Is GMROI Actionable?
GMROI (also called GMROII) is one of the most widely used metrics for retail inventory management. It shows how much gross profit inventory investments produce and can be used to compare product categories, departments, SKU-s and other classifications. If you’re never heard of it, read on – chances are, you have low hanging fruits to improve your bottom line.
GMROI is easy to use and provides a simple mechanism how to evaluate the profitability of cash investments in inventories. Systematic improvements in GMROI can make the company more profitable and improve its return on assets (ROA). Due to GMROI’s simplicity there are shortcomings as well, which must be taken into account to prevent possibly harmful decisions.
150 000 annual gross profit / 30 000 average inventory = GMROI 5.0
10 000 July gross profit / 30 000 average inventory = GMROI 0.33
Those time differences make GMROI values of different time periods incomparable.
(gross profit for the time period) / average inventory
where average inventory = (sum of each weeks opening inventory at cost value + closing inventory of the last week) / (total number of weeks + 1)
Now, the GMROI-s of weeks and years become comparable.
How to improve GMROI
Shortcomings of GMROI
Is GMROI an actionable metric?
Once the product categories are different and have a different cost structure, things get more complicated. You should take into account several factors which are not readable from gross profit and inventory turnover: