To help with this, there are tools being used by the big end of town retailers and there is no reason you cannot use them – after all you are also a retailer.
You order a product in. You put it in the store. You put a price on it and generate a Gross Profit, sell it and then reorder. Every product, department and store goes through this cycle.
The tools described in this article measure $ Gross Profit against the three major costs in a hardware operation:
These costs are usually separated out in financial reporting but, by linking them to Gross Profit Margin and comparing for example departmental results, decisions can be made about the right amount of inventory, allocation of space, staff time and investment.
I will use two case study departments whose financial information is based on theoretical yearly data:
Gross Margin 35%
Average Stock Holding $50,000
Selling space 100m2
Staffing wage allocation* $60,000
Gross Margin 30%
Average Stock Holding $45,000
Selling space 150m2
Staffing wage allocation* $40,000
(*Note: Wage allocation can be determined by staffing time in the department that is selling, counting, ordering and general housekeeping.)
Now to illustrate our three tools, using Department A’s figures:
1. GMROII (Gross Margin Return on Inventory Investment)
The Gross Profit Margin return on Inventory is $2.10 for every $1 invested.
More sales at a higher margin and a quicker stock turn mean higher return on investment in inventory.
2. GMROS (Gross Margin Return on Space)
So your Gross Margin Return on Space is $1050 per m2.
This tool allows comparisons in the use of floor space and effective space allocation.
3. GMROL (Gross Margin Return on Labour)
So $1 of wages generates $1.75 Gross Profit Margin.
A useful tool in assessing staffing levels and payroll costs per department.
Now for a comparison between Departments A and B:
1. GMR on Inventory Investment
|$2.10 to $1||$1.33 to $1|
2. GMR on Space
|$1050 per m2||$400 per m2|
3. GMR on Labour
|$1 generates $1.75||$1 generates $1.50|
From this comparison table it is obvious that Department A is easily outperforming Department B.
One interpretation could be that Department B has too much inventory, that it’s not turning its stock over quick enough or that the Gross Margin percentage is too low. Also too much space may be allocated to Department B while its staff labour costs are not generating the same sort of $ Gross Margin as Department A.
These three tools are useful when comparing departments. But, at “the upper end of town”, these tools are used to drill down to product categories and individual products!
In these times it is increasingly important to monitor and improve the productivity of the major costs in your business that is inventory, selling space and wages.
Peter Cox is a senior consultant for Macquarie Advisory Partnership based in Sydney. He has over a decade of experience training and consulting in the retail hardware industry. He conducts key-note addresses, and management and sales workshops, which are aimed at improving profitability and liquidity in one of Australasia’s most competitive retail environments. Phone 0061 438 712 200 or visit www.petermcox.com.au