One of the ways you can simplify controlling your retail business is through Gross Margin Return on Inventory Investment (GMROII) – commonly called JimRoy. It is, arguably, one of the most important Retail Key Performance Indicators (KPI).
Why is GMROII so important? Because it takes into account 3 very important operational activity areas in retail:
1. Sales performance
2. Desirability (demand) of the product (or buying effectiveness)
Here is the formula for GMROII:
GMROII = GM% x (Sales / Avg. Inventory)
As a numerical example, if we assume Gross Margin of 33.33% and the store net sales of 24M over 12 months with 12 month average inventory of 4M, then:
GMROII % = 33.33 x (24 / 4) = 199.98% (some people use margin as a fraction, in which case this result becomes 1.9998)
Which means that for every $100 investment you make on your inventory, you get $199.98 back! Pretty good deal!
This metric is also a great tool for benchmarking similar stores, districts and regions as well as companies within the same retail vertical. It is also used to evaluate suppliers / vendors. You can apply GMROI to department, category, brand and SKU as well. A very versatile KPI indeed.
Keep a close eye on your GMROII, since through reporting of one number, you can reduce the amount of reports you have to look at or, at least, you will be consuming less time figuring out what’s going on.
Next week, we are going to dig even deeper into how you can manage your whole business through just one number
All the Success!
PS. Retail Math-Made Simple, 3rd Edition has a lot of information on KPI’s and their calculations. Choose from an electronic download, printed version, DVD presentation or any combination. Learn how your retail business operates by the numbers.
You can check it all out here.