2012 Trends in Inventory Auditing WIS Customer Forum Oct 2012 KPMG LLP.

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2012 Trends in Inventory Auditing WIS Customer Forum Oct 2012 KPMG LLP

Transcript of 2012 Trends in Inventory Auditing WIS Customer Forum Oct 2012 KPMG LLP.

Page 1: 2012 Trends in Inventory Auditing WIS Customer Forum Oct 2012 KPMG LLP.

2012 Trends in Inventory Auditing

WIS Customer Forum Oct 2012

KPMG LLP

Page 2: 2012 Trends in Inventory Auditing WIS Customer Forum Oct 2012 KPMG LLP.

© 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.

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Industry Trends

Impacting Inventory, Accounting and Shrink Accuracy

‒ Importance of attaining accuracy and insight to the business

‒ Importance of accuracy related to Physical Inventory

‒ Tracking inventory at the item level continues to increase

‒ Retailers are changing their accounting method from retail to cost

‒ Identification, quantification and remediation of shrink continues to be challenging

‒ Potential impact of IFRS

Page 3: 2012 Trends in Inventory Auditing WIS Customer Forum Oct 2012 KPMG LLP.

© 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.

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Inventory Trends and Implications

Importance of attaining accuracy and insight to the business and drive performance

‒ Alignment of operational and financial reporting is increasingly important

‒ Retailers report inventory using a variety of accounting methods

‒ Even under the same method there can be significant differences

‒ The time is takes to report on PI results continues to be a challenge for many organizations

Retailers are increasingly reporting unexplained margin variances

‒ Unexplained variances often can be linked to the method of accounting, the inconsistent application of cost, the application of vendor funds, and shrink.

‒ Retail method while acceptable is less precise

‒ Many retailers are moving to ERP systems

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Page 4: 2012 Trends in Inventory Auditing WIS Customer Forum Oct 2012 KPMG LLP.

© 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.

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Inventory Trends and Implications

Importance of accuracy related to Physical Inventory

‒ Increasingly management is questioning the value of frequent inventories

‒ Increase use of three parties assisting with physical inventory

‒ Grocers often take inventory monthly in fresh departments and annually,

semi-annually or quarterly in center store

Page 5: 2012 Trends in Inventory Auditing WIS Customer Forum Oct 2012 KPMG LLP.

© 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.

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Inventory Trends and Implications

Tracking inventory at the item level continues to increase

‒ Some are using it only to support operational systems, increasingly we see retailers using to drive financial systems

Leveraging the power of perpetual inventories at store level

Opportunities

‒ Tracking units, cost and retail can greatly assist in root cause and trending analysis

‒ Leverage automated demand planning, ordering and replenishment

Challenges

‒ Requires new systems

‒ Requires a focus on item level accuracy across the organization

Page 6: 2012 Trends in Inventory Auditing WIS Customer Forum Oct 2012 KPMG LLP.

© 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.

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Inventory Trends and Implications

More retailers are moving from the retail method of accounting to cost

‒ Advances in technology now enable tracking at the item level

‒ What are the advantages of moving to cost?

Page 7: 2012 Trends in Inventory Auditing WIS Customer Forum Oct 2012 KPMG LLP.

© 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.

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Inventory Trends and Implications

If cost is more accurate, why are many retailers still using the retail method?

‒ The cost to modify legacy systems

‒ Change management

‒ Challenges related to variable weight items, multiple vendors, production items, recipes

‒ Requires improved operational disciplines related to inventory accuracy

Page 8: 2012 Trends in Inventory Auditing WIS Customer Forum Oct 2012 KPMG LLP.

© 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.

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Inventory Trends and Implications

Increased focus on the Identification, quantification and remediation of shrink

‒ Few leading indicators related to shrink performance

‒ Requires a more holistic view

‒ Traditional focus on theft is not enough

Page 9: 2012 Trends in Inventory Auditing WIS Customer Forum Oct 2012 KPMG LLP.

