retail inventory accounting

SAP RetailRetail Inventory Accounting

Jason BoyerRetail Field ServicesSAP Retail Group

February 21, 2008

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Disclaimer

This presentation contains forward looking statements and is not subject to your license agreement or any other agreement with SAP. This document contains only intended strategies, developments, and functionalities of the SAP® product and is not intended to be binding upon SAP to any particular course of business, product strategy, and/or development. Please note that this document is subject to change and may be changed by SAP at any time without notice. SAP assumes no responsibility for errors or omissions in this document.

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1. SAP Inventory Valuation Overview

2. Retail Method of Accounting

3. Cost Method of Accounting

4. Extended Retail Method of Accounting

5. Summary

Agenda

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Inventory Valuation Methods

Inputs: Beginning inventory Purchases Vendor returns Transfers Markups Sales Customer returns Markdowns Physical inventory Adjustments Shrinkage …

Outputs: General ledger

Cost of sales (income statement) Ending inventory (balance sheet)

Stock ledger reports Support planning, pricing, …

Stock Ledger

Apply a method:

• Cost method

• Traditional retail method

• Hybrid or extended retail method

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Key Concepts for SAP Inventory Management

Document Principle Accounting principle of “no posting without a document” A document must be generated and stored in the system for every transaction/event that

causes a change to inventory Inventory transactions create 2 postings:

– Stock ledger– General ledger

Once the document is posted it can’t be changed or altered; it can be reversed or reversed and replaced with a new document

Movement Type Each goods movement is classified by a type (e.g., receipt, transfer, sale, shrinkage, etc.) Movement types have important control functions (e.g., relevant accounts, information

required for input, etc.) Revaluation

Price changes and manual adjustments create changes to the inventory value at cost and/or retail (e.g., markups, markdowns)

Creates revaluation documents

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Article Document

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Revaluation Document

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Accounting Document(Relevant for CMA and ERMA)

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5. Summary

Agenda

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Retail Method of Accounting (RMA) or Retail Inventory Method (RIM)

Financial inventory transactions are captured into “buckets” throughout a defined period Inventory is primarily managed in retail values at aggregate levels, e.g., category/class or

department Inventory values are calculated periodically Cost of sales and ending inventory at cost are derived by applying a cost % to the retail

values of inventory Margin is managed at an aggregate level

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Illustration of Traditional RMA Calculation

Cost-Value Retail-Value

Beginning Inventory +$10,000 +$20,000

Purchases + $5,500 +$11,000

Markups + $1,000

Available for Sale $15,500 $32,000

Cost Complement = $15,500 / $32,000 = 0.484375 Above Line

---------------------------------------------------------------------------------------------------------------

Sales -$20,500 Below Line

Shrinkage (1%) - $205

Markdowns - $1,000

Ending inventory $4,986.64 $10,295

Total retail reductions ($20,500 + $205 + $1,000) = $21,705

Cost of goods sold ($21,705 * 0.484375) = $10,513.36

Ending inventory at cost ($15,500 - $10,513.36) = $4,986.64

Ending inventory at retail ($32,000 - $21,705) = $10,295

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SAP Support for Traditional RMA

Before December 2007 RMA stock ledger had been available as a project based-solution

December 2007 Globally available, standard supported RMA stock ledger

March 2008 Additional standard reports Recasting/reclassification Planned shrinkage Employee discounts (an additional bucket for a type of POS markdowns) Support for consignment Support for Value Added Tax

Several customers from multiple segments have provided input

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SAP RMA Stock Ledger Overview

Collect Inventory Transactions into RMA Stock Ledger “Buckets” Inventory transactions and goods movements are collected throughout the defined period

by type. Flexible RMA Formula That Calculates the RMA Results

See next slide… Standard RMA Stock Ledger Reports

A unified view to all relevant inventory activity Calculate key ratios

Post RMA Calculation Results End of period calculation of results and closing process Post results into general ledger (and other relevant processes, such as, planning and

open-to-buy)– Ending inventory at cost– COGS– Planned shrinkage reserve (reconciled at physical inventory)

Reverse and repost corrected results, if needed

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Flexible RMA Formula

Flexible RMA formula to model each customer’s business requirements Begin with a standard delivered RMA formula Remove unnecessary buckets

