2012 Trends in
Inventory Auditing
WIS Customer Forum Oct 2012
KPMG LLP
Industry Trends
Impacting Inventory, Accounting and Shrink Accuracy
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Importance of attaining accuracy and insight to the business
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Importance of accuracy related to Physical Inventory
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Tracking inventory at the item level continues to increase
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Retailers are changing their accounting method from retail to cost
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Identification, quantification and remediation of shrink continues to be challenging
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Potential impact of IFRS
© 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.
1
Inventory Trends and Implications
Importance of attaining accuracy and insight to the business and drive
performance
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Alignment of operational and financial reporting is increasingly important
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Retailers report inventory using a variety of accounting methods
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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
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Unexplained variances often can be linked to the method of accounting, the
inconsistent application of cost, the application of vendor funds, and shrink.
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Retail method while acceptable is less precise
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Many retailers are moving to ERP systems
© 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.
2
Inventory Trends and Implications
Importance of accuracy related to Physical Inventory
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Increasingly management is questioning the value of frequent inventories
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Increase use of three parties assisting with physical inventory
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Grocers often take inventory monthly in fresh departments and annually,
semi-annually or quarterly in center store
© 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.
3
Inventory Trends and Implications
Tracking inventory at the item level continues to increase
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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
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Leverage automated demand planning, ordering and replenishment
Challenges
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Requires new systems
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Requires a focus on item level accuracy across the organization
© 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.
4
Inventory Trends and Implications
More retailers are moving from the retail method of accounting to cost
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Advances in technology now enable tracking at the item level
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What are the advantages of moving to cost?
© 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.
5
Inventory Trends and Implications
If cost is more accurate, why are many retailers still using the retail method?
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The cost to modify legacy systems
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Change management
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Challenges related to variable weight items, multiple vendors, production items,
recipes
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Requires improved operational disciplines related to inventory accuracy
© 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.
6
Inventory Trends and Implications
Increased focus on the Identification, quantification and remediation of shrink
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Few leading indicators related to shrink performance
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Requires a more holistic view
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Traditional focus on theft is not enough
© 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.
7
Inventory Trends and Implications
Growing percentage of shrink is not associated with physical loss
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Reported shrink (known shrink) is understated and a significant cause of controllable
shrink
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Inventory valuation is subject to volatility in reporting
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Receipt accuracy likely contributes to shrink and out of period adjustments
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Our research shows a significant opportunity to improve the accuracy of our fresh
inventories
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We increasingly are seeing issues related to processes, systems and accounting
How effective is your reporting related to:
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Known shrink and waste
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Inventory adjustments
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PO, receipt, invoice & payments
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ASN exception reporting and receiving accuracy
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Vendor compliance
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Non-match reporting (RTV, PO Order Qty, Receipts, Wrong or missing PO)
© 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.
8
Inventory Trends and Implications
Organizations are moving toward allowances to manage returns and shrink
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Allowances are not sufficient to cover the rate of waste or loss
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Tracking waste and damage is critical to evaluating the appropriateness of
allowances
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We must look at margin and shrink together to understand the trend
© 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.
9
Inventory Trends and Implications
Increased use of scan based technology to assist in tracking know shrink
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Our studies show that a significant percent of shrink is related to waste, expired
product and damage
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Increase use of tools to manage production
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Increase use of tools to manage receipts and variable weight items
© 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.
10
Inventory Trends and Implications
Potential impact of IFRS
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Only first in, first out
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The method of accounting needs to approximate cost
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IFRS requires all inventories to be on one accounting method
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There is no LIFO method in IFRS
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Under IRS rules you cannot be on LIFO for tax unless you are on LIFO for book
purposes
© 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.
11
Inventory Accuracy Leading Practices
Establish Accountability
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Top Management Support to the level of the organization responsible for
accomplishing a consistent, accurate physical count of inventory
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Establish high measurement goals and continuously assess the organization’s
progress in achieving and maintaining their goals
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Develop employee performance measurement systems to hold appropriate
personnel accountable for achieving the organization’s performance goals
Establish Written Policies
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Planning begins 30 to 60 days out
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Inventory instructions are sent to the stores at least 3 week prior to Inventory
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Web-based prep materials and instructions
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Well documented steps with pictures and training videos
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Standard operating procedures and capture of leading practices

© 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.
12
Inventory Accuracy Leading Practices
Frequency and Completeness of Counts
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Rolling inventory schedule based on previous year (once or twice per year)
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Facing prior to inventory, stock before or after inventory
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Perform blind counts
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Ensure cutoff procedures
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Perform test counts and recounts
Measuring Prep
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Set standards for trouble or research tables
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Percent of generic SKU product
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Feedback from the field
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Feedback from the inventory service
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Scorecard on Prep
© 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.
13
Inventory Accuracy Leading Practices – Continued
Reporting
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Provide generic/clearance SKU report
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Provide both cost and retail values
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Provide pre-counts by SKU to assist with identifying potential count errors or
missed items
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Track dollars and units for all reporting
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Track net and absolute variances
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3 year trend reports
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Store cycle count adjustments report
© 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: arvoels@kpmg.ca
© 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.
15
© 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.
.