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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.