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To make the financial planning even easier, weve put all these techniques together into Inventory Planner. It helps
you to:
see the most detailed breakdowns to identify in which vendor or category you should invest
Calculating GMROI
GMROI (Gross Margin Return on Inventory Investment) indicates how much gross margin you get back for each
dollar invested in inventory.
Through careful analysis, you can see which lines, departments or categories are the most rewarding for your
inventory investment. And which are least productive!
Heres the formula for calculating GMROI:
GMROI% = Annual Sales $ divided by Average Inventory @Cost $ times Gross Margin %
For example, consider this merchandise category:
Annual Sales: $130,000. Average Inventory at Cost: $40,625. Gross Margin: 49%
GMROI % = $130,000 / $40,625 X 49%
GMROI% = 157%
The inventory investment in this category is generating a 157% return in gross margin. Or, stated another way, for
the year this retailer is getting $1.57 in gross margin back for every $1.00 invested in inventory in this
category.
This is a great tool! But, it becomes really powerful once you are able to compare this category to the others in
your store, and/or to last year.
The Power of GMROI: Compare and Contrast!
Consider this example. Which of these four departments is the most productive?
Here are the GMROI calculations for each of these four departments. Revealing, isn't it?
Department D - admit it, sometimes overlooked because it has the lowest sales and margin - is
the productivity winner! It has the highest GMROI. Its lower margin is offset by its higher inventory turns.
One key finding to keep in mind: Sales and margin alone cant really tell the whole story.
Prefer a "Down 'n Dirty" GMROI Formula?
Just find the Gross Margin Dollars (of a department) for one full week. Then multiply it by 52 weeks, and complete the calculation by
dividing your current on-hand inventory at cost into the "annualized" figure for Gross Margin Dollars. With many of today's POS
systems, this is quick to calculate and useful for comparing departments on the fly.
In September 1998 you begin planning for the Early Spring 1999 season.
You plan to build up Januarys stock in anticipation of the stock needed
February, which is the start of the season. You also determine the planned
revenue and month-end closing stock for the months February through April.
The stock initializer specifies an opening stock of $100 for the planning
horizon (January to April).
In this phase, the OTB is determined by the following formula:
Purchasing Phase
In November you make the first purchases. OTB is calculated as the difference
Pln.
Pln.
For
example:
January: $0 - $100 + $600 - $500
= $0
During the
Business Phase
During the course of any
month, the month-end sales
volume is extrapolated from
the actual data to that point.
Differences between
planned sales and
extrapolated sales are taken
into account in calculating
OTB:
Pln. sales - Actual opening
stock + Pln. ending
stock - Open POs
+ (Extrapolated sales - Pln. sales) = OTB
For example:
March: $2000 - $600 + $400 - $1000 + ($2600 - $2000) = $1400