– e.g., don’t use markdown cancellations Add additional buckets for a more detailed view

– e.g., damaged goods, spoiled goods, samples, markdown reserve, charitable donations, … Define calculation sequence

– “Above line” – Part of the inventory available for sale calculation– Items that affect the cost complement

– “Below line”– Inventory reductions

Define relationships between RMA components– e.g., planned shrinkage is a % of sales

Calculate cost complement according to – Year-to-date – Period-to-date

Key performance indicators – Standard KPIs provided– Add new KPIs

Calculate on any merchandise hierarchy level

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Screenshot: RMA Formula

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Architecture

BI CONT

Retail BIFoundation

ERP

Logistics(Master Data,

Inventory Management,Retail revaluation)

FI(General Ledger)

RMA (BI Content)

RMA Engine

PIPE

XML

XI

RFC

POS

Service API IDoc

Service API

Analytical Applications(MAP, etc)S

ervice AP

I

Service A

PI

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Standard RMA “Buckets”

Beginning Inventory Net Receipts

– Receipts– Returns to Vendor

Net Transfers– Transfers In– Transfers Out

Markups Markup Cancellations Manual Adjustments Available for Sale Inventory Cost Complement (%) Net Sales

– Gross Sales– Customer Returns

Permanent Markdowns POS Markdowns Promotional Markdowns Markdown Cancellations Count Adjustments Actual Shrinkage Planned Shrinkage Ending Inventory Cost of Goods Sold

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Standard RMA Key Performance Indicators (KPIs)

Gross Margin $ Gross Margin % Maintained Markup $ Maintained Markup % Beginning Margin $ Beginning Margin % Beginning Markup $ Beginning Markup % Initial Margin $ Initial Margin % Initial Markup $ Initial Markup % Cumulative Margin $ Cumulative Margin % Cumulative Markup $ Cumulative Markup %

Current Margin $ Current Margin % Current Markup $ Current Markup % Inventory Turnover (Retail) Inventory Turnover (Cost) GMROI % Sell Through % Inventory to Sales % Permanent Markdown % POS Markdown % Promotional Markdown % RTV to Receipts % RTV to Sales % Customer Returns % Count Adjustments % Actual Shrinkage %

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Standard RMA Stock Ledger Reports

Available in December 2007 Period Report

Available in March 2008 Periods-to-Date Report Historical Comparison Report

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Selection and Drill-downs for RMA Reports

Period Merchandise hierarchy

e.g., department, class, sub-class Organizational hierarchy

Company Distribution channel Location group

– e.g., division, region Location

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RMA Administrator Workbench

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Period Close – Posting to the General Ledger

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Some Advantages of SAP’s RMA Stock Ledger

Flexible RMA calculation to support detailed and unique requirements Mix inventory valuation methods across business units, channels and locations

e.g., one company on RMA, one CMA e.g., warehouses on CMA, stores on RMA

Mix inventory valuation methods across valuation levels e.g., some categories using RMA, some CMA

Tight integration to robust, flexible reporting environment Simple migration path from RMA to CMA available (just turn off adjustment postings) or vice

versa (just turn on the adjustment postings) Migration could be done incrementally

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5. Summary

Agenda

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Cost Method of Accounting (CMA)

Inventory is managed at the location/item level Inventory values are based upon what you actually paid for the item Inventory values are calculated by multiplying current on-hand units by the unit cost Inventory is updated by every inventory transaction Gross margin and cost of sales are calculated using the difference between selling price and

purchase price Cost value of inventory is independent of retail price changes Planning and management of gross margin and sell-thru are key

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5. Summary

Agenda

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ERMA: A Compromise Between Cost and Traditional Retail

The “hybrid” or “extended” retail method is a “best of both worlds approach” combining elements of the cost method and traditional retail method

Takes advantage of the benefits of using the cost method while allowing the merchants to remain in the familiar territory of the retail method

An alternative to RMA

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Hybrid or Extended Retail Method (ERMA)

Inventory values are updated after every inventory transaction, i.e., perpetual inventory Inventory is managed at the location/item level, not a category or department level Inventory is tracked in both cost and retail values using a base unit of measure

