GMROI has been a traditional measurement used by retailers and wholesale distributors. Many are able to measure and report GMROI down to the item level. Since these organizations typically resell the items they purchase without any manufacturing value added, the calculation is straight forward.
GMROI use by manufacturers
GMROI has been used much less frequently in manufacturing organizations, most likely because of the difficulty of associating raw material inventory with specific end item products. However, with much more extensive databases and data collection along with a shift to the greater use of contract manufacturing, it can be possible to calculate and track GMROI in manufacturing organizations as well.
At a minimum, GMROI can be computed at the organizational level based on published financial statements. And if inventory is categorized in a way that allows discrete chunks of inventory to be grouped together, such as by product line, project or program, GMROI can be categorized and evaluated on that basis.
What is a good number?
Generally the higher the better.
To set a benchmark for the organization, use either current financial statements or budgets for the future. Calculate the GP %, ITO and compute the existing or target GMROI.
Measure every appropriate segment against this target. You will identify groups that are exceeding the targets and also those that are not pulling their own weight.
While most organizations have some "loss leaders", it is important to understand which items/groups that are under-performing. Choices are to live with the performance, improve the margin, improve the turnover or in extreme cases, discontinue the poor performing product.
In one organization, a product line extension was under way. Part of the financial evaluation was to project the margin and the turnover. Historically, these had been plugged numbers, identical for all items in the product line. However, when better estimates of turnover at the item level was calculated based of historical demand history (which was highly reliable), coupled with the lot sizes required for production, the GMROI for some items was very low. A decision was made not to include the low GMROI items in the line extension.
Is a high GMROI always good?
Not always. If a product or group of products has an abnormally high turnover, there may be service issues not reflected in the GMROI.
In one organization, a product line had margins over 50% and a turnover rate over 50 turns. The GMROI was astronomical. However, in reality, the products were only made once a week, immediately shipped out and were backordered the balance of the week. There were severe penalty costs associated with the poor in-stock service levels. Production was increased to reduce the turnover to more rational levels, service improved and GMROI still exceeded the target.
