Why Inventory Accuracy Is Retail's Burning Platform

Xterprise LLC. – Copyright ©2014 - All Rights Reserved

i s r e t a i l ’ sWhy inventory accuracy

I don’t know what’s in

stoooock!!

(and how item-level RFID can help)

SML Is Organized To Support Customers With All RFID Solution Needs

RFID Tag Solutions RFID Inventory Software Solutions

RFID Tags Encoding Solutions Supply Chain In-Store Value Added

Services


A little background…

Clarity™ Software

Applications

Retail ITL Process Leader

Enterprise Class

Deployment Leader

RFID Tech

Experts

Total Solution Delivery

& Support

1 Billion RFID Transactions During 2013 Holiday Season >4 years running

in production

>20 Countries

100’s of Sites

>1000 of RFID Readers

100’s of Omni-channel orders daily

Partial or Complete Solutions Solutions:

Software, Hardware, Services, Support & Tags

Installer & Upgrade Technology

SLA Based Remote Solution Support

RFID Solutions For Brand Suppliers & Retailers

Business Cases – Hardware- Readers –Software – Deployment Services


Agenda

Retail: the burning platform

Clarity™: helping put the fire out

Real world business cases

Easy adoption/how you can get started


What To Do About The Burning Platform?

R F I D T e c h n o l o g y

I must innovate!

1 9 8 0 ’ s D a t a c o l l e c t i o n T e c h n o l o g y

M a n u a l / L a b o r I n t e n s iv e p r o c es s e s

Bi-Annual Freque ncy o f Cycle Counts

G a p s i n D a t a c o l l e c t i o n P r o c e s s e sPOS PLMWMS

Staff eCOM

Inventory Inaccuracy

Serialized IDsNon-Line of Sight Read Capability

>1000 tags/second data collection Enhanced Process Software Applications

Inventory Accountability & Control

$ $$ $ $


Practical Omnichannel Execution

The problem

The solution

Inventory Accuracy is poor for most retailers and brand owners … causing them to “jump” off status quo technology

0102030405060708090

100

Spot on +/- 1 +/- 2 +/- 3 +/- 4 +/- 5 ormore

Cumulative % of items with variance

Source: “A Comprehensive Guide to Retail Out-of-Stock Reduction” (Gruen & Corsten)

• Retailers have a count within +/- 1 on only 65% of items

• These poor counts are driven by manual counting, POS, and restocking algorithms

• Because accuracy is so low, retailers must estimate stock conservatively

% of total

Item variance to actual


a t r u e

$ $i n l o s t r e v e n u e f o r e v e r y

Lack of inventory accuracy drives significant out-of-stocks and lost sales

High demand itemshad almost6 times

the lost sales due toout-of-stocksthan low-demand items

This contributed to an average loss of

4% per year

i n s a l e s f r o mout-of-stocks…

For manufacturers, this translates to

$23 million dollars

$ 1 b i l l i o n i n s a l e s

M e aning t hat f o r e ve r y

1 3 i t e m sa customer wants to buy,

1 is out of stockM a k in g in ve nto r y accu rac y

Oh, the humanity!

Source: Gruen & Corsten Xterprise LLC. – Copyright ©2014 - All Rights Reserved

Retailers using non-item-level RFID inventory methods are behind the curve even before accounting for customers

A retailer without item levelvisibility can be over 10% in thehole on inventory accuracy evenbefore accounting for externalshrink, out of stocks, returns,damages and misplaced items—i.e., before customers are evenfactored in, inventory issignificantly off—and accuracydeclines another 2-3% everymonth under normal operations.

-5%

-4%

-1%

-11%100%

89%

Manual audits

Receiving/shipping

POSerror

This is your inventory the day after a comprehensive manual audit.

This error rate represents accuracy immediately after inventory is taken, and degrades by 2-3%

every month.

-1%

Internal shrink

Source: Xterprise research, Gruen & Corsten, “RFID-Enabled Visibility and Retail Inventory Record Inaccuracy: Experiments in the Field” (Hardgrave et al.)


