-Claim Reporting
Business
Value
H
M
Timescale
M
M
Costs
M
Resources
DifficultySlide29
Contact InformationAl VoelsRetail Practice LeaderKPMG Canada
Telephone: (206) 979-7654
Email:
arvoels@kpmg.caSlide30
© 2012 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.