GMROI stands for Gross Margin Return On Inventory. Some people like to think of it as "gross margin return on inventory investment" or gmroii. However, gmroi is a measure of gross profitabilty of an item. It really means what it says. If your software does not track it, do not fret. There are two ways of calculating it:

• Margin percent multiplied by the sales to inventory ratio OR
• Markup percent mulitplied by turns

GMROI can be calculated on each item, a vendor line, or a class of items. For example, lets say that we have a widget with turns of 6.0 and markup percent of 25.0. Then our gmroi would be 150.0. (6.0 x 25.0 = 150.0) Okay, what does this mean? This means that for every dollar that you put into this item/vendor line/class of items that you will make a gross $1.50 out of it. (Keep that item/line/class!!!)

Limitations...

• fill rates: If you have a high gmroi, check your fill rate. If your fill rate is low, then you are not keeping enough on-hand. Only you can make the decision for what minimum service levels you must maintain.
• terms:additional terms (dating or discounts) are not typically factored into the gmroi (unless they are adjusted into the average cost of the item(s)). If you have an item that has a low gmroi, check to see that you are not getting additional considerations (terms, dating, discounts, rebates, etc) As of yet, I have not been able to figure out how to factor in these additional considerations into the gmroi calculation. I would imagine that you could put a rough estimate into gmroi. Let's say you get an additional 1% cash discount ("1%/10, net 30 days" dating) and you always take your cash discounts from this vendor. Then I suppose you could put an additional 1% of you average purchase and multiply that times your turn rate. But, that really is not what gmroi is about. I guess I just wanted to demonstrate that gmroi is a good tool for reviewing broad categories' profit contribution.
• additional costs that are not included in average cost:For example, outbound freight will skew gmroi higher than it really is.

I saw another web site that had a similar chart to the one below. So I re-did it in excel. It is a great visual image of the turns to markup relationship or gmroi number. Note that there are some numbers that have been bolded. These bolded numbers are the minimum numbers that you should expect a gmroi to be. An easy way to think about it is, "For every dollar I put into this item, I get X back, on an annual basis." For example, if you markup an item 12% you must turn that item at least 9 times before you start to make money on that item.