Behavior to compensate for poor inventory visibility…causes numerous compounding

consequences“Traditional” inventory management

High and low velocity items are stocked on the sales floor; high-velocity items can sell > 3x as fast

Due to distortion, high & low velocity items must be kept in stock

Front store Back stock or DC

High velocity items can sell 3 or more times faster than low; as they do, low velocity items are flexed to fill holes in rack space

Safety stock for slow items remains idle while fast-item stock is moved to the floor


It can take days for an out-of-stock to be addressed; flexed inventory can exacerbate the problem

Eventually, stock of the high-velocity item is depleted.


High-velocity itemRack B

Rack A Rack B

Rack A Rack B

Low-velocity item• Algorithmically driven

replenishment with known margin of error

• Must compensate via safety stock ‘buffer’ on both high and low-velocity SKUs, resulting in muda (waste)

• High-velocity product is consumedmuch faster than low-velocity

• Slow-velocity items are flexed to fill‘gaps’ in sales floor

• High-velocity backstock volume isconstrained by space needed forsafety stock of low-velocity items

• As high velocity stock is consumed, a higher relative proportion of low velocity items remain

• These items are flexed to fill gaps, giving the impression of full shelves

• Ironically, the sales floor can become disproportionately stocked with slower selling items

Source: Xterprise proprietary analysis, Gruen & Corsten

1

2

3

Rack A


The net effect of inventory inaccuracy is to make physical retailers less competitive and relevant

E-tailer Retailer

Merchandising

Shipping trends

“Effective” Inventory accuracy 96%+ 70%

Usually warehouse; easier to maintain inventory accuracy vs. store

Typical accuracy 65-75% due to shrink, movement, human error, misinterpreted signals

Massive selection including ‘best sellers’ and ‘long tail’ items

Selection based on 20% ‘best sellers’ and average taste (1 σ or less from mean)

Increased shipping options are getting closer and closer to same-day delivery

Despite proximity to customers, inventory visibility acts as constraint to shipping speed

Implications• Inventory accuracy serves as the

bottleneck to implementing omnichanneltactics

• Retailers are limited in how much they can offer with multichannel due to lack of visibility, confidence

• Ultimately, poor accuracy limits flexibility and responsiveness

• E-tailers use their digital storefront to offera massive long-tail selection

• Physical retailers are constrained tocarrying a focused array of items cateringto mass appeal

• Stores have limited flexibility to tailorselection to local market

• The lack of confidence in inventory levelsacross channels prevents retailers fromfully capitalizing on one of their greatestadvantages: physical proximity

• E.g., most retailers do not offer same-dayor even overnight delivery from stores






Agenda


The Clarity™ Software Suite from Xterprise has numerous features that improve accuracy, eliminate out-of-stocks and enable practical

Omnichannel models… making existing systems better

Transfers/ShippingTransfers/Shipping

Receiving/Auditing Receiving/Auditing

Cycle CountingCycle Counting

ReplenishmentReplenishment


POSPOS

OmnichannelOmnichannel






Search/FindSearch/Find Search/FindSearch/Find

Search/FindSearch/Find


Reporting, tag management, systems integrationReporting, tag management, systems integration

Item-level RFID from Xterprise extinguishes the ‘burning platform’ issues of inventory inaccuracy

70%Reduction in Out-of-Stocksusing Clarity™I t em -le ve l RFI D so lut io ns

+40%

70% 98%

I t e m l e v e l R F I D c a n

d r a s t i c a l l y i m p r o v einventory accuracyt o a s h i g h a s 9 8 %

Which enables

And up to a 50%increase

in SKU density……allowing retailers to have

Better selection Omni-confidence

In stock!