The cost flow is moving average cost Markdowns may cause adjustments to the cost value of inventory

Creates a markdown cost adjustment that is taken in the current period Cost of goods sold is calculated by taking the cost of the exited inventory (e.g., sales,

shrinkage) plus the markdown cost adjustments

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Similarities of ERMA to RMA

Plan, manage, and analyze inventory in retail dollars Markdowns

Markdowns trigger an adjustment to the retail value of inventory Markdowns create in the current period a write-down of the cost value of inventory (using a cost %) COGS is increased for the current period by the markdown cost adjustment

Many transactions are valued the same ERMA and RMA can feed OTB with markdown values

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Differences Between ERMA and RMA

ERMA RMA

Level of inventory management

Location / Item Location / Category, department, etc.

Cost complement Current margin or markup % Available for sale (cost / retail)

Markup and markdown cancellations

No Optional

Transfers at retail If the retail price differs between locations, then the inventory is revalued to the receiving location price and the receiving store takes the adjustment, which goes to “receipts”

If the retail price differs between locations, then the sending location or the receiving location can take the adjustment; original retail price can be taken into account or not

Transfers at cost Moving average cost of sending location is used

2 options: (1) apply most recent cost complement to the retail value, or (2) use the moving average cost, which the system calculates anyway

Gross margin % Item level Blended at category or department level

COGS Moving average cost of goods movements (e.g., sales, actual shrink) + markdown cost adjustments

Apply cost complement (%) to the total retail reductions

Ending inventory Not derived from a cost complement Derived from a cost complement

Initial margin or markup (IMU) based on purchases

New purchases impact item margin only New purchases impact blended category margin

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Comparison Spreadsheet ERMA vs RMA

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Standard ERMA Reports

Period Report Period Report – Buyer Periods-to-Date Report Periods-to-Date Report – Buyer Historical Comparison Report Historical Comparison Report – Buyer

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Top Level Selection and Drill-down Criteria

Period Merchandise and organizational hierarchies

Merchandise hierarchy level (e.g., department, class, sub-class) Location group (e.g., division, region) Location

Buyer Buyer Vendor Vendor item grouping

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Standard ERMA “Buckets”

Beginning Inventory Net Receipts

– Receipts– Returns to Vendor

Net Transfers– Transfers In– Transfers Out

Markups Available for Sale Inventory Net Sales

– Gross Sales– Customer Returns

Permanent Markdowns POS Markdowns Promotional Markdowns Count Adjustments Manual Adjustments Shrinkage Ending Inventory

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Key Performance Indicators (KPIs)

Average Unit Value - Retail $ Average Unit Value - Cost $ Cost of Goods Sold (COGS) Gross Margin $ Gross Margin % Maintained Markup $ Maintained Markup % Beginning Margin $ Beginning Margin % Beginning Markup $ Beginning Markup % Initial Margin $ Initial Margin % Initial Markup $ Initial Markup % Cumulative Margin $ Cumulative Margin % Cumulative Markup $ Cumulative Markup %

Current Margin $ Current Margin % Current Markup $ Current Markup % Inventory Turnover (Retail) Inventory Turnover (Cost) GMROI % Sell Through % Inventory to Sales % Permanent Markdown % POS Markdown % Promotional Markdown % RTV to Receipts % RTV to Sales % Customer Returns % Count Adjustments % Manual Adjustments % Shrinkage %

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ERMA (and CMA) Financial and Operational Benefits

Improve visibility Item level profitability Vendor profitability Merchandise and financial books match

Improve accuracy, tracking and control of inventory RMA is an averaging method developed prior to advent of perpetual inventory systems Avoid abusive practices Reduce working capital tied up in unnecessary inventory

Improve category margins and net profit Increase revenue Improve negotiating power with suppliers Reduce shrinkage

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Summary

SAP supports several inventory valuation methods: Retail method of accounting Cost method of accounting Extended retail method of accounting

SAP can support the continued use of RMA or in migrating to ERMA or CMA (now or later)

retail inventory accounting

Documents

merchandise

inventory

retail price

extended retail

flexible rma

accounting

markdown cost

retail method