2. 
Economies of Scale

Seasonal Fluctuations: Make-to-stock type
of goods

Price speculation

Hedge against uncertainties

Decoupling inventory

3. 
Cycle Stock

Safety Stock

Anticipatory Inventory

Pipeline Inventory

Decoupling Inventory

4. 
Dependent Demand – MRP and JIT.

Independent Demand – Continuous
and
Periodic Review.

Safety
stock calculation for independent
demand.

5. 
ABC Classification

VED
Classification
:
Vital,
Essential
and
Desirable

HML Classification: High value, Medium and
Low Value

FSND – Fast Moving, Slow Moving, Non-Moving
and Dead

6. 
SDE – Scarce, Difficult and Easy to procure.

GOLF – Government-controlled items, Openly
available items, Locally available items and
Foreign-supplied items.

S-OS: Seasonal and Off-seasonal items.

XYZ: Closing values of the inventory at the end of
stock taking exercise – X – High inventory values, Z
– Low tie-up capital and Y – those in between.

7. A
B
C
V
I
I
I
E
I
II
II
D
I
II
III

8. 
Method of measuring ROI in inventory – ‘Turn
and Earn’ calculation of Gross Margin Return
on Inventory Investment (GMROI or GMROII)

GMROI = ($Gross Profit / $Sales) * ($Sales /
$Average inventory at cost)

‘Earn’ term is simply the Gross Profit Margin

‘Turn’ term = Turnover rate / (1 – GPM%)

GMROI = GPM% * [Turnover rate / (1 – GPM%)]

9. 
An item has sales of $10000, & Gross Profit of
$1000. Then GPM% = 10.

Cost of sales is $9000, then Cost of Goods Sold
% or COGS% = 90%.

If the average inventory $900, then Inventory
Turnover = 9000 / 900 = 10

This item earns 1.11 in Gross profit for every
dollar carried in inventory. ($1000 Gross profit /
$900 average inventory).

10. 
GMROI = GPM% * (Turnover / (1 – GPM%))

GMROI = 10 * (10 / (1 – 10))

GMROI = 10 * (10 / 90) = 10 * (1/9) = 1.11

11. 
GMROI analysis provides 3 benefits:
› It shows how buying and pricing procedures
combine with inventory management procedures
to affect profitability.
› It shows how product with relatively low gross profit
margin and high turnover can be just as profitable
as those with higher margins and lower turnover.
› It demonstrates that as gross margins decrease,
inventory turnover must increase or profitability will
suffer.

12. 
Incorporate
GMROI
into
your
Sales
and
Production planning meetings.

Calculate GMROI for your company’s major
products. Find out which products account for
most of your investment in inventory. This analysis
can
reveal
significant
profit-improvement
opportunities.

Add GMROI to your list of critical profit factors.
Reductions in GMROI should serve as red flag
requiring investigation and corrective actions.