1245169062_Chap012(0) - GMROI Gross Margin Return on...

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12-1 GMROI = Gross Margin Percent x sales-to-stock ratio = gross margin x net sales net sales avg inventory at cost = gross margin avg inventory at cost Inventory Turnover = (1 – Gross Margin Percent) x sales-to-stock ratio GMROI Gross Margin Return on Investment
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12-2 How do buyers influence GMROI? Components that buyers can control: Gross margin component: Price: Prices that buyers set Prices that buyers negotiate with vendors Sales-to-stock ratio component: Popularity of the merchandise buyers buy GMROI = Gross Margin Percent x sales-to-stock ratio = gross margin x net sales net sales avg. inventory at cost = gross margin avg. inventory at cost
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12-3 ROI and GMROI Asset Productivity Measures Strategic Corporate Level Return on Assets = Net Profit Total Assets Merchandise Management Level GMROI = Gross Margin Avg. Inventory at Cost
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12-4 Illustration of GMROI Merchandise categories with different margin/turnover profiles can be compared and evaluated Canned food Canned food Fresh Bakery Fresh Bakery
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12-5 GMROI for Selected Department in Discount Stores
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12-6 Measuring Sales-to-Stock Ratio Net Sales/Average Inventory at Cost Retailers report on an annual basis If the sales-to-stock ratio for a three-month season is 2.3, the annual sales-to-stock ratio will be 9.2 Estimation of average inventory Use information system: averaging the inventory in stores and distribution centers at the end of each day Divide the sum of the end-of-month (EOM) inventories for several months by the number of months
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12-7 Managing Inventory Turnover Inventory turnover = Net Sales Average inventory at retail Inventory turnover = Cost of goods sold Average inventory at cost Average inventory = Month1 + Month2 + Month 3 +… Number of months Inventory Turnover helps assess the buyer’s performance in managing asset (merchandise inventory) But focusing on increasing inventory turnover can actually decrease RMROI Buyers need to consider the trade-offs associated with managing Inventory Turnover Calculation
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12-8 Inventory Turnover Month Retail Value of Inventory EOM January $22,000 EOM February 33,000 EOM March 38,000 Total Inventory $93,000 Average inventory = $93,000 ÷ 3 = $31,000
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12-9 Inventory Turnover and Stock-to-Sale Ratio Inventory turnover = Net Sales (at retail) Average inventory at retail Inventory turnover = Cost of goods sold (at cost) Average inventory at cost Sock-to-Sales Ratio = Net Sales Average cost of inventory
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12-10 Advantages of Rapid Turnover Increased sales volume Less risk of obsolescence and markdowns Improved salesperson morale More resources to take advantage of new buying opportunities
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12-11 Approaches for Improving Inventory Turnover Reduce number of categories Reduce number of SKUs within a category Reduce number of items in a SKU BUT if a customer can’t find their size or color or brand, patronage and sales decrease!
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1245169062_Chap012(0) - GMROI Gross Margin Return on...

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