I Have Been Thinking About Inventory

A number of things that I have been working on has me thinking about the inventory that a distributor holds.

What metrics do distributors use to measure their inventory in terms of their business performance?

I have come across the term:  GMROI

That is Gross Margin Return on Investment.

GMROI evaluates profitability of your inventory with a simple ratio, analyzing the ability to turn that inventory into cash at a profitable rate above the cost of the inventory. So how do you calculate GMROI? The calculation is quite simple: to calculate GMROI take (gross margin in dollars) / (average inventory investment in dollars).

Another is: ROWC

That is Return on Working Capital. 

It is quite similar to Return on Inventory Investment.  Essentially it is looking at how efficient a business is at returning a profit on invested or borrowed capital.

Both GMROI and ROWC consider how efficiently a business is selling or turning over its inventory.

This leads to another common inventory management concept, the Turn and Earn Index.

Turn and Earn Index is also commonly referred to as the Turn/Earn Ratio, Turn/Earn Formula, or just as Turn and Earn.

This is a simple and straight-forward method to help with inventory management, and can help to evaluate either the inventory as a whole, or a specific line (or even individual product) in that inventory.

A business that has inventory frequently turning over might operate on lower margins (think Costco) and a business that has a wide variety of items (potentially selling subpacks of cases) that do not sell as frequently must operate on higher margins (think an automotive part store).

What ever the situation, the following will greatly erode GMROI, ROWC or a Turn and Earn Index:

Slow moving inventory

Obsolete inventory

Dead inventory

I have been part of a group working on a solution to help distributors with this problem inventory.  More details are coming soon but do feel free to reach out to me to learn more!