The magical number is 1
Just to remind you, one of the more popular GMROII formula is: Gross profit after reductions (e.g. markdowns) divided by average monthly stock at cost.
It does not measure volume but rather efficiency.
It can be measured over any period but a year is typical.
It can also be used at any level from SKU to company level.
Let’s take an SKU stocked by an exclusive jeweller. The cost price is $40,000 and it is marked at a retail price of $100,000.
After a year the jeweller sells the item for $80,000 – an expected discount built into the original retail price.
According to the GMROII formula, the GP after reductions was $40,000 and the average monthly stock at cost was $40,000. Therefore the GMROII is 1. This is not good.
Taking the $40,000 at the beginning of the year and putting it into the bank would have generated more income.
Clearly then anything less than 1 is bad and anything above 1 is better. If GMROII is less than 1 you are losing money and running at a loss.
The same holds good for an item bought at $4, marked $10 and sold after a year at $8.
The GMROII is still 1 and hence the comment above that volume is immaterial.
Incidentally in this case the stock turn is 0.8 which is not as good a measure because stock turn usually uses monthly opening stock at retail.
The essential difference between GMROII and planned stock turn is that stock turn does not factor in markdowns.
If markdowns are zero, stock turn and GMROII should be similar. But of course this doesn’t happen.
Designing an incentive scheme for buyers using GMROII and GP$ keeps things very simple, provided you can inculcate GMROII and provided it is really understood.