Improving Merchandise/CategoryManagement Performancethrough Industry Benchmarking

Chris Verheuvel, Senior Vice President, SAP RetailGreg MacKinnon, Value Engineering Senior PrincipalMichael Met, Value Engineering Principal

October 23, 2007

Session Objectives

Introduce you to SAP’s benchmarking approach

Solicit your feedback to further refine a relevant set of merchandise/category management benchmarks that are critical to your business

Engage in a brief survey to illustrate some key themesØKey business challengesØBusiness lever impact and value creationØKey performance indictorsØ Investment in technology and business process improvementØLeveraging data to drive insights

Today’s session is interactive and your participation is requested

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SAP Value Engineering

Benchmarking (Best practices) VLM (Tools)

Customer Engagements(Interactions)

n 39,000 customers world-wide

n Over 4,000 CXO interactions per year

n Over 2,000 ongoing customer engagements

n Over 2,000 benchmarking participants

n Benchmarking and best practices in over 20 functional areas

n Over 50,000 industry and process-specific pain points and best practices

n ~15,000 individual operational metrics

Over 200 professionals

with deep industry

expertise

We have mined SAP customer engagements and developed services and Intellectual Capital to help you attain more value

VLM = Value Lifecycle Management tool

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Please indicate your industry sector

Let’s test these devices …….

13%

22%

30%

35%

Grocery Apparel Hardlines Other

Grocery

Apparel

Hardlines

Other

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What Does It Mean To Benchmark?

Definition:

To measure and compare various aspects of a business process against a specified standard or best practice in order to improve upon one’s own business process performance

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Why does Benchmarking Matter?

¦ Benchmarking opens organizations to new methods, ideas and tools to improve effectiveness

¦ Benchmarking empowers and stimulates people to address real issues and find solutions where results can be measured and proven

¦ Benchmarking enables businesses to overcome "paradigm blindness” -- the "If it isn't broken, don't fix it” challenge

¦ That works as long as you can tell "it's not broken”

¦ Which requires benchmarks

¦ Because you can't improve or fix what you don't measure

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Which business challenge “keeps you up at night” ?

RevenueStagnation

Margin Erosion Both

25%

54%

21%

Revenue Stagnation

Margin Erosion

Both

Question #1Business Challenges

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Retail Industry 5-yr Sub-sector Performance

Bubble Size indicates relative size of sub-sector

4.75%

9.31%

Strong Growth

Growth Challenged

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Identifying and managing revenue and profit levers

4.75%

9.31%© SAP 2007 / Page 9

Which one lever do you believe could create the greatest revenueimpact?

Question #2Revenue Business Levers

New StoreOpenings

StoreRemodels/

Relos

Newmarket

expansion

Newproduct

introduction

Acquisition Other

32%

4% 4%

16%

20%

24%

New Store Openings

Store Remodels/Relos

New market expansion

New product introduction

Acquisition

Other

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Which one lever do you believe could create the greatest operating profit impact?

Question #3Operating Profit Business Levers

Organization& Mgmt.Practices

BusinessProcess

Improvement

TechnologyEnhancement

CompanyAcquisition

Other

13%

71%

0%0%

17%

Organization & Mgmt. Practices

Business Process Improvement

Technology Enhancement

Company Acquisition

Other

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Value Gets Created At All Levels Of The Enterprise

Department

Process

Firm

Ecosystemn Mergers / Acquisitionsn Joint Venturesn Partnershipsn Divestitures

Value Drivers Value Created

~ 1 x

~ 10 x

~ 100 x

~ 1000 x

n Standardized Processesn Scale Across Entitiesn Enterprise Visibilityn Compliance Enablement

n Process Simplificationn Process Reengineeringn Process Replicationn Competitive Advantage

n Efficiencyn Team Productivityn Resource Utilizationn Transaction Automation

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Value Can Be Created By 3 Levers Of Change

Organization

CEO

4-8 mos.

12-36 mos.6-18 mos.

