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

2. © 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 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

3. © 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 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 -

4. © 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 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

5. © 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 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

6. © 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 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?

7. © 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 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

8. © 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 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

9. © 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 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)

10. © 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 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

11. © 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 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

12. © 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 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

13. © 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 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

14. © 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 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

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. 14 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

16. © 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 Contact Information Al Voels Retail Practice Leader KPMG Canada Telephone: (206) 979-7654 Email: arvoels@kpmg.ca

17. © 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..