Average GMROII
Financial textbooks often show a formula with a yearly or monthly calculation. When tactical decisions are required for variable time periods, it is helpful for systems to be set up so that GMROII can be analyzed at either the yearly, monthly, or weekly level. Due to the textbook GMROII formula, depending on the time period, a different result would occur.
For example:
- ($100,000 annual profit) / ($25,000 average inventory cost) = GMROII of 4.0
- ($8,000 July profit) / ($25,000 average inventory cost) = GMROII of 0.32
- ($4,000 first two weeks of July profit) / ($25,000 average inventory cost) = GMROII of 0.16
Therefore it is advantageous to use Average Weekly GMROII which takes time out of the picture. That way, the retailer looks at similar types of numbers regardless of how many weeks are being looked at. The formula is: Average Weekly GMROII = (Profits for the total time period) / (Sum of each week ending inventory cost value)
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