Problems with GMROI

Here I explained and showed you how to calculate the GMROI which is the most important of all retails KPIs.

It shows how much profit you are making compared to your stock investment and is used to reviewstock items for profit. Many retailers run and study their GMROI every month as it is a very powerful tool. However, it should be noted that like any measurement, it has some shortcomings that if you use it, you need to take into account. Here are some common issues.

- Items that sell out do better with GMROI. This is a common problem in retail; it causes even marginal products to look like stars. That is why you have to look at the sales too of the item.

- Suppliers have different payment cycles, for example, a supplier who insists on monthly payments and their items have a stock turn greater than 12, actually cost you nothing. A similar situation occurs if some items are sold on consignment such as telco products, in both these cases the GMROI is not giving you a meaningful figure.

- Some items you need to have as, they bring in customers, they may have low GMROI, but you must have them.

- Many costs are not included in the calculation such as space, handling costs, electricity and equipment costs. These costs are frequently not minor. If, for example, an item needs more handling, then another item, then it’s costs is higher, but you will not see this in the GMROI.

- Volume is important too. An item that sells more is often desirable just for that reason.

Like everything, you need to have some intelligence and thinking too, we are still a long way from having a computer run a shop.