Why Inventory Accuracy Is Retail's Burning Platform

Xterprise LLC. – Copyright ©2014 - All Rights Reserved
i s r e t a i l ’ s
Why 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 80 ’ s D at a co llec t ion Tec h no lo g y
Manual / Labor Intensive processes
Bi-Annual Frequency of Cycle Counts
Gaps in Data collection Processes
POS PLMWMS
Staff eCOM
Inventory Inaccuracy
Serialized IDs
Non-Line of Sight Read Capability
>1000 tags/second data collection
Enhanced ProcessSoftware 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
0
10
20
30
40
50
60
70
80
90
100
Spot on +/- 1 +/- 2 +/- 3 +/- 4 +/- 5 or
more
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 lo st re ve nue fo r e ver y
Lack of inventory accuracy drives significant out-of-
stocks and lost sales
High demand items
had almost
6 timesthe lost sales due to
out-of-stocks
than low-demand items
This contributed to an average loss of
4% per year
i n s a l e s f r o m
out-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
Meaning that for every
1 3 i t e m s
a customer wants to buy,
1 is out of stock
Making inventory accuracy
Oh, the
humanity!
Source: Gruen & Corsten

Retailers using non-item-level RFID inventory methods are
behind the curve even before accounting for customers
A retailer without item level
visibility can be over 10% in the
hole on inventory accuracy even
before accounting for external
shrink, out of stocks, returns,
damages and misplaced items—
i.e., before customers are even
factored in, inventory is
significantly off—and accuracy
declines another 2-3% every
month under normal operations.
-5%
-4%
-1%
-11%
100%
89%
Manual
audits
Receiving/
shipping
POS
error
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 stockedon 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 item
Rack 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 consumed
much faster than low-velocity
• Slow-velocity items are flexed to fill
‘gaps’ in sales floor
• High-velocity backstock volume is
constrained by space needed for
safety 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 optionsare
gettingcloser 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 omnichannel
tactics
• 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 offer
a massive long-tail selection
• Physical retailers are constrained to
carrying a focused array of items catering
to mass appeal
• Stores have limited flexibility to tailor
selection to local market
• The lack of confidence in inventory levels
across channels prevents retailers from
fully capitalizing on one of their greatest
advantages: physical proximity
• E.g., most retailers do not offer same-day
or even overnight delivery from stores

Retail: the burning platform
Clarity™: helping put the fire out
Real world business cases
Easy adoption/how you can get started
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/AuditingReceiving/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-Stocks
using Clarity™
Item-level RFID solutions
+40%
70% 98%
I t e m l e v e l R F I D c a n
d r a st ic a ll y impr ov e
inventory accuracy
t 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
happier customers
omnichannel excellence
higher sales/lower costs
I retail
+ =

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 senseto focus almost exclusively on a
small number of fast-movingitems
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 days
Retailerswithout item-level accuracy must manually check stock
before committingto 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? 3
Locations of DC? LA, Dallas, NJ
How many company stores do you operate? none
Total Number of Skus 500
Where are existing price tickets applied to item? Factory in Asia
Cost 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 Info
Number of stores that carry product 300
Average sales price $ 2.00
Average cost of goods sold $ 1.00
Average number of items/store 1000
Average number of Skus/store 300
Average number of items sold/year/store 500
Is 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 DC
How are replenishment orders generated? By who? retailers system
How often are replen orders generated? daily
How often are cycle counts performed? 2x year
How are cycle counts performed? manual by store
associates
Input Fields

Example In-Store Clarity System Topologies… match to
customer business case and error prone processes
POS
SCM
Clarity
Central Server
Inventory
Terminal
POS
POS
Front & Transition
Portal
SCM
Clarity
Central Server
Inventory
Terminal
POS
SCM
Clarity
Central Server
Inventory
Terminal
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 processesBenefit:Valuecapture*
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% value
capture
• Two handheld readers
• Central/Cloud Application Server
• Web based reporting portal with
out of stock, replenishment and
multisite inventory reporting
“Medium”: 80-90%
value capture
• 1-2 receive/transition portal/ exit
readers
“Full”: 100% value
capture
• 1-2 receive/transition portal/
workstation readers
• 1 reader for POS with Clarity POS
companion integration

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 info@xterprise.com www.xterprise.com

Why Inventory Accuracy Is Retail's Burning Platform

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