Saying Goodbye to GMROI
In short, there is a much larger profit impact from increasing gross margin than
there is from reducing the level of inventory. The two profit levers in the GMROI
model are not even close to equal.
From a GMROI perspective, though, reducing inventory is actually better than
increasing the gross margin percentage. The GMROI after the inventory
reduction is 222.2%, while the GMROI from increasing margin is only 220.0%. In
both cases GMROI went up, but the weaker of the two levers gets credit for
better performance. Turn and Earn shows the same set of results, albeit with
slightly different numbers.
GMROI will always make low gross margin items look better than they are and
make high gross margin items look worse than they are. It will also almost always
make actions that produce small profit improvements look good and actions that
make large profit improvements look bad. It is a serious limitation that impact
inventory investment decisions daily.