Is Gross Margin Return on Inventory an Overrate Metric?
We hear it all the time—Gross Margin Return on Inventory (GMROI) is hailed as the holy grail of purchasing decisions. But is it really that simple? Sure, GMROI focuses on boosting margins while reducing assets, and that sounds great for cash flow. But there’s a trap here: focusing too much on GMROI can blind you to broader business opportunities.
Here are three ways GMROI could lead you astray if you don’t keep the bigger picture in mind:
1️⃣ Eliminating low-GMROI items too quickly: Just because a product has a poor GMROI doesn’t mean it’s worthless. It might be essential for customer retention or future growth. Don’t cut too hastily.
2️⃣ Over-focusing on a few high-GMROI items: Yes, these products are critical—but beware of becoming too dependent. You could be missing out on diversifying your offerings and positioning for long-term success.
3️⃣ GMROI goals can become tunnel vision: Setting company-wide targets is helpful, but focusing too heavily on them can stifle innovation. Purchasing decisions need to be dynamic and flexible, not just driven by a single metric.
Now, don’t get me wrong—GMROI is valuable, but only when used strategically and balanced with other key metrics. If you’re relying too much on GMROI and losing sight of broader goals, it’s time to rethink your approach. Need help building a more holistic purchasing strategy? Reach out today, and we’ll help you connect the dots!
