The retail quiz

 

I ran this post as a decision-making challenge at Inside Retailing.

I do it basically to lillustrate the benefits fo belonging to a MasterMind group.

We are building a Smart Community: HERE

The intention is not to embarrass anyone with a trick question – but your comment can be anonymous anyway.

Product 1

  • Sales $200K
  • 50% GM

Product 2

  • Sales $300K
  • 33% GM

A rep is making you an offer to buy additional stock of $5k of Product 1.

Assumptions:

  • You don’t have sufficient free cash, and can only do it by reducing stock of Product 2 to the same amount.
  • All other things are equal. (E.g. The additional stock will sell as well as the existing stock, the decision you make is instantaneous and simultaneously effective, etc.)
  • BUT DO NOTE: these products are different (A & B) - the 'equality' refers to extraneous/trick variables 

 
 What are you going to do next?

 

STOP HERE AND FIGURE OUT BEFORE YOU CONTINUE


Don't cheat....

 

Additional Info

Product 1

 

  • Average Inventory at Cost Price: $20K

 

 

Product 2

 

  • Average Inventory at Cost Price: $15K

 

 

STOP HERE AND FIGURE OUT BEFORE YOU CONTINUE


Don't cheat....

 

The answer:

You should want to calculate your GMROI.

Read more about GMROI here.

These table show that whilst the higher margin product appears to be attractive, the higher stockturn of Product B has a bigger final impact (gross margin return on inventory investment)

 

Conclusion:

Whilst the higher margin product appears to be attractive, the higher stockturn of Product 2 has a bigger total impact (gross margin return on inventory investment) on the GP.

You could simply calculate GMROI very easily

OR you can tediously work through comparative statements to calculate the GM impact to discover that:

  • Increasing Product 1 increases your Gross Margin Dollars (+$25,000)
  • Decreasing Product 2 decreases your Gross Margin Dollars (-$33,00)

If you take the GMROI shortcut, you will know that:

  • GMROI of $5 means GMD impact is ($5 x $5000 = $25k)
  • GMROI of $6.60 means GMD impact is ($6.60 x $5000 = $33k)

Of course the key to remember is that as you ADD stock to your inventory, the stockturn will likely start to decrease, but that is what we mean by ‘all things being equal’ as an assumption

 

OR you can tediously work through comparative statements as below.

 

Product 1

 
 

Increase by

$5,000

 

Margin

50%

Margin

 

Current

Future

 

Net Sales

 $       200,000

 $         250,000

 

Gross Profit

 $       100,000

 $         125,000

 $           25,000

Ave Stock @ Cost

 $         20,000

 $            25,000

 

Ave Stock @Retail

 $         40,000

 $            50,000

 

Stockturn

5.00

5.00

 

GMROI

5.00

5.00

 

 

(Sorry about this but I can't fix the layout - just visually line up the the rows with the same row headers.

Product 2

 

Reduce by

$5,000

 

33%

 

Current

Future

 

 $         300,000

 $             200,000

 

 $           99,000

 $               66,000

-$      33,000

 $           15,000

 $               10,000

 

 $           22,388

 $               14,925

 

13.40

13.40

 

6.60

6.60