Using GMROI to Optimize SKU Rationalization and Drive Profits
If you’ve been following our posts on Gross Margin Return on Inventory (GMROI), you know it’s a powerful blend of product profitability and inventory asset cost (Gross Profit / Inventory Cost). Given GMROI’s unique ability to measure how individual products contribute to profitability and cash flow growth, it becomes an ideal tool for SKU rationalization. ️
Not familiar with SKU rationalization? It’s the process of reviewing your product hierarchy to identify items that aren’t meeting profitability and cash flow goals. Each SKU in a product-based business has associated overhead beyond just its cost. Some of these costs include:
1️⃣ Marketing: Managing pricing and ensuring each product stays competitive in the marketplace.
2️⃣ Purchasing: Monitoring reorder levels, issuing replenishment orders, and maintaining vendor relationships.
3️⃣ Warehouse: Receiving, stocking, cycle counting, and shipping items when orders are processed.
4️⃣ And so on…
If you’re operating in a regulated industry like food manufacturing, your overhead is even higher with requirements for lot traceability, quality control, quality assurance, etc., that a business selling humming bird feeders doesn’t.️
How GMROI can help with SKU rationalization: Start by targeting the lowest GMROI products and establish a review process:
1️⃣ Are we unable to raise prices on this product?
2️⃣ Have we optimized inventory levels based on service needs?
3️⃣ Do we have more profitable substitutes that can satisfy customers?
Feel free to customize this list, but it’s a great starting point to rationalize SKUs and trim the product hierarchy.
Need help calculating GMROIs for your product hierarchy? Let’s talk! We can provide the tools you need to make informed decisions.
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