White Paper: Inventory as an Investment

As store owners, we must purchase products before we have anything to sell. We are truly investors more than we are shop-keepers; but instead of a tidy, manageable investment portfolio, we have tens of thousands of inventory items to manage.

Inventory profitability and GMROI

While there are many ideas about what makes a store profitable, a single measurement just doesn’t provide enough information. However, evaluating inventory investments by gross margin return-on-investment (GMROI) considers all factors. An item could have a decent velocity code (move quickly off your shelves), but be a poor investment; while another item could have a poor margin or anemic sales, but still be a great investment. GMROI accounts for these factors to provide a true picture of an inventory item’s investment performance.

In our experience, inventory requires a GMROI of at least 300% per year on average to be considered profitable. Some inventory investments will exceed that threshold, which is necessary to subsidize underperformers.

The impact of overstock on your bottom line

One of the most devastating factors against GMROI is overstock. Stock depth should be enough to meet expected demand for 2 to 4 order cycles and nothing more. Purchase cost contributes directly to margin, but it’s not the most important factor in GMROI. Order cycle and minimum order quantity are critical to a healthy GMROI. The more frequently products can be ordered, the lower their warehousing costs. Higher investments due to high order minimums lower GMROI and take dollars from other inventory investments.

A case study: Order quantity and GMROI

To illustrate the impact of order quantity on GMROI, let’s look at an item that typically requires a $48.00 investment due to high order minimums and how paying a slightly higher purchase price results in a higher GMROI.

Item	Supplier 1	Supplier 2	Supplier 3
Inventory Stocking Depth (in weeks)	2	2	2
Minimum order quantity	24	1	6
Sales per week	3	3	3
Order quantity per order cycle	24	6	6
Purchase cost per unit	$2.00	$2.35	$2.15
Retail price per unit	$2.99	$2.99	$2.99
Investment	$48.00	$14.10	$12.90
52-week profit	$154.44	$99.84	$131.04
GMROI	322%	708%	1016%

Supplier 1 requires a minimum order of 24 units at $2.00 each. Supplier 2 has no minimum and sells the same unit for $2.35 each. Supplier 3 requires a minimum order of 6 and a purchase price of @2.15 per unit. A higher purchase price more than doubled GMROI when using Supplier 2 or Supplier 3.

Yes, the profit (in dollars) was lower. However, we have $33.90-$35.10 left to invest in another product in the two scenarios with higher purchase costs and lower order minimums. If we invest those dollars in another item that meets our required 300% GMROI, the profit dollars are recouped and then some:

Item	Supplier 1	Supplier 2	Supplier 3
Investment in additional inventory	$0.00	$33.90	$35.10
52-week profit for additional inventory at 300% GMROI	$0.00	$101.70	$105.30
Total investment	$48.00	$48.00	$48.00
Total 52-week profit	$154.44	$201.54	$236.34
Total GMROI	322%	420%	492%

Business-as-usual invested $48.00, earned $154.44, and achieved a GMROI of 322%. Paying a higher purchase price to avoid overstock cost, the same $48.00 in investment dollars earned between $201.54 and $236.34, and resulted in an overall GMROI of 420-492%.

GMROI and your bottom line

Careful evaluation of high minimum order products and consideration of alternate sources may be your ticket to increasing your GMROI and, ultimately, your bottom line.

This concept of measuring an inventory item’s performance using GMROI and increasing your bottom line through tight inventory control should be fundamental to your point-of-sale software package. At an absolute minimum it should:

• Identify underperforming items that might benefit from looking at suppliers with lower order minimums.
• Identify inventory items that are frequently overstocked due to high order minimums.

We believe these tools will help you make the most of your investment dollars and increase your annual profits.

Learn more

If you’d like to learn more about inventory management, GMROI, or point-of-sale software, please visit Paladin Point of Sale or call Customer Support at 800-725-2346.

Copyright © 2022 Paladin Data Corporation. All Rights Reserved. The information in this document is furnished for informational use only, is subject to change without notice, and should not be construed as a commitment by Paladin Data Corporation. Paladin Data Corporation assumes no responsibility or liability for any errors or inaccuracies that may appear in this publication. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, recording, or otherwise, without the prior written permission of Paladin Data Corporation.