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May 06
2009
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Increase Your GMROI, How?Posted by Donna Tang in vendor, retail cloud, Inventory, GMROI   |
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We have talked about the Key Performance Indicator on last blog (Retail Metrics-Increase Your Profit). GMROI evaluates your rate of return of your inventory. You definitely want to increase your GMROI. But how? Let us look at Inventory Turnover first.
Inventory Turnover
You must have heard of this term for a lot of times. What is it? How it can help you?
Inventory Turnover is a measure of how many times your inventory turns over in the course of a year.
For example, if you have an average inventory of 100 jackets in a year and you sell 100 jackets every 4 months, your inventory is totally replaced 3 times per year. Therefore, your inventory turnover is 3.
Given the example above, it is obvious that if your inventory turnover increases, assuming your pricing is fixed, you should earn more money from inventory (GMROI increases). However, the truth is that turnover often is increased by reducing selling price, which reduces Gross Margin from Sales.
That is why I want to mention Inventory Turnover before summarizing how to increase your GMROI. Actually GMROI can also be calculated by : GMROI = Gross Margin % x Inventory Turnover.(If you want to know how to get this formula, I can tell you.)
Now, you can find that you can increase your GMROI by increasing the factors in the formula, for examples:
- Improving Delivery Speed. Now you can reevaluate the importance of your vendor delivery speed. It has impact on your GMROI! A shorter lead time means a lower reorder point, lower average inventory, increased Inventory Turnover and eventually increased GMROI. You should choose the vendors with average lead time as short as possible.
- Careful pricing strategy: using markup or markdown to increase GMROI is much more complicated than picking a vendor. But the good news is, you don't need to be a mathematician, statistician or science giant to make decisions on your pricing. You can use retail IT tool to help forecast your GMROI based on possible pricing plans before you make final decisions.
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