Gross margin return on investment (GMROI)

GMROI is one of the most important metrics in the retail/supplier world because it allows you to understand both the velocity with which your inventory is turning and the return you are getting on your investment. GMROI is a measure of inventory productivity that shows the relationship between total sales and the gross profit you earn on those sales in conjunction with the amount of dollars invested in inventory.

GMROI can be expressed as either a percentage or dollar multiple. Many retailers calculate GMROI at a product family or department level, but it can also be calculated at an individual item level.

GMROI (%) = gross margin (%) x [sales / average inventory at cost]

where gross margin (%) = (sales – cost of goods sold) / sales

and average inventories at cost for one year = add ending inventory at cost for every month of the year plus the ending inventory at cost for the previous year and then divide by 13.

Analysis software which automates the calculation of GMROI at an item level, and then allows the user to input exception monitoring based on business logic, is ideal. This setup provides significant time savings and proactively alerts a user to problems.

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