Reduced shrink…ultimately resulting in

h a p p i e r c u s t o m e r s

omnichannel excellencehigher sales/lower costs

I retail

+ =


Agenda






Inventory accuracy ~ 80% > 98%

Inventory cycle count 2x per year Up to 200x per year

Receive audits 1-5% random sample

100%

Internal shrink 0.5 – 1% 70% reduction

Out-of-stocks (sales floor)

10 – 25% < 5%2 – 7% sales lift

3rd-party audit costs $3K – $30K per store, per year

$0

Sales floor density 2 SKUs/ft2 3 SKUs/ft2(50% increase!)

Retail business case


Item-level inventory management with Clarity™ leads to improved competitiveness & omnichannel fulfillment

Front store Back stock or DC Front store Back stock or DC

Before Clarity™ item-level RFID After Clarity™ item-level RFID

With low visibility, retailers must keep higher ‘safety stock’ on hand—as much as 50% above minimums

Higher accuracy reduces the quantity of each item that must be carried, reducing excess inventory and freeing up floor space

Item-level allows a reduction in safety stock numbers both in front and back of store

Item-level drives accuracy and fast replenishment, permitting more SKUs

With low accuracy it makes sense to focus almost exclusively on a small number of fast-moving items

With high accuracy, retailers can take advantage of liberated floor space to offer a longer tail of items, making selection comparable to online

Item-level enables ship-from-store and in-store pickup with higher confidence

x1-2 daysRetailers without item-level accuracy must manually check stock before committing to fulfilling an online order

With item-level visibility, retailers know with a high degree of confidence what they have in stock, enabling faster, more flexible shipping options


• Roll out Specs – 250 stores, 20countries, 40M units a year

– 99.x% tagged

– First stores since q1/2009

– Handhelds + Fixed readers in Back Stock and POS

• Why did the customer purchase and deploy RFID?– Out of stocks….. eliminated out of stocks on sales floor by

70%, increased sales 1%<x<10%

– But found shrink reduction “paid for the system” … reduced shrink by >50%

– Also found that eliminated need for balance sheet 3rd party inventory audits and increased inventory accuracy helped in banking relationships

– 40% increase in skus/sqft. Used to have 5k skus in store.. now >7k skus

– 80% reduction in back stock. Used to have 1x of sales floor in back stock … now have < .2x of sales floor in back stock

– Omnichannel orders accuractely filled daily in stores

American Apparel has used Clarity™ for 5 years to reduce out-of-stocks by over 70% and drive 1 – 10% sales lift


“..RFID (deployments)..have allowed us to reduce our unit inventory levels..”“..RFID (solution) .. Increase sales, reduce costs and increase liquidity..”

American Apparel felt strongly enough about RFID’s contribution that they featured it in their 10-K


Inventory accuracy

Inventory cycle count

Receive audits

Shipping audits

Documented shipping errors

Estimated excess inventory

~ 80% > 98%

1x per year

12-24x per year

Random sample 0.1%-1.0%

100%; every container, every item

Random sample 0.1-1.0%

100%; every container, every item

> 1% 0

10 – 20% 3 – 5%

Supply chain business case


• 100% Carton Level Auditing for JCP and Sears Shipments

– Solution went live 4/2011

– 1 distribution center

– Over 100,000 cases processed

– 250 ft/min, 40 cartons/minute

• Business Case (payback in <9 months)

– 100% elimination of mis-packed cartons

• Determined Packing Errors >1.2% of cartons, for business process improvement

A large brand owner has used Clarity™ to eliminate carton packing errors at their DC


Clarity Business Case Model

• We have developed a business case model that is based on real/proven best practices + full solution costs vs. an estimated partial picture

• Includes accurate software solution and tagging solution costs based on specific customers business model

• Supply Chain & In-Store benefits

Company Info (North America

Only)Number of DC's? 3Locations of DC? LA, Dallas, NJ

How many company stores do you operate? noneTotal Number of Skus 500

Where are existing price tickets applied to item? Factory in AsiaCost of average price ticket? $ 0.001

% of business through big box stores (Dick's, etc.) 30%% of business through pro shops (Dr. Pepper center, etc.) 40%% of business through small retailer (Players Bench, etc.) 30%

