1. How to Manage Inventory For Maximum Profit By George Hines – President of George’s Music

2. “No Retailer ever filed bankruptcy because their turns were too high”
-Michael Gould
Chairman of Bloomingdales

3. 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

4. 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

5. Diamond of DOOM
PROFITS

6. We need to turn the $
DOOM & GLOOM
into

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

8. “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?

9. $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

10. (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”

11. = 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

12. Two Ways to Increase GMROI:
Increase Turn

13. 1% increase in Gross Margin on 1 million dollars in sales =
$10,000 extra profit

14. 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
$400,000 (GM$) ÷ $300,000 (Avg. BOH$)
= (GMROI)
How do I determine GMROI
Gross Margin Return on Investment Formula is:
Average annual BOH
Divided by annual GM$
Equals “x” 14

15. 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

16. 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

17. 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

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

19. 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

20. 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…..

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

22. It’s all about the
MIX

23. Funnel Down

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

25. 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

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

27. 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

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

29. 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

30. 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

31. 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

32. 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

33. 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

34. 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

35. 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

36. Result: Happy Store Owner