Technologyn Sustaining Process Changen Information Visibilityn Supplier Collaborationn Process Optimizationn IT Cost Reductionn Application Portfolio Optimization

Processn Process Improvementn Compliancen Standardizationn End-to-End Process Managementn Cycle Time Reduction

Technology is the best lever for creating and sustaining process change

n New Partnershipsn New Channelsn Reorganizationn New Performance Rewardsn Distribution Agreements

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Improving Management

Practices

Investing in IT Investing in IT while Improving Management

Practices

2%

8%

%Im

prov

ed P

rodu

ctiv

ity

20%

Incr

ease

d V

alue

IT and Business Units Disconnected

2XMoreValue

Source: “When It Lifts Productivity”, The McKinsey Quarterly, 2004 Number 4

Organization And Process Change Is Multiplied Through Technology Enablement

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¦ Only 28% of companies quantitatively measure value post-implementation

¦ 50% believe they achieve value later than planned

¦ Only 17% believe they attain their benefit objectives

¦ 73% realize value on time

¦ 23% exceed their targets

Companies with a business process-centric approach

Companies without a business process-centric approach

Companies that align technology initiatives with strategic objectives through clearly defined financial and operational metricsrealize more value faster

Value is not Realized By Chance

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Which Merchandise/Category Management KPI’s does your organization measure and track on a regular basis?

Please select all that apply

Question #4Key Performance Indicators (KPI’s)

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Revenue per Square Foot

Comp Store Sales

Average Ticket

Forecasting Accuracy

Markdown % of Revenue

Buyer Effectiveness

SKU Profitability

Gross Margin %

Lost Sales from Stock Outs

Days In Inventory

How integrated are the Top 3 (KPI’s) metrics in your organization’s overall enterprise scorecard?

Not Integrated at

all

SomewhatIntegrated

MostlyIntegrated

CompletelyIntegrated

14%

38% 38%

10%

Question #5KPI Tracking

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Not Integrated at all

Somewhat Integrated

Mostly Integrated

Completely Integrated

What are the reasons for not tracking the Bottom 3 KPI’s?

Data is notavailable

Cumbersomeand time

consuming toaccess andcompile data

Lack skill setsrequired toanalyze the

data

Do not trustdata

Other

17%

39%

9%

13%

22%

Data is not available

Cumbersome and time consuming to access and compile data

Lack skill sets required to analyze the data

Do not trust data

Other

Question #5 (cont)KPI Tracking

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0% 20% 38% 25%

0% 20% 0% 25%

0%0%0% 50%

67% 40% 50% 0%

33% 20% 13%0%

0% 20% 40% 60% 80% 100% 120% 140% 160%

Other

Do not trust data

Lack skill sets re...

Cumbersome and tim...

Data is not availa...

Grocery Apparel Hardlines Other

Data is not available

Lack skill sets required to analyze the data

Do not trust data

Other

Cumbersome and time consuming to access

and compile data

What are the reasons for not tracking the Bottom 3 KPI’s?

Aligning KPI’s to Revenue and Profit Growth

¦ Markdowns % of Revenue

¦ Gross Margin %

¦ Buyer Effectiveness

¦ Days in Inventory

¦ SKU Profitability

5-Y

ear

Ave

rag

e P

rofi

t

¦ Revenue per Square Foot¦ Comp Store Sales¦ Average Transaction¦ Forecasting Accuracy¦ Lost sales from Stockouts

5-Year Revenue Growth

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Retail Business Process Investment

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Over the PAST 2 - 3 years please rank order the areas your company has invested in technology and process improvement

Question #6Retail Business Process Investment

Merch/Category

Mgmt

SupplyChain

StoreExperience

FinancialMgmt.

HumanResources

20%

28%

11%

16%

26%Merch /Category Mgmt

Supply Chain

Store Experience

Financial Mgmt.

Human Resources

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In the NEXT 2 - 3 years please rank order the areas your company plans to invest in technology and process improvement

Question #7Retail Business Process Investment

22% 20% 22% 19% 17%

20% 28% 26% 16% 11%

Merch /Category

Mgmt. Supply Chain

Store Experience

Financial Mgmt.

Human Resources

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Merch /Category Mgmt.

Supply Chain

Store Experience

Financial Mgmt.

Human Resources

Improve Revenue

Improve Profitability

§ Improve Forecast Accuracy

§ Increase Buyer Effectiveness

§ Improve SKU Profitability

§ Increase Revenue per Sq. Ft.

