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

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Presentation on theme: "How to Manage Inventory For Maximum Profit By George Hines – President of George’s Music."— Presentation transcript:

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 Question Is Inventory: A. an Asset B. a Liability

4 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 Inventory Management

5 PROFITS Diamond of DOOM

6 We need to turn the into

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

8 Universal Laws: “Law of Expectation” Make a decision

9 $10,000

10 Step 1 – Understanding GMROI Gross Margin Return on Investment Formula: (Annual GM$) ÷ (Avg. Annual BOH$) = GMROI

11 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) Gross Margin Return on Investment

12 Two Ways to Increase GMROI: 1.Increase GM$ 2.Increase Turn

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

14 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) Gross Margin Return on Investment

15 The NEW Norm: More from Less Embrace the 80/20 Rule

16 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) Gross Margin Return on Investment

17 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 Gross Margin Return on Investment

18 Step 2: Invest Wisely – Focus On Profits 1.Cleansing the Inventory The 80/20 Rule 2.Budget and Purchasing Worksheet 3. Purchase Inventory by GMROI

19 Cleansing the Inventory 1. Ranking Inventory… 80/20 Rule…A List 2.YTD Gross Margin Dollars (Descending) 3.YTD Units Sold (Descending) 4.Eliminate Old and Bad Stock

20 Budgeting DateBudgeting and Purchase Tracker - BasicInventory Change Inventory Level June Week 1Beginning Monthly Inventory300,000 Cost of Goods Sold15,000285,000 Budget for Purchases10,000295,000 Week 2Beginning Monthly Inventory295,000 Cost of Goods Sold12,000283,000 Budget for Purchases10,000293,000 Week 3Continue Same as above…..

21 Purchase Inventory by GMROI 1. MIX Large vs. Small Goods by GMROI 2.Rank Vendors by GMROI 3.Rank Departments by GMROI 4.Rank Items by GMROI

22 It’s all about the

23 Funnel Down

24 What is your Mix of Goods? GM$ and Turn Large Goods GM$ and Turn Small Goods

25 Large Goods vs Small Goods Dep’t Name Annual Sales Annual C.O.G. Annual GM $ Approx. Annual BOH $ Turnover Rate GMROI $ Total Sales 1,000, ,000370,000285, Large Goods 700,000490,000210,000245, Small Goods 300,000140,000160,00040, The Power of GMROI

26 35% Margin 3 Turns Vendor 30% Margin 2 Turns WINNER! Vendor What is your Vendor Mix?

27 Vendor vs Vendor Dep’t Name Annual Sales Annual C.O.G. Annual GM $ Approx. Annual BOH $ Turnover Rate GMROI $ Total Sales 1,000, ,000370,000285, Vendor A 30,00024,0006,0008, Vendor B 36,00024,00012,0008, The Power of GMROI

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

29 Department vs Department Dep’t Name Annual Sales Annual C.O.G. Annual GM $ Approx. Annual BOH $ Turnover Rate GMROI $ Total Sales 1,000, ,000370,000285, Dept A50,00025,000 12, Dept B100,00065,00035,00025, The Power of GMROI

30 What is your Item Mix? 25’ XLR CableStudio 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 Item vs Item Dep’t Name Annual Sales Annual C.O.G. Annual GM $ Approx. Annual BOH $ Turnover Rate GMROI $ Total Sales 1,000, ,000370,000285, Item A Example 6,0002,0004,0001, Item B Example 10,0007,5002, The Power of GMROI

32 Measure: Key Indicators Chart JanFebMarAprMayJunJulAugSepOctNovDecTot Gross Sales GM% GM$ INV. BOH $ GM ROI The Power of GMROI

33 Review 1. Make a Decision on how much you want to earn $_________________ 2. Invest Wisely – Focus on Profit Choose your method 3. Measure Progress with Key Indicator Worksheets

34 Make Inventory an ASSET Not a Liability

35 Retail Owners Institute 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


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