What is GMROII?

January 2, 2019

ROI (Return on Investment) is a crucial measure when calculating distribution business investment. Yet, when it comes to inventory, a more specified ROI formula is necessary to ensure you’re actually making money. For instance, most distributors (and their salespeople) look at how much money they make on a sale. While this is important, there’s much more to consider. Let’s take a deeper look.

A2Z Wholesale’s purchasing agent buys 10 cases of lag bolts at a great price: $100/case. From this, the sales department sells three cases at $225/case. Did they make a profit? Sure. $100 x 3 = $300 cost, and they sold those three cases for $675. So, mathematically they made $375.

But do they have any money? The answer is no. Why? Though they did make a profit, they had to pay their supplier $1000 but they only took in $675. That means they’re still short $325. In other words, A2Z Wholesale made money but ended up having none.

This example perfectly demonstrates the value of using GMROII (Gross Margin Return on Inventory Investment). Instead of only looking at Gross profit per sale, companies should be looking at three numbers versus just one:

  • Gross profit dollars
  • Average inventory during the year
  • Turns–how often the item sells in a year

By calculating GMROII, you will know how much money you are making or losing on all inventory because you look at the money from the items that sold plus the “loss” from the items that didn’t sell.

A GMROII number greater than 1 means you’re making and keeping money while GMROII less than one is cause for concern. Now that you understand GMROII, take a look at the following chart. Using the sample information, can you determine which product line your salespeople want to sell?

 

Interested in taking a deeper dive into GMROII or want to ask additional questions? Contact us today.

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Highlighting distributor successes

Customers share their ROI achievements. Click each testimonial to read the full case study.

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Empire Bolt & Screw

“Out of the gate, our first cost savings occurred in accounting. What was previously a full-time job went down to just 2 hours a day. This change alone saved us $40,000 in year-over-year labor costs.”

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Patlin Inc.

“Distribution One has allowed us to deliver 30% more orders without having to increase our labor force.”

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The Nut Place

“ERP-ONE actually helps our business be more productive. We operate more efficiently because our software performs like a world-class product. And that’s not marketing hype. We trust in its reliability. It is one of the best decisions our company made.”

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Colorado Industrial Packaging

“ERP-ONE tracks product costs and sales margins for us… that benefit alone has added 4% to our bottom line after the first year of implementation and has more than paid for the cost of ERP-ONE.”

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A-Jax Fasteners and Tools

“Enhanced productivity, lower operational costs, higher service levels, and stronger customer relationships—it’s all been attained through our ability to provide continuous real-time data generated through the myriad of programs within ERP-ONE.”

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VLC Distribution

“Having spent 30 years on the operations side of distribution using SAP and AS400 software, I have not encountered a better system than ERP-ONE. The efficiencies and expandability has allowed us to improve our sales by $500,000 per employee in a year.”

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On Time Supply

“We had immediate visibility into which sales representatives were performing and which product lines were providing the best return for our business.”

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Cathy’s Concepts

“The ability to manage orders online has created greater efficiency in their business and has delivered more flexibility in modifying and tracking orders. Changes to an order instantly cascade all the way through the terminals and the processing stations cutting production time by at least 15%.”

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Intercorp

“I’m excited about the future. We processed hundreds of orders in the first week and project our webstore will be handling over 10,000 orders per year.”

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