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 Gould Chairman of Bloomingdales

Is Inventory: an Asset a Liability Question Why are we here? Ask for feedback - Universal Laws: Law of Expectation – Make a decision before we get started $ 10,000 min Question: Is Inventory an Asset or Liability? 3

Problem: Too Much Inventory Inventory Management 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 Evidence of a liability

Diamond of DOOM PROFITS

We need to turn the $ DOOM & GLOOM into

Solution: Inventory Management Step One: Understand GMROI Step Two: Invest Wisely – Focus on Profits Step Three: Measure with Key Indicators

“Law of Expectation” Universal Laws: Make a decision Why are we here? Ask for feedback - Universal Laws: Law of Expectation – Make a decision before we get started $ 10,000 min Question: Is Inventory an Asset or Liability?

$10,000 Why are we here? Ask for feedback - Universal Laws: Law of Expectation – Make a decision before we get started $ 10,000 min Question: Is Inventory an Asset or Liability? 9

(Annual GM$) ÷ (Avg. Annual BOH$) Gross Margin Return on Investment Step 1 – Understanding GMROI Formula: (Annual GM$) ÷ (Avg. Annual BOH$) = GMROI How do I determine GMROI Gross Margin Return on Investment Formula is: Average annual BOH Divided by annual GM$ Equals “x”

= 1 (GMROI) Store Sales for the year are 1 million Gross Margin Return on Investment Example 1 Store Sales for the year are 1 million Gross margin % is 30% Gross Margin $ for the year is $300,000 Avg. Annual BOH Inventory is $300,000 $300,000 (GM$) ÷ $300,000 (Avg. BOH$) = 1 (GMROI) How do I determine GMROI Gross Margin Return on Investment Formula is: Average annual BOH Divided by annual GM$ Equals “x” 11

Two Ways to Increase GMROI: Increase Turn

1% increase in Gross Margin on 1 million dollars in sales = $10,000 extra profit

Example 2 – Increase Margin Gross Margin Return on Investment Example 2 – Increase Margin Store Sales for the year are 1 million Gross margin % is 40% Gross Margin $ for the year is $400,000 Avg. Annual BOH Inventory is $300,000 $400,000 (GM$) ÷ $300,000 (Avg. BOH$) = 1.33 (GMROI) How do I determine GMROI Gross Margin Return on Investment Formula is: Average annual BOH Divided by annual GM$ Equals “x” 14

More from Less The NEW Norm: Embrace the 80/20 Rule Why are we here? Ask for feedback - Universal Laws: Law of Expectation – Make a decision before we get started $ 10,000 min Question: Is Inventory an Asset or Liability? 15

Example 3 – Increase Turn Gross Margin Return on Investment Example 3 – Increase Turn Store Sales for the year are 1 million Gross margin % is 40% - Increase Turn Gross Margin $ for the year is $400,000 Avg. Annual BOH Inventory is $200,000 $400,000 (GM$) ÷ $200,000 (Avg. BOH$) = 2 (GMROI) How do I determine GMROI Gross Margin Return on Investment Formula is: Average annual BOH Divided by annual GM$ Equals “x” 16

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 Turn GMROI is: $400,000 (GM$) ÷ $200,000 (Avg. BOH$) = 2.0 How do I determine GMROI Gross Margin Return on Investment Formula is: Average annual BOH Divided by annual GM$ Equals “x” 17

Step 2: Invest Wisely – Focus On Profits Cleansing the Inventory The 80/20 Rule Budget and Purchasing Worksheet 3. Purchase Inventory by GMROI

Cleansing the Inventory 1. Ranking Inventory… 80/20 Rule…A List YTD Gross Margin Dollars (Descending) YTD Units Sold (Descending) Eliminate Old and Bad Stock

Budgeting Date Budgeting and Purchase Tracker - Basic Inventory Change Level 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 12,000 283,000 293,000 Week 3 Continue Same as above…..

Purchase Inventory by GMROI 1. MIX Large vs. Small Goods by GMROI Rank Vendors by GMROI Rank Departments by GMROI Rank Items by GMROI

It’s all about the MIX

Funnel Down

What is your Mix of Goods? GM$ and Turn Large Goods GM$ and Turn Small Goods BY LARGE VS SMALL

Large Goods vs Small Goods The Power of GMROI Large Goods vs Small Goods Dep’t Name Annual Sales C.O.G. GM $ Approx. BOH $ Turnover Rate GMROI $ Total 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 Small 300,000 140,000 160,000 40,000 3.50 4.00

Vendor Vendor What is your Vendor Mix? A B 30% Margin 2 Turns WINNER!

The Power of GMROI Vendor vs Vendor Dep’t Name Annual Sales C.O.G. Approx. BOH $ Turnover Rate GMROI $ Total 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 12,000 1.50

What is your Dept Mix? Keyboards – Dept. B Guitars – Dept A

Department vs Department The Power of GMROI Department vs Department Dep’t Name Annual Sales C.O.G. GM $ Approx. BOH $ Turnover Rate GMROI $ Total 1,000,000 630,000 370,000 285,000 2.21 1.30 Dept A 50,000 25,000 12,500 2.00 2.0 Dept B 100,000 65,000 35,000 2.6 1.4

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

The Power of GMROI Item vs Item Dep’t Name Annual Sales C.O.G. GM $ Approx. BOH $ Turnover Rate GMROI $ Total 1,000,000 630,000 370,000 285,000 2.21 1.30 Item A Example 6,000 2,000 4,000 1,000 2.00 4.00 Item B 10,000 7,500 2,500 3.00 1.00

Measure: Key Indicators Chart 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 $ GM ROI

Review ACTION PLAN Make a Decision on how much you want to earn $_________________ Invest Wisely – Focus on Profit Choose your method Measure Progress with Key Indicator Worksheets

ASSET Make Inventory an Not a Liability Why are we here? Ask for feedback - Universal Laws: Law of Expectation – Make a decision before we get started $ 10,000 min Question: Is Inventory an Asset or Liability? 34

Retail Owners Institute http://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