I wrote this video script was as part of an educational content series for wholesale inventory and pricing managers. It explains the concept of GMROI (gross margin return on investment) and how it to expose the true performance numbers of your inventory stock.
Business education video script
Understanding GMROI
Voiceover
When it comes to inventory management, looks can be deceiving. Some products look profitable, flying off your shelves as fast as you can get it in stock, but are quietly draining your cash. Other products may have fewer turns, but might be your undercover superstar. Some products look profitable, but quietly drain your cash.
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show inventory shelves with mixed products, some highlighted in red
Voiceover
When it comes to managing inventory, the difference between guessing and knowing comes down to the tools you use.
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show tools and a toolbox
Voiceover
One of the most powerful and most overlooked tools available is GMROI. If you are not familiar with it, you are not alone. GMROI, or Gross Margin Return On Investment, measures how well your inventory turns into profit.
Visual
text on screen GMROI transforms into Gross Margin Return On Investment
inventory image with arrow pointing to a dollar sign
Voiceover
It compares the profit you make to the value of the inventory you carry, so you can see which products are earning their space and which are not. This calculation only applies to inventory you have on hand. It doesn’t apply to direct or drop ship orders. But GMROI is more than a margin metric. It is a decision tool.
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show a multitool
Voiceover
It shows you how profitable, or how costly, a product, a product line, or even your entire inventory really is.
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show one tool on the multitool
Voiceover
It helps you spot products that are dragging down your margins so you can adjust your sales mix.
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show another tool
Voiceover
It highlights where you may be overpaying, giving you leverage to negotiate better costs.
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show another tool
Voiceover
And it shows where you are carrying too much stock, so you can free up cash and space.
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show another tool
Voiceover
Before we look at how to use GMROI, let’s break down how it works.
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show a blank equation on a chalkboard
Voiceover
Start with your sales. Subtract your cost of goods sold. That gives you your gross margin. Then divide that by your average inventory value.
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fill in the equation step by step
Voiceover
Most people multiply the result by one hundred to make it easier to read as a whole number.
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add the multiplier to the equation
Voiceover
Once you have the formula, you can apply it to any product, category, or location in your business.
Let’s look at a single product. A widget.
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image of a widget
show GMROI equation with labels
Voiceover
Our widget generated eleven thousand dollars in sales.
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replace Sales with 11000
Voiceover
It cost nine thousand dollars to purchase.
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replace COGS with 9000
Voiceover
That leaves us with a gross margin of two thousand dollars.
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update top of equation to 2000
Voiceover
The average inventory value on hand was eighteen hundred dollars.
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replace Average Inventory Value with 1800
Voiceover
Run the calculation and the GMROI comes out to about one hundred eleven.
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show final result
Voiceover
That means for every one hundred dollars of inventory, this product generated about one hundred eleven dollars in gross margin. This is a product you want to keep in stock and potentially invest in.
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add a positive indicator
Voiceover
This works for more than just single products. Let’s look at a full product line. Brand X.
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show base formula in words
add Brand X label or logo
Voiceover
Brand X generated eighty nine thousand dollars in sales last quarter.
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replace Sales with 89000
Voiceover
It cost eighty thousand dollars to purchase.
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replace COGS with 80000
Voiceover
That leaves a gross margin of nine thousand dollars.
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update top of equation to 9000
Voiceover
But the average inventory value was twelve thousand dollars.
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replace Average Inventory Value with 12000
Voiceover
Run the calculation and the GMROI is seventy five.
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show final result
Voiceover
That means for every one hundred dollars of inventory, you only generated seventy five dollars in gross margin. This product line is underperforming. Worse than that, you’re losing twenty-five cents on every dollar you spend to purchase it from your supplier. It’s time to renegotiate or remove Brand X from your inventory.
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add a negative indicator
Voiceover
GMROI shows you how much money you are making or losing for every dollar of inventory you carry. In the first example, each dollar of inventory generated a positive return.
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show first equation
Voiceover
In the second example, each dollar of inventory reduced your overall return.
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show second equation
clear page
Voiceover
This is the difference between guessing and managing. With GMROI, you can see exactly where your inventory is working for you and where it is working against you. In upcoming videos, you will learn how to use GMROI to improve inventory performance, test “what-if” scenarios, and negotiate from a stronger position.
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show icons representing inventory, analysis, and negotiation