Thursday, July 16, 2009

Use of Inventory productivity in Retail Industry

What is inventory productivity?
Inventory is the amount of stocks (goods or materials) that is stored in a factory at any given time. The store owners need to know the amount of stock in the store or factory in order to place the order or to control losses. Thus inventory refers to both stocks in hold and the act of counting them. The success lies in for an investor when he turns the inventory into cash. An unwanted inventory in any product can decline profitability. While doing the analysis the investor has to be confident and clear in making five decision such as,

1. Mark up
2. Mark down
3. Buy more
4. Buy less
5. Don’t do anything

Thus, Inventory Productivity can be defined as the amount of sales and gross profit dollars an inventory investment generates over a given period of time, usually a year. And the most basic measures of inventory productivity are inventory turnover and gross margin return on investment (GMROI).

Inventory turnover
Inventory turnover help you to identify the turnover made from the inventory, and also buy more from that and turn that to into cash. Inventory turnover determines the stability of the store or factory and henceforth the profitability too.
The formula for calculating inventory turnover is:

            Inventory turnover = Sale (at retail value) / Average Inventory Value (at retail value)

Suppose if you have only inventory value at cost, you can calculate inventory turnover in the other way.

            Inventory turnover (At cost) = Cost of Goods Sold / Average Inventory Value (at cost)

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

1 comment:

  1. Inventory productivity plays a very important role; it also helps in creating a marketing strategy & other important management decision.