What percentage of your business is on-line 40%

Scenario 1: Big Box

Product InfoNumber of stores that carry product 300

Average sales price $ 2.00 Average cost of goods sold $ 1.00

Average number of items/store 1000Average number of Skus/store 300

Average number of items sold/year/store 500Is there a back stock yes

% of inventory in back stock 30%

Business Performance

(today)Rough Estimates % out of stocks 20%

Rough Estimate % shrink 2%Are you charged for errors in shipments? (wrong sku and /or qty) yes

What is your shipment error rate? 0.5%Penalty for missed shipments? $1/case

How are returns processed? manual at DCHow are replenishment orders generated? By who? retailers system

How often are replen orders generated? dailyHow often are cycle counts performed? 2x year

How are cycle counts performed? manual by store associates

Input Fields


Agenda






Example In-Store Clarity System Topologies… match to customer business case and error prone processes

POS

SCM

ClarityCentral Server

InventoryTerminal

POS

POS

Front & Transition Portal

SCM


InventoryTerminal

POS

SCM


InventoryTerminal

POS

“Full” “Medium” “Light”

Front & Transition Portal

Clarity™ Inventory SCM Solution Physical Configurations

RFID Fixed Reader Portable Read Station (Case & GOH)

RFID Fixed Reader Manual Station

(Pallet, Case & GOH)

RFID Fixed Reader Conveyor Read Station

(Case)

RFID Mobile Reader Mobile Read Station(Case & GOH)

Piloting and proof of concepts can be surprisingly easy, depending on initial targeted processes

Bene

fit:

Valu

e ca

ptur

e*

Cost: Technology + Use Case Footprint

*Value capture for solution configuration shown, on a per-store basis

“Typical” solution configurations (specialty retailer example) & the value they capture

“Light”: 65-75% valuecapture

• Two handheld readers• Central/Cloud Application Server• Web based reporting portal with

out of stock, replenishment andmultisite inventory reporting

“Medium”: 80-90%value capture

• Two handheld readers• 1-2 receive/transition portal/ exit

readers• Central/Cloud Application Server• Web based reporting portal with


“Full”: 100% valuecapture

• Two handheld readers• 1-2 receive/transition portal/

workstation readers• 1 reader for POS with Clarity POS

companion integration• Central/Cloud Application Server• Web based reporting portal with



Xterprise helps in all phases of the item-level RFID adoption and implementation curve

ROI model tailored to the customer’s business and highlighting value of various aspects of item-level RFID

Simple, easy-to-implement, packaged approach to POCs/pilots that are very cost-effective while demonstrating real value

Analyze data, derive lessons learned and develop proposal for full rollout

Solution, Tags, Training, implementation and integration to make existing teams and systems better

Full spectrum of support at whatever level is desired by the customer

Investigation/ Prelim Bus

Case POC/ Pilot

Business Case

Validation

Phased Rollout Support


To get started, begin with the business case… Technology is not the question anymore

Key questions for understanding the business case of item-level RFID

Brand Owner:• Will items come into your DC tagged?• If not where is the best place in the supply chain to tag them? Now? Down the road?• What is the process to receive goods into your warehouse? Picking and Shipping?• What is the accuracy of those processes (measured by assortment, not just count) today?• How many items do you receive and ship each day?• What inventory levels are you carrying today?• What existing systems would find value to be integrated with ITL RFID system? POS, WMS, ERP,

etc.• Average cost of each item?

Retailer: • How many items per store will be tagged? Across how many stores? • Does this represent all items, or just select categories?• Where will items be tagged (factory, DC, in-store)?• What existing systems would find value to be integrated with ITL RFID system? POS, WMS, ERP,

etc.• Will the solution be hosted on an in-store server, or in the cloud?• What is the average gross margin—both % and $--of products being tagged?


Thank You

Q&A

@xterpriseRFID [email protected] www.xterprise.com
