how to manage inventory for maximum profit by george hines – president of george’s music

How to Manage Inventory For

Maximum Profit By George Hines – President of George’s Music

“No Retailer ever filed bankruptcy because their turns were too high”

-Michael GouldChairman of Bloomingdales

Question

Is Inventory:A. an AssetB. a Liability

Problem: Too Much Inventory

• Reduces Available Cash• Increased Freight • Increased Handling and Storage• Increased Shrinkage• Increased Costs in Obsolescence• Increased Markdowns to Reduce

levels• Increased Costs to Promote and Sell

Inventory Management

PROFITS

Diamond of DOOM

We need to turn the

into

Solution:

• Step One: Understand GMROI

• Step Two: Invest Wisely – Focus on Profits

• Step Three: Measure with Key Indicators

Inventory Management

Universal Laws:

“Law of Expectation”Make a decision

$10,000

Step 1 – Understanding GMROI

Gross Margin Return on Investment

Formula:

(Annual GM$) ÷ (Avg. Annual BOH$)

= GMROI

Example 1

Store Sales for the year are 1 millionGross margin % is 30%

Gross Margin $ for the year is $300,000Avg. Annual BOH Inventory is $300,000

$300,000 (GM$) ÷ $300,000 (Avg. BOH$)

= 1 (GMROI)

Gross Margin Return on Investment

Two Ways to Increase GMROI:

1. Increase GM$

2. Increase Turn

1% increase in Gross Margin on

1 million dollars in sales =

$10,000 extra profit

Example 2 – Increase Margin

Store Sales for the year are 1 millionGross margin % is 40%

Gross Margin $ for the year is $400,000Avg. Annual BOH Inventory is $300,000

$400,000 (GM$) ÷ $300,000 (Avg. BOH$)

= 1.33 (GMROI)

Gross Margin Return on Investment

The NEW Norm:

More from LessEmbrace the 80/20 Rule

Example 3 – Increase Turn

Store Sales for the year are 1 millionGross margin % is 40% - Increase Turn

Gross Margin $ for the year is $400,000Avg. Annual BOH Inventory is $200,000

$400,000 (GM$) ÷ $200,000 (Avg. BOH$)

= 2 (GMROI)

Gross Margin Return on Investment

REVIEW

Example 1:GMROI is: $300,000 (GM$) ÷ $300,000 (Avg. BOH$) = 1

Example 2: Increase Gross Margin $GMROI is: $400,000 (GM$) ÷ $300,000 (Avg. BOH$) = 1.33

Example 3: Increase Gross Margin and TurnGMROI is: $400,000 (GM$) ÷ $200,000 (Avg. BOH$) = 2.0

Gross Margin Return on Investment

Step 2: Invest Wisely – Focus On

Profits

1. Cleansing the InventoryThe 80/20 Rule

2. Budget and Purchasing Worksheet

3. Purchase Inventory by GMROI

Cleansing the Inventory

1. Ranking Inventory… 80/20 Rule…A List

2. YTD Gross Margin Dollars (Descending)

3. YTD Units Sold (Descending)

4. Eliminate Old and Bad Stock

BudgetingDate Budgeting and Purchase Tracker -

BasicInventory Change

InventoryLevel

June

Week 1 Beginning Monthly Inventory 300,000

Cost of Goods Sold 15,000 285,000

Budget for Purchases 10,000 295,000

Week 2 Beginning Monthly Inventory 295,000

Cost of Goods Sold 12,000 283,000

Budget for Purchases 10,000 293,000

Week 3 Continue Same as above…..

Purchase Inventory by

GMROI

1. MIX Large vs. Small Goods by GMROI

2. Rank Vendors by GMROI

3. Rank Departments by GMROI

4. Rank Items by GMROI

It’s all about the

Funnel Down

What is your Mix of Goods?

GM$ and TurnLarge Goods

GM$ and TurnSmall Goods

Large Goods vs Small Goods

Dep’tName

AnnualSales

AnnualC.O.G.

AnnualGM $

Approx.AnnualBOH $

TurnoverRate

GMROI $

Total Sales

1,000,000

630,000 370,000 285,000 2.21 1.30

Large Goods

700,000 490,000 210,000 245,000 2.00 .86

SmallGoods

300,000 140,000 160,000 40,000 3.50 4.00

The Power of GMROI

• 35% Margin• 3 Turns

Vendor

• 30% Margin• 2 Turns

WINNER!

Vendor

What is your Vendor Mix?

Vendor vs Vendor

Dep’tName

AnnualSales

AnnualC.O.G.

AnnualGM $

Approx.AnnualBOH $

TurnoverRate

GMROI $

Total Sales

1,000,000

630,000 370,000 285,000 2.21 1.30

Vendor A

30,000 24,000 6,000 8,000 3.00 .75

Vendor B

36,000 24,000 12,000 8,000 3.00 1.50

The Power of GMROI

Guitars – Dept A

Keyboards – Dept. B

What is your Dept Mix?

Department vs Department

Dep’tName

AnnualSales

AnnualC.O.G.

AnnualGM $

Approx.AnnualBOH $

TurnoverRate

GMROI $

Total Sales

1,000,000

630,000 370,000 285,000 2.21 1.30

Dept A 50,000 25,000 25,000 12,500 2.00 2.0

Dept B 100,000 65,000 35,000 25,000 2.6 1.4

The Power of GMROI

What is your Item Mix?

25’ XLR Cable Studio Mic Pack

• Cost $5 estimate

• Sell $15 estimate

• Invest $65 (13 units)

• Profit : $195 estimate

• Cost $65 estimate

• Sell $99 estimate

• Invest $65

• Profit : $34 estimate

Item vs Item

Dep’tName

AnnualSales

AnnualC.O.G.

AnnualGM $

Approx.AnnualBOH $

TurnoverRate

GMROI $

Total Sales

1,000,000

630,000 370,000 285,000 2.21 1.30

Item AExample

6,000 2,000 4,000 1,000 2.00 4.00

Item BExample

10,000 7,500 2,500 2,500 3.00 1.00

The Power of GMROI

Measure: Key Indicators Chart

Jan

Feb

Mar

Apr

May

Jun Jul Aug

Sep

Oct Nov

Dec

Tot

Gross Sales

GM%

GM$

INV.BOH $

GMROI

The Power of GMROI

Review

1. Make a Decision on how much you want to earn

$_________________

2. Invest Wisely – Focus on ProfitChoose your method

3. Measure Progress with Key Indicator Worksheets

Make Inventory an

ASSETNot a Liability

Retail Owners Institutehttp://www.retailowner.com/

• Look at GMROI Calculators• Financial Cash Flow Worksheets• Training Tools• Benchmarks for the industry

George Hines – President, George’s Music

ghines@georgesmusic.com

Result: Happy Store Owner