Tuesday, June 16, 2009

Strategic Performance Analytics GMROI,GMROS and GMROL, The Key ‘Retail Measure’




Some of the tools that are very useful in Strategic Performance Analysis are GMROI, GMROS and GMROL

GMROI - Gross Margin return on Investment

GMROI is a planning and decision making tool used by the retailers to calculate their profit from the investment made. GMROI measure inventory productivity that expresses the relationship between your total sales, the gross profit margin you earn on those sales, and the number of rupees you invest in inventory. GMROI also called as GMROII stands for Gross Margin Return On Inventory Investment.

Thus GMROI assist buyers in evaluating whether a sufficient gross margin is being earned by the SKU's purchased, compared to the investment in inventory required to generate those gross margin dollars. GMROI shift the business focus from the sales to the profitability. GMROI actually make you to talk in percentage which almost all the successful business people likes talk about.

      GMROI = Gross Margin($)/Average Inventory at Cost = Gross Margin % x Inventory Turn

Two main things that we need to calculate is

i) Average inventory at cost
ii) Gross margin of the item

Average inventory at cost is obtain by adding beginning cost inventory for each month and the ending cost inventory for the last month in the period divided by total months plus 1.

Average Inventory at Cost = (beginning of each month + ending cost of last month) / total number of month + 1

consider if we need to calculate the Average inventory at cost for 3 months from Jan 2010 to Mar 2010. Then Average inventory at cost = (beginning cost inventory for Jan 2010 + beginning cost inventory for Feb 2010 + ending cost inventory for Mar 2010)/4

Gross margin of the item is the difference between total sales of the item and the cost of goods sold.

Gross Profit = Revenue − Cost of Sales

or

as the ratio of gross profit to sales revenue, in the form of a percentage:

Gross Margin Percentage = (Revenue-Cost of Sales)/Revenue


How to improve GMROI:

Gross margin is the value of sales minus the cost of goods sold. To increase gross margin, you must either increase sales revenue or reduce the cost of the merchandise. The obvious way to increase sales revenue is simply to increase prices. Unfortunately, in a competitive environment, that is not so simple.

Here are three possible strategies to employ to increase GMROI:
  1. Raising Prices

  2. Careful Use of Markdowns

  3. Reducing Cost of Goods Sold

Raising Prices

A common rule of thumb is to avoid price increases on products that are known value items or those that your competitors focus on for price comparisons. Sample Steps for implementing a price increase at first is by defining a representative sample selection of products from your stores. Each product should be of a particular size or be aimed at a particular demographic. Select a control group that resembles as closely as possible the first group. Increase prices in the sample stores and track how sales perform against the control group during a trial period. If there is little or no effect on sales, you can roll out the price change throughout your stores.

Reducing Markdowns

Reducing markdowns is another strategy for improving GMROI. To do this, track the SellThrough % by store. Suppose Store A is selling faster than plan and will sell out early. Store B is selling slower than plan but a markdown may help it along. Store C is doing really poorly and even a large markdown may not be enough to clear the problem. In this case, consider moving merchandise from Store C to Store A, where it can still sell at full price. This capacity to apply markdowns selectively and transfer goods judiciously is an important component in increasing gross margin.

Reducing Cost of Goods Sold

Reduction in COGS is used to measure the success of the manufacturing product. this fundamentally captures material, labor, overhead and tooling costs. You can, for example, analyze vendor performance and possibly order products from different vendors. Again, this is not a simple decision and must be considered with other factors. For example, one vendor may be a little more expensive but delivers on time and offers better quality with fewer returns. When all the factors are considered, the more expensive supplier may, in fact, be "Cheaper."

Specific benefits of GMROI

  • GMROI exposes the actuall profits in dollars vs paper profits

  • GMROI shift focus from sales to the return-on-investment of the product

  • Also GMROI shift SKU's focus from total department to the individual product

  • GMROI differentiate product "winners" from products "starving to become winners"

  • (Product "winners" are those which boost profitability (i.e.) it gives best return on investment. Products "starving to become winners" is the one which has all the qualities to become winners but under a specified category)

  • GMROI identifies "core" business/never outs

  • ('Core products' are those list out the existing winners which is selected at all times. It gives best return on investment. 'Never out" are those product change occasionally according to the season and by location.

GMROS - Gross Margin Return on Selling Area

GMROS also called as GMROF (Gross Margin Return on Feet). GMROS is a measure of inventory productivity that expresses the relationship between your gross margin, and the area allotted to the inventory. GMROS express the profit percentage
(i.e) how much returns you've got per area (selling feet) during a specified period. In a simple term, GMROS is a measure of gross margin returns on space occupied by a particular category of the store

      GMROS = Gross Margin% x Net Sales /Selling Area

GMROL - Gross Margin Return on Labor

GMROL is a measure of inventory productivity that expresses the relationship between your gross margin, and the full time employee. It explains the profit gained by a full employee in a specific period of time.

      GMROL= Gross Margin % x Net Sales /Full Time Equival.

Full Time Equival= E1*H1*D1 + E2*H2*D2 + E3*H3*D3* + ……/ Hrs. in regular shift * No. of working days in a week

Where,
E = Employees, H = Hours worked, D = Days worked




  • It is a relation between Gross Margin and Stock Turns

  • Gross margin is the value of sales less the cost of goods sold

  • Increasing gross margin entails increasing sales revenue or reducing the cost of the merchandise

  • Increasing Stock Turns means reducing the inventory carry cost

  • Thus this measure gives you insight into the retailers performance

9 comments:

  1. What is the benchmark of GMROII for Luxury products (high end watches & kewelery)

    ReplyDelete
  2. Sales/Avg inventory is not "Turn". Sales are goods sold at retail, Avg inventory are goods en stock at cost.

    ReplyDelete
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  4. What is standtd gmroii for food retail

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  5. Is there any recent trends......... That we should follow.......

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  9. As a retail marketer's we should follow these rules for each category as well as we must keep some regular FF (foot fall) driver categories to maintain a successful retail.

    ReplyDelete