GMROI Case Study

Companies generally allocate a majority of its money towards inventory. Gross Margin Return on Investment (GMROI) is an essential tool that many companies use to analyze its ability to buy and sell inventory in a profitable manner. GMROI is the measure of how many dollars a company has made for each dollar of investment in inventory, allowing you to compare categories and products (Chapter 12 slides). It is calculated by either dividing gross margin by average inventory cost or by multiplying gross margin percent by the sales to stock ratio. Using this calculation allows companies to separate winning and losing products, which is vital to creating a more profitable product mix. Calcuations of GMROI using gross margin and average inventory

A useful tool in managing inventory is calculating an order point for each product. An order point is the lowest number of units that a product can reach before a replenishment is issued. Essentially, when inventory reaches this point, retailers know it is time to reorder the particular product. Determining the correct order point is vital to managing merchandise. If inventory goes too low, a retailer will likely run out of stock before the next order arrives if they do not calculate the order point accurately(chapter 12 slides). The order point is calculated by multiplying sales per week by lead time plus review time, then by adding buffer stock to that solution (Chapter 12 slides). By using order point, you are close to guaranteeing to a high degree of certainty that you will never stock out. Calculations of products x,y,z reveal that the order point of Product X is 90, Product Y is 1,470 and Product Z is

Every business is continually working towards growing its profits. Through profit maximization, businesses can find the best price levels to achieve its profitability goals. This method allows companies to set different product at prices that return maximum revenue and profitability. Profit maximizing prices are important because they have a positive long-run effect on profit, rather than markdowns, which create excitement but inevitably have a negative long term profit effect. In order to find this equilibrium price, a company must determine its consumer’s price elasticity or price sensitivity (Chapter 14 slides). This is determined by comparing the change of new and old quantities in correlation to the change of new and old prices (Chapter 14 slides). Once the price elasticity is determined, a company must multiple the elasticity by price per unit of the specific product, divided by the elasticity of price plus one (chapter 14 slides). Essentially, by using supply and demand figures, retailers are able to find an equilibrium price in which supply equals demand. This creates some sort of “compromise price” with the consumer, thus yielding the most profit for that product. Calculations showed Product A has an elasticity of -1.36 and a calculated profit maximization price of $302.22, Product B has an elasticity of -2.5 and a calculated profit maximization price of $50.00, and Product C has an elasticity of -1.67