§ Improve Comp Store Sales

§ Reduce unplanned Markdowns

§ Reduce Days in Inventory

§ Increase Average Ticket

§ Reduce Excess Inventory

§ Reduce lost sales from stockouts

§ Reduce CoGS as a % of Revenue

Aligning KPI’s to Merchandise/Category Management Process

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Over the past 2 - 3 years please rank order the areas your company has invested in technology and process improvement

Question #8Merchandise/Category Management Process

DemandForecasting

MerchandiseAssortmentPlanning /Category

Management

Price,Promotion &

Item Management

InventoryManagement

18%

28%25%

28%

Demand Forecasting

Merchandise Assortment Planning / Category Management

Price, Promotion & Item Management

Inventory Management

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Over the next 2 - 3 years please rank order the areas your company plans to invest in technology and process improvement

24% 27% 23% 26%

18% 28% 25% 28%

Demand Forecasting

Merchandise Assortment

Planning /

Price, Promotion & Item

Management

Inventory Management

Question #9Merchandise/Category Management Process

Demand Forecasting

Merchandise Assortment Planning / Category Management

Price, Promotion & Item Management

Inventory Management

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Demand Forecasting

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Does your organization spend a majority of time managing, analyzing or utilizing data?

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1 2 3 4 5

28%

33%

6%6%

28%

Question #10Data to Information to Insight

1

2

3

4

5

0% 100%

¢ Aggregate, Cleanse & Validate

¢ Analyze Data

¢ Model / Forecast

L

☺

K

☺L K

Do You Know Where Your Data Is?

50% of enterprises maintain data separately in 11 or more source systems

Companies spend an average of 25 minutes per SKU per year manually cleansing out-of-sync item information (~1 FTE for every 4,000 SKU’s)

Most retailers spend in excess of $350 per SKU per year

New-product rollouts take four weeks due to inefficient and error-prone processes for exchanging and updating attributes in buyer and seller systems

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SAP Merchandise/Category Management Benchmark Survey

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SAP BenchmarkingDesigned to Get Actionable Results

¦ Benchmarking is a strategic service offered by ASUG and SAP, launched at the end of 2004 as a forum to exchange metrics and best practices

¦ The Benchmarking program covers 15 business processes, with 2,000+ participants to date who leverage the program to:

– Build a Business Case for change– Compare performance to leading companies, industry peers,

and between regions/divisions– Assess Value Realization, year-over year– Prove Success

¦ Survey participation is FUNDED BY SAP

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PROGRAMS AT CRITICAL MASSMATURE PROGRAMS RAMP UP PROGRAMSHuman Resources

Finance

Procurement & Sourcing

TCO

Supply Chain Planning

Manufacturing

Customer Contact Centers

New Product Dev.

Governance, Risk & Compliance

Auto Supplier Collaboration

Transportation Mgmt.

Warehouse Mgmt.

Business Intelligence

Channel Management

Trade Promotion Management

Shared Services

Value Realization

Upgrades

CoE Outsourcing

Centers of Excellence (CoE) Business Intelligence

IT Strategy

Enterprise Asset Mgmt.

Organizational Change MgtEnterprise Data Management

ESA Adoption ERP Critical Ops. Survey

CRM Strategy

IN PROGRESS SURVEYSCOMPLETED SURVEYS

BENCHMARK SURVEYS

BEST PRACTICE SURVEYS

Merchandise/Category Management

In Development

Benchmark and Best Practice Surveys

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Call to Action

Participate in the SAP Merchandise/Category Management Benchmark Survey1

An SAP benchmark consultant will review your report with you to identify actionable next steps3

SAP will provide a detailed, confidential report comparing your performance to industry peers2

Participation in the survey is FUNDED BY SAP4

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ASUG Members: http://www.asug.com/benchmarking

Non ASUG members: https://www.benchmarking.sap.com/cgi-bin/qwebcorporate.dll?idx=N4J5ND&SRP1Q5=VECVA

How to Sign Up

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Questions

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Thank you!

Gregory MacKinnonSenior Principal, Value Engineering Retail Team Lead

SAP America, Inc.3 Van De Graaff DriveBurlington, MA 01803

T/M 781.267.1772E greg.mackinnon@sap.com

Michael MetPrincipal, Value Engineering

SAP America, Inc.600 East Las Colinas Blvd.Irving, TX 75039

T/M 210.204.7307E michael.met@sap.com