how to manage inventory for maximum profit by george hines – president of george’s music
TRANSCRIPT
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How to Manage Inventory For
Maximum Profit By George Hines – President of George’s Music
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“No Retailer ever filed bankruptcy because their turns were too high”
-Michael GouldChairman of Bloomingdales
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Question
Is Inventory:A. an AssetB. a Liability
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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
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PROFITS
Diamond of DOOM
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We need to turn the
into
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Solution:
• Step One: Understand GMROI
• Step Two: Invest Wisely – Focus on Profits
• Step Three: Measure with Key Indicators
Inventory Management
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Universal Laws:
“Law of Expectation”Make a decision
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$10,000
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Step 1 – Understanding GMROI
Gross Margin Return on Investment
Formula:
(Annual GM$) ÷ (Avg. Annual BOH$)
= GMROI
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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
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Two Ways to Increase GMROI:
1. Increase GM$
2. Increase Turn
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1% increase in Gross Margin on
1 million dollars in sales =
$10,000 extra profit
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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
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The NEW Norm:
More from LessEmbrace the 80/20 Rule
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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
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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
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Step 2: Invest Wisely – Focus On
Profits
1. Cleansing the InventoryThe 80/20 Rule
2. Budget and Purchasing Worksheet
3. Purchase Inventory by GMROI
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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
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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…..
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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
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It’s all about the
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Funnel Down
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What is your Mix of Goods?
GM$ and TurnLarge Goods
GM$ and TurnSmall Goods
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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
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• 35% Margin• 3 Turns
Vendor
• 30% Margin• 2 Turns
WINNER!
Vendor
What is your Vendor Mix?
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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
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Guitars – Dept A
Keyboards – Dept. B
What is your Dept Mix?
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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
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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
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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
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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
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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
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Make Inventory an
ASSETNot a Liability
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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
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Result: Happy Store Owner