How to Manage
Inventory For
Maximum Profit
By George Hines – President of George’s Music
“No Retailer ever filed bankruptcy
because their turns were too high”
-Michael Gould
Chairman of Bloomingdales
Question
Is Inventory:
A. an Asset
B. a Liability
Inventory Management
Problem: Too Much Inventory
• Reduces Available Cash
• Increased Freight
• Increased Handling and Storage
• Increased Shrinkage
• Increased Costs in Obsolescence
• Increased Markdowns to Reduce levels
• Increased Costs to Promote and Sell
Diamond of DOOM
PROFITS
We need to turn the
into
Inventory Management
Solution:
• Step One: Understand GMROI
• Step Two:
Invest Wisely – Focus on Profits
• Step Three: Measure with Key Indicators
Universal Laws:
“Law of Expectation”
Make a decision
$10,000
Gross Margin Return on Investment
Step 1 – Understanding GMROI
Formula:
(Annual GM$) ÷ (Avg. Annual BOH$)
= GMROI
Gross Margin Return on Investment
Example 1
Store Sales for the year are 1 million
Gross margin % is 30%
Gross Margin $ for the year is $300,000
Avg. Annual BOH Inventory is $300,000
$300,000 (GM$) ÷ $300,000 (Avg. BOH$)
= 1 (GMROI)
Two Ways to Increase GMROI:
1. Increase GM$
2. Increase Turn
1% increase in Gross Margin on
1 million dollars in sales =
$10,000 extra profit
Gross Margin Return on Investment
Example 2 – Increase Margin
Store Sales for the year are 1 million
Gross margin % is 40%
Gross Margin $ for the year is $400,000
Avg. Annual BOH Inventory is $300,000
$400,000 (GM$) ÷ $300,000 (Avg. BOH$)
= 1.33 (GMROI)
The NEW Norm:
More from Less
Embrace the 80/20 Rule
Gross Margin Return on Investment
Example 3 – Increase Turn
Store Sales for the year are 1 million
Gross margin % is 40% - Increase Turn
Gross Margin $ for the year is $400,000
Avg. Annual BOH Inventory is $200,000
$400,000 (GM$) ÷ $200,000 (Avg. BOH$)
= 2 (GMROI)
Gross Margin Return on Investment
REVIEW
Example 1:
GMROI is: $300,000 (GM$) ÷ $300,000 (Avg. BOH$) = 1
Example 2: Increase Gross Margin $
GMROI is: $400,000 (GM$) ÷ $300,000 (Avg. BOH$) = 1.33
Example 3: Increase Gross Margin and Turn
GMROI is: $400,000 (GM$) ÷ $200,000 (Avg. BOH$) = 2.0
Step 2:
Invest Wisely – Focus On Profits
1. Cleansing the Inventory
The 80/20 Rule
2. Budget and Purchasing Worksheet
3. Purchase Inventory by GMROI
Cleansing the Inventory
1. Ranking Inventory… 80/20 Rule…A List
2. YTD Gross Margin Dollars (Descending)
3. YTD Units Sold (Descending)
4. Eliminate Old and Bad Stock
Budgeting
Date
Budgeting and Purchase Tracker - Basic
Inventory
Change
Inventory
Level
June
Week 1
Week 2
Week 3
Beginning Monthly Inventory
300,000
Cost of Goods Sold
15,000
285,000
Budget for Purchases
10,000
295,000
Beginning Monthly Inventory
295,000
Cost of Goods Sold
12,000
283,000
Budget for Purchases
10,000
293,000
Continue Same as above…..
Purchase Inventory by GMROI
1. MIX Large vs. Small Goods by GMROI
2. Rank Vendors by GMROI
3. Rank Departments by GMROI
4. Rank Items by GMROI
It’s all about the
Funnel Down
What is your Mix of Goods?
GM$ and Turn
GM$ and Turn
Large Goods
Small Goods
The Power of GMROI
Large Goods vs Small Goods
Dep’t
Name
Annual
Sales
Annual
C.O.G.
Annual
GM $
Approx.
Annual
BOH $
Turnover
Rate
GMROI $
Total
Sales
1,000,000
630,000
370,000
285,000
2.21
1.30
Large
Goods
700,000
490,000
210,000
245,000
2.00
.86
Small
Goods
300,000
140,000
160,000
40,000
3.50
4.00
What is your Vendor Mix?
Vendor
• 30% Margin
• 2 Turns
Vendor
• 35% Margin
• 3 Turns
WINNER!
The Power of GMROI
Vendor vs Vendor
Dep’t
Name
Annual
Sales
Annual
C.O.G.
Annual
GM $
Approx.
Annual
BOH $
Turnover
Rate
GMROI $
Total
Sales
1,000,000
630,000
370,000
285,000
2.21
1.30
Vendor
A
30,000
24,000
6,000
8,000
3.00
.75
Vendor
B
36,000
24,000
12,000
8,000
3.00
1.50
What is your Dept Mix?
Keyboards – Dept. B
Guitars – Dept A
The Power of GMROI
Department vs Department
Dep’t
Name
Annual
Sales
Annual
C.O.G.
Annual
GM $
Approx.
Annual
BOH $
Turnover
Rate
GMROI $
Total
Sales
1,000,000
630,000
370,000
285,000
2.21
1.30
Dept A
50,000
25,000
25,000
12,500
2.00
2.0
Dept B
100,000
65,000
35,000
25,000
2.6
1.4
What is your Item Mix?
25’ XLR Cable
•
•
•
•
Cost $5 estimate
Sell $15 estimate
Invest $65 (13 units)
Profit : $195 estimate
Studio Mic Pack
•
•
•
•
Cost $65 estimate
Sell $99 estimate
Invest $65
Profit : $34 estimate
The Power of GMROI
Item vs Item
Dep’t
Name
Annual
Sales
Annual
C.O.G.
Annual
GM $
Approx.
Annual
BOH $
Turnover
Rate
GMROI $
Total
Sales
1,000,000
630,000
370,000
285,000
2.21
1.30
Item A
Example
6,000
2,000
4,000
1,000
2.00
4.00
Item B
Example
10,000
7,500
2,500
2,500
3.00
1.00
The Power of GMROI
Measure: Key Indicators Chart
Jan Feb
Gross
Sales
GM%
GM$
INV.
BOH $
GM
ROI
Mar Apr
May Jun
Jul
Aug Sep Oct Nov Dec Tot
Review
1. Make a Decision on how much you want to
earn
$_________________
2. Invest Wisely – Focus on Profit
Choose your method
3. Measure Progress with Key Indicator
Worksheets
Make Inventory an
ASSET
Not a Liability
Retail Owners Institute
http://www.retailowner.com/
• Look at GMROI Calculators
• Financial Cash Flow Worksheets
• Training Tools
• Benchmarks for the industry
George Hines – President, George’s Music
ghines@georgesmusic.com
Result: Happy Store Owner