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KNOWLEDGE LIBRARY

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27Jun

Warehouse Occupancy Percentage

Optimal storage utilization helps enforce healthy inventory management. In our early work with Honda their...

02Jun

Efficient Procurement Inventory

Efficient procurement inventory (EPI) is often required to realize steep discounts when a special opportunity...

02Jun

Inventory Carrying Rate

The inventory carrying rate (ICR) is the percent of the unit inventory value used to...

26Jun

Inventory Activity Profiling & Data Mining

Suppose you were sick and went to the doctor for a diagnosis and prescription.  When...

27Jun

Inventory Performance Measures

Inventory performance measures include financial, productivity , quality, and response time indicators for evaluating the efficiency and...

Gross Return on Inventory (GMROI)

The Return on Inventory (ROI) or Gross Margin Return on Inventory (GMROI) calculation treats inventory like the investment that it is and assesses the financial performance of the inventory as if it were an investment in a bank. The computation is as follows…

  • GMROIi = { [ USPi – UIVi ] x ADi } / AIVi
  • USPi = Unit Selling Price of Item i
  • UIVi =   Unit Inventory Value of Item i
  • ADi =   Forecast Annual Demand of Item i
  • AIVi =  Average Inventory Value of Item i

For example, if the unit selling price of an item is $25.00, the unit inventory value of the item is $15.00, the annual demand for the item is 5,000 units, and the average inventory value is $10,000.00, then the Gross Margin Return on Inventory is…

GMROI = { [$25.00 – $15.00] x 5,000 } / $10,000.00 = 5.00 or 500%

The trouble with inventory is it’s not a very flexible or liquid investment. Once it’s made or bought, you can’t reinvest that money and you can’t convert it into another resource. It’s a very risky asset in general. We’re looking for flexibility. If that’s the case, companies and SKUs with high turn rates and high GMROIs are much better investments than those with low turnover rates and low GMROIs.

 

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