2012 Learning About Inventory from ERP Implementations 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. 1 Why are Retailers Moving to ERP Systems? ‒ Importance of one source of truth for both financial and management reporting ‒ Enhanced receivable/billing process and matching ‒ A unified and single reporting system to analyze the statistics/ numbers/ status etc in real-time, across all the functions / departments ‒ Automatic and coherent work-flow from one department / function to another to ensure smooth transition/ completion of processes ‒ ERP systems are more secure as centralized security policies can be applied to them and all the transactions happening via the ERP systems can be tracked ‒ Single Database is implemented on the back-end to store all the information required by the ERP system and that enables centralized storage / back-up of all enterprise data. ‒ ERP systems make it easier for order tracking, inventory tracking, revenue tracking, sales forecasting and related activities

© 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 ERP Challenges ‒ Cost ‒ IT or Finance Led rather than business ‒ IT resources not sufficient to deploy and maintain ‒ Data Governance ‒ It is hard to customize ‒ Very few companies can effectively use ERP right out of the box ‒ It must be modified to suit their needs, and this process can be both expensive and tedious. ‒ Even when a company does begin changing the system, they are limited in what they can do ‒ Can’t undo your conversion ‒ Disruptions to transaction flows ‒ Interface failures between SAP and other 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. 3 ERP Challenges Challenges our clients have faced: ‒ Ensuring you leverage all of the ERP functionality ‒ Importance of accurate process, system and accounting flows ‒ Master data and department hierarchy ‒ There is not “standard definition” of cost in Retail ‒ Organizations often define cost differently for domestic vs. globally sourced product ‒ ERP conversion planning – physical Inventories, accuracy of item files, open PO’s ‒ Chart of account mapping & testing ‒ Perpetual inventory management (negatives, dept rings) ‒ 3 way match and associated issues ‒ Inventory shortage and of inventory adjustments tracking ‒ Importance of receiving accuracy ‒ Bill of material 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. 4 Discussion – Converting to Cost Challenges our clients have faced: ‒ Communicating the advantages ‒ Challenges of change management ‒ Organizations often focus on financial reporting when converting to cost rather than management reporting ‒ Payables- accuracy & matching issues, import reconciliation, level of matching (summary, line item) ‒ Payables -practice of paying the lower of invoice ‒ Merchants - discipline of master item files accuracy ‒ Merchants – vendor compliance and enforcement ‒ Merchants – new management reporting – margin reporting in particular ‒ Importance of receiving – DC & Store ‒ Store Operations – cycle counts, mark-outs, inventory processes, reporting, POS discipline, finish goods, unidentified inventory, dept rings, RTV

© 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 Financial Considerations ‒ Which method of accounting? ‒ Assess the financial impacts of moving to cost and outline mitigation strategies ‒ Assess any tax impacts related to moving to cost and outline mitigation strategies ‒ Provide a summary of recommendations related to key themes (definition of cost, inventory adjustments, cycle counting, master data management, etc) ‒ Inventory movement tracking and accounting ‒ 3 Way Match ‒ Map and test chart of accounts ‒ Project ROI and cost management

© 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 Process Considerations ‒ Set up cross functional meeting to discuss and map end to end business processes ‒ Identify key stakeholders impacted by the project and will be responsible for implementing and communicating key business process changes ‒ Store Operations – cycle counts, mark-outs, inventory processes, reporting, POS discipline, finish goods, unidentified inventory, dept rings, RTV ‒ Estimate the level of difficulty using three dimensions (time, cost, and resources) ‒ Assess overall organizational readiness for change ‒ Assess roles, responsibilities and job impact ‒ Conversion planning and the potential impacts on 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. 7 System Considerations ‒ ERP is often too focused on technology ‒ ERP conversion planning – physical Inventories, accuracy of item files, open PO’ ‒ Integration with WMS systems ‒ Has your organization completed transaction testing? ‒ 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?

© 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 Reporting Considerations Complete a reporting impact analysis ‒ Importance of establishing one source of truth for reporting ‒ Assess master data clean-up and maintenance ‒ Document key current operational and financial reporting related to margin, shrink and inventory adjustments ‒ Assess shrink and waste calculations ‒ Assess inventory adjustments, cost adjustments, and other top level adjustments impacting margin, shrink and inventory adjustments ‒ How effective is your reporting related to:  Inventory Adjustments  PO, Receipt, Invoice & Payment  ASN Exception Reporting  Vendor Compliance  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. 9 Shrink Framework 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 Control

© 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 ToolWhat is it and why?Project Benefits Process Documentation A facilitated cross functional approach to documenting and identifying key gaps, controls and risks associated with key business processes. Process, system and account mapping is a critical step in planning and executing a successful new systems implementation. This step will help identify process improvement, and alignment issues prior to implementation. It will also highlight potential areas requiring system modifications or process changes to avoid custom modules when implementing new systems. It also is a important input for the job impact analysis. Organization and Job Impact Analysis A set of tools to identify and manage specific impacts to job roles and responsibilities within the organization associated with the specific change effort. All too often organizations do not focus enough on the job roles, impacts, and related capability gap questions associated with a change that need to be proactively addressed. Company X benefits by having a disciplined approach to both defining job roles in the future state but also doing a fact-based analysis of what activities will need to start, stop and continue in the new environment. Tools

© 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 ToolWhat is it and why?Project and Company X Benefits Stakeholder Analysis A Stakeholder Analysis identifies who the stakeholders are and evaluates their current commitment and what level of commitment is required from them in order for the project to succeed. Stakeholders can be defined as any person / group of individuals, internal or external to the organization who will be impacted by the changes, or who could have an impact on the success of the project. A Stakeholder Analysis helps Company X and the program team by identifying and understanding who are the most powerful/influential stakeholders and where the change team needs to spend time managing stakeholders to achieve effective support for the project. Achieving this insight early on in the project enables active stakeholder management to achieve sustainable commitment Leadership Action Plans A series of plans for key stakeholders and leaders to help drive change management efforts for the initiative. Leadership action plans provide a blueprint of key activities necessary from leadership to executive change activities and communications associated with the transformation. Leaders' values and behaviors are aligned with the business vision and there are actionable plans for those leaders to spearhead the change. Deliverables - Benefits

© 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 ToolWhat is it and why?Project and Company X Benefits Change Risk Analysis Practical approach and statistical diagnostics to help identify, quantify, qualify, prioritize, and mitigate the organization change readiness and risk factors in implementing the change. The CRA articulates the specific recommended actions required to proactively manage the change effort and provides key input to downstream change management deliverables by identifying the situational enablers and barriers. This diagnostic will shed light on organizational capacity for change and will allow Company X to develop the right solution while also creating a roadmap to move the Banners and impacted individuals through the Change to drive sustainability. The key benefit here is to understand what unique risks Company X is facing and how to deal with them. Executive Summary A summary of our finding, observations and recommendations related to project topics including – financial impacts, tax implications, Inventory valuation methods, roll-out approach, store operations impacts, etc. Practical approach and advice related to key issues and challenges that other retailers have faced when converting to cost and in implementing key retail systems. This approach will assist in evaluating the benefits, cost and difficulty related to operational, financial and system changes and process improvements. Deliverables - Benefits

© 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 Contact Information Al Voels Retail Practice Leader KPMG Canada Telephone: (206)

© 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..