How to Manage Inventory For Maximum Profit By George Hines – President of George’s Music.
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Transcript of How to Manage Inventory For Maximum Profit By George Hines – President of George’s Music.
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 GouldChairman of Bloomingdales
Question
Is Inventory:A. an AssetB. a Liability
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
Inventory Management
PROFITS
Diamond of DOOM
We need to turn the
into
Solution:
• Step One: Understand GMROI
• Step Two: Invest Wisely – Focus on Profits
• Step Three: Measure with Key Indicators
Inventory Management
Universal Laws:
“Law of Expectation”Make a decision
$10,000
Step 1 – Understanding GMROI
Gross Margin Return on Investment
Formula:
(Annual GM$) ÷ (Avg. Annual BOH$)
= GMROI
Example 1
Store Sales for the year are 1 millionGross margin % is 30%
Gross Margin $ for the year is $300,000Avg. Annual BOH Inventory is $300,000
$300,000 (GM$) ÷ $300,000 (Avg. BOH$)
= 1 (GMROI)
Gross Margin Return on Investment
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
Example 2 – Increase Margin
Store Sales for the year are 1 millionGross margin % is 40%
Gross Margin $ for the year is $400,000Avg. Annual BOH Inventory is $300,000
$400,000 (GM$) ÷ $300,000 (Avg. BOH$)
= 1.33 (GMROI)
Gross Margin Return on Investment
The NEW Norm:
More from LessEmbrace the 80/20 Rule
Example 3 – Increase Turn
Store Sales for the year are 1 millionGross margin % is 40% - Increase Turn
Gross Margin $ for the year is $400,000Avg. 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 TurnGMROI is: $400,000 (GM$) ÷ $200,000 (Avg. BOH$) = 2.0
Gross Margin Return on Investment
Step 2: Invest Wisely – Focus On
Profits
1. Cleansing the InventoryThe 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
BudgetingDate Budgeting and Purchase Tracker -
BasicInventory Change
InventoryLevel
June
Week 1 Beginning Monthly Inventory 300,000
Cost of Goods Sold 15,000 285,000
Budget for Purchases 10,000 295,000
Week 2 Beginning Monthly Inventory 295,000
Cost of Goods Sold 12,000 283,000
Budget for Purchases 10,000 293,000
Week 3 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 TurnLarge Goods
GM$ and TurnSmall Goods
Large Goods vs Small Goods
Dep’tName
AnnualSales
AnnualC.O.G.
AnnualGM $
Approx.AnnualBOH $
TurnoverRate
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
SmallGoods
300,000 140,000 160,000 40,000 3.50 4.00
The Power of GMROI
• 35% Margin• 3 Turns
Vendor
• 30% Margin• 2 Turns
WINNER!
Vendor
What is your Vendor Mix?
Vendor vs Vendor
Dep’tName
AnnualSales
AnnualC.O.G.
AnnualGM $
Approx.AnnualBOH $
TurnoverRate
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
The Power of GMROI
Guitars – Dept A
Keyboards – Dept. B
What is your Dept Mix?
Department vs Department
Dep’tName
AnnualSales
AnnualC.O.G.
AnnualGM $
Approx.AnnualBOH $
TurnoverRate
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
The Power of GMROI
What is your Item Mix?
25’ XLR Cable Studio Mic Pack
• Cost $5 estimate
• Sell $15 estimate
• Invest $65 (13 units)
• Profit : $195 estimate
• Cost $65 estimate
• Sell $99 estimate
• Invest $65
• Profit : $34 estimate
Item vs Item
Dep’tName
AnnualSales
AnnualC.O.G.
AnnualGM $
Approx.AnnualBOH $
TurnoverRate
GMROI $
Total Sales
1,000,000
630,000 370,000 285,000 2.21 1.30
Item AExample
6,000 2,000 4,000 1,000 2.00 4.00
Item BExample
10,000 7,500 2,500 2,500 3.00 1.00
The Power of GMROI
Measure: Key Indicators Chart
Jan
Feb
Mar
Apr
May
Jun Jul Aug
Sep
Oct Nov
Dec
Tot
Gross Sales
GM%
GM$
INV.BOH $
GMROI
The Power of GMROI
Review
1. Make a Decision on how much you want to earn
$_________________
2. Invest Wisely – Focus on ProfitChoose your method
3. Measure Progress with Key Indicator Worksheets
Make Inventory an
ASSETNot a Liability
Retail Owners Institutehttp://www.retailowner.com/
• Look at GMROI Calculators• Financial Cash Flow Worksheets• Training Tools• Benchmarks for the industry
George Hines – President, George’s Music
Result: Happy Store Owner
