SECOND PART of three-part series: Want to be in the Top 25% for profitability? work on your inventory. There’s simply no escaping GMROI.
Learn What it Takes To Be Top Dog (2)
Last month, I reviewed some of the findings from the latest FIT Performance Group Study. Each year, we take the financial statements of our FIT performance group members (and Profit Mastery workshop attendees) and isolate the Top 25% based on how much owner’s discretionary profit, or ODP, they make as a percentage of sales.
ODP allows you to measure profit before the owner decides how much pay to take out.
While there was not one single thing that led to a company making the Top 25%, a big factor was how efficiently they managed their cost of goods sold and all other expenses. See last month’s column). The second big factor is inventory productivity.
Retailers commonly measure the productivity of their inventory using gross margin return on inventory (GMROI). A high (good) number results when inventory investment is low (due to fast turnover) and/or gross profits are high (due to both high volume of sales and high gross profit margin as a percent of sales.
FIT members have shown impressive improvement in GMROI since 2005. The median GMROI for all participants increased by 10 percent. This means that in 2007, half of all participating companies earned $1.22 in gross profit for every dollar invested in inventory, up from $1.10 in 2005. The Top 25% had significantly higher inventory productivity — earning $1.37 in gross profit for every dollar invested in inventory.
GMROI is a critical benchmark, because poor inventory management is one of the leading causes of cash-flow shortages and high debt for retail jewelers.
The higher GMROI in 2007 could be attributed to several shared factors:
Performance group members set goals in several key areas, including GMROI, at the beginning of the year. They then track these benchmarks on a quarterly basis, comparing their performance against that of the Top 25%.
What gets measured gets managed. If they see their GMROI slipping, they seek out the best practices from their group’s GMROI leaders and apply them right away.
GMROI leaders tend to buy for a targeted margin, know their price points, and carry only the lines that give them the desired target. Some members will even select only vendors that have a demonstrated ability to help them reach their GMROI goals.
Laurie Owen is senior vice president at Business Resource Services. Contact her at brs@brs-seattle.com.