© 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.

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Inventory Trends and Implications

Growing 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

‒ Receipt accuracy likely contributes to shrink and out of period adjustments

‒ Our research shows a significant opportunity to improve the accuracy of our fresh inventories

‒ We increasingly are seeing issues related to processes, systems and accounting

How effective is your reporting related to:

‒ Known 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)

Page 10: 2012 Trends in Inventory Auditing WIS Customer Forum Oct 2012 KPMG LLP.

© 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.

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Inventory Trends and Implications

Organizations are moving toward allowances to manage returns and shrink

‒ Allowances are not sufficient to cover the rate of waste or loss

‒ Tracking waste and damage is critical to evaluating the appropriateness of allowances

‒ We must look at margin and shrink together to understand the trend

Page 11: 2012 Trends in Inventory Auditing WIS Customer Forum Oct 2012 KPMG LLP.

© 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.

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Inventory Trends and Implications

Increased use of scan based technology to assist in tracking know shrink

‒ Our studies show that a significant percent of shrink is related to waste, expired product and damage

‒ Increase use of tools to manage production

‒ Increase use of tools to manage receipts and variable weight items

Page 12: 2012 Trends in Inventory Auditing WIS Customer Forum Oct 2012 KPMG LLP.

© 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.

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Inventory Trends and Implications

Potential impact of IFRS

‒ Only first in, first out

‒ The method of accounting needs to approximate cost

‒ IFRS requires all inventories to be on one accounting method

‒ There is no LIFO method in IFRS

‒ Under IRS rules you cannot be on LIFO for tax unless you are on LIFO for book purposes

Page 13: 2012 Trends in Inventory Auditing WIS Customer Forum Oct 2012 KPMG LLP.

© 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.

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Inventory Accuracy Leading Practices

Establish Accountability ‒ Top Management Support to the level of the organization responsible for

accomplishing a consistent, accurate physical count of inventory‒ Establish high measurement goals and continuously assess the organization’s

progress in achieving and maintaining their goals‒ Develop employee performance measurement systems to hold appropriate

personnel accountable for achieving the organization’s performance goals

Establish Written Policies ‒ Planning begins 30 to 60 days out‒ Inventory instructions are sent to the stores at least 3 week prior to Inventory‒ Web-based prep materials and instructions‒ Well documented steps with pictures and training videos‒ Standard operating procedures and capture of leading practices

Page 14: 2012 Trends in Inventory Auditing WIS Customer Forum Oct 2012 KPMG LLP.

© 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.

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Inventory Accuracy Leading Practices

Frequency and Completeness of Counts

‒ Rolling inventory schedule based on previous year (once or twice per year)

‒ Facing prior to inventory, stock before or after inventory

‒ Perform blind counts

‒ Ensure cutoff procedures

‒ Perform test counts and recounts

Measuring Prep

‒ Set standards for trouble or research tables

‒ Percent of generic SKU product

‒ Feedback from the field

‒ Feedback from the inventory service

‒ Scorecard on Prep

Page 15: 2012 Trends in Inventory Auditing WIS Customer Forum Oct 2012 KPMG LLP.

© 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.

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Inventory Accuracy Leading Practices – Continued

Reporting

‒ Provide generic/clearance SKU report

‒ Provide both cost and retail values

‒ Provide pre-counts by SKU to assist with identifying potential count errors or missed items

‒ Track dollars and units for all reporting

‒ Track net and absolute variances

‒ 3 year trend reports

‒ Store cycle count adjustments report

Page 16: 2012 Trends in Inventory Auditing WIS Customer Forum Oct 2012 KPMG LLP.

© 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.

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Contact Information

Al Voels

Retail Practice Leader

KPMG Canada

Telephone: (206) 979-7654

Email: [email protected]

Page 17: 2012 Trends in Inventory Auditing WIS Customer Forum Oct 2012 KPMG LLP.

© 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.

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