As I stated, GRMOI is one of the foundations of modern inventory management today. This is why we have supplied our clients with this powerful tool.
Hopefully, now, you have been trying out Gross Margin Return on Inventory (GMROI) in your shop. If not, look at my post a few days ago and only then come back to this post.
What GMROI incorporates in one figure, stock turns and profit. It allows you to focus on margins and turnovers.
The significant advantage of GMROI
1) It is consistent and widely used. Other systems, such as Direct Product Analysis (DDP), need you to make assumptions. They take much longer to work out. Different people using it come out with other figures. So their analysis will give various figures depending on who runs the report. I will show you DDP in our software in another post soon because it is also excellent.
With GMROI, everyone is looking at the same figure.
2) It is quick and easy to use. All you have to do is run a report. The computer can do the calculation.
GMROI is simple.
3) It allows you to compare widely different products quickly.
Using it, you can compare every item in the shop in seconds.
4) Overstocking is highlighted.
This is one of its best functions so it will cut your stock levels.
Let us discuss the problems.
1) A minor product can have a terrific GMROI, but its effect on the shop can be zero. For example, if a product that turns over a lot has a decent margin, it is pretty useless if it made you a profit of $2/week. It would not even pay the handling and rent that it takes up.
So you are not going to get out of using our profit reports, which need to be considered.
2) If you understock, you can often drive the stock turns up, so giving you higher GMROI. Yet that will cost you sales.
High GMROI is not always good.
3) It does not consider other costs, e.g. handling and shipping costs or suppliers terms.
4) It does not take into account that often you need a range of products. For example, people may come to your shop because they know you have an extensive range. If all you have is one title or brand, they may decide to go elsewhere else. After all, they can buy in a supermarket which also has a common brand.
Range often sells.
5) It may show you problems but not what you can do to fix the problem. There may be only so many you can sell. There may be good reasons why your low margin items are low: price-sensitive, set by suppliers, etc.
Often its conclusions are not actionable.
As a rule, I recommend looking at the extremes of the GMROI, both the high and low results, first. Once used to GMROI, you will find it an indispensable tool.
Enjoy and let me know how it goes.