Learning Goal: Use GMROI to measure profitability of inventory investment and manage purchasing with OTB.


Complete Lesson Content:
GMROI (Gross Margin Return on Inventory Investment) = Gross Margin ($) / Average Inventory at Cost. It tells you how many gross margin dollars are generated for every dollar invested in inventory. A GMROI of 3.0 means you earn $3 for every $1 of inventory. OTB (Open‑to‑Buy) is the purchasing budget available to buy new merchandise, considering planned sales, markdowns, and current inventory. OTB = Planned Sales + Planned Markdowns + Planned EOM Inventory – BOM Inventory – On Order.
Step‑by‑step Explanation:

  1. A product line had gross margin of $50,000 and average inventory cost of $20,000. GMROI = 2.5.
  2. For a month: planned sales $80,000, planned markdowns $5,000, EOM inventory target $30,000, BOM inventory $25,000, on order $10,000. OTB = $80k + $5k + $30k – $25k – $10k = $80,000.
    **Best Practices:** Track GMROI by category to see where your inventory is working hardest.
    **Common Mistakes:** Forgetting to include markdowns or current orders in OTB, leading to overbuying.
    **Real Industry Example:** A category with a GMROI of 5.0 receives more open‑to‑buy dollars than one with 1.5.
    **Mini Case Study:** A planner miscalculated OTB, overbought by $20,000, and ended up with excess stock that had to be liquidated. A standardized OTB sheet solved it.
    Practical Activity: Using a provided OTB template, fill in numbers for a given scenario.
    Assignment: Calculate GMROI for two departments and write a recommendation on where to invest more inventory dollars.
    Lesson Summary: GMROI and OTB are advanced tools that connect finance and assortment decisions.
    Key Takeaways:
  • GMROI > 3 is generally strong.
  • OTB prevents overbuying.
  • Use both to optimize inventory profitability.
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