Understanding Gross Margin Impacts on Profitability
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Transcript of Understanding Gross Margin Impacts on Profitability
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Understanding Gross Margin Impacts on Profitability
Annual Catalog Conference
June, 2001
Presented by:
George J. Mollo, Jr.
GJM Associates
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© GJM Associates
George J. Mollo, Jr.
� Identify Gross Margin Components
� Review Mathematics Components for Gross Margin Determination
� Explore the GMROI concept as a productivity measure for category evaluation
Gross Margin Audit: Agenda
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© GJM Associates
George J. Mollo, Jr.
Gross Margin Audit: Audit Steps
� Identify Components of Gross Margin
� Report and Track
� Evaluate by individual category and then in total
� Use GMROI to enhance business decisions
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© GJM Associates
George J. Mollo, Jr.
Gross Margin Audit: GOALS
� Increase Margin Dollars vs. Percentages
� Reduce Cost of Goods Sold
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© GJM Associates
George J. Mollo, Jr.
Gross Margin Audit: Margin Components(front end)
� Initial Product Costs
� Initial Mark-on
� Inbound freight costs
� Samples
� Receiving and Marking
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© GJM Associates
George J. Mollo, Jr.
� Discounts
� Invoice Terms, Specials, Incentives
� Anticipation
� Quantity discounts (Initial orders, reorders)
� Bulk Warehouse discount
Gross Margin Audit: Discounts, Allowances and Chargebacks
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© GJM Associates
George J. Mollo, Jr.
� Allowances
� Advertising
� Photography
� Inside Catalog placement
� Defective Merchandise
� Year End Allowance
Gross Margin Audit: Discounts, Allowances and Chargebacks
Gross Margin Audit: Discounts, Allowances and Chargebacks
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© GJM Associates
George J. Mollo, Jr.
� Chargebacks
� Contract Violations - Late shipments, early shipments, packaging errors
� Excessive Markdowns
� Excessive Returns
� Defective Merchandise
Gross Margin Audit: Discounts, Allowances and Chargebacks
Gross Margin Audit: Discounts, Allowances and Chargebacks
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© GJM Associates
George J. Mollo, Jr.
Gross Margin Audit: Margin Erosion(back end )
� Markdowns
� Defective merchandise, write offs
� Shrinkage
� Operational costs of Backorders, Return processing
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© GJM Associates
George J. Mollo, Jr.
Gross Margin Audit: Margin Mathematics(+) Gross Margin
Net Product Sales 100.0%
Initial Mark-on 50.0%
Discounts 4.0%
Allowances 5.0%
Anticipation 0.1%
Vendor Chargebacks 0.3%
Year End Allowance 2.0%
Product Gross Margin 61.4%
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© GJM Associates
George J. Mollo, Jr.
Gross Margin Audit: Margin Mathematics( - ) Gross Margin
Product Gross Margin 61.4%
Damages 0.2%
Samples 0.3%
Freight In 2.0%
Markdowns 6.8%
Shrinkage 0.5%
Backorder Processing 1.5%
Net Maintained Margin 50.1%
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© GJM Associates
George J. Mollo, Jr.
Gross Margin Audit: Goals
� Generate Capital for Growth
� Growth (Items, Categories, Catalog, Company)
� Optimize Capital Usage
� Increase Economic Value of Business
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© GJM Associates
George J. Mollo, Jr.
Gross Margin Audit: Return On Investment
Commonly defined as:
� Dividend Yield (+ Market fluctuations) on stock
� Interest Rate on Savings accounts
� Interest Yield (+ Market fluctuations) on bonds
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© GJM Associates
George J. Mollo, Jr.
Gross Margin Audit: ROI
Return on Investment is a function of:
� Profit Margin
� Rate of Turnover of Invested Capital
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© GJM Associates
George J. Mollo, Jr.
Gross Margin Audit: ROI
“....No other financial principal with which I am acquainted serves better than rate of return as an objective aid to business judgment.”
Alfred P. Sloan, Jr.
“My Years With General Motors”
President of General Motors 1923-1937;
Founded the Sloan-Kettering Institute for Cancer Research, 1945.
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© GJM Associates
George J. Mollo, Jr.
Gross Margin Audit: Return On Investment
$ 5.00 profit X $ 100.00 sales = 10%
$ 100.00 sales $ 50.00 investment
(percentage) x (ratio) = ROI
5% X 2.0 = 10%
OR
(profit) $ 5.00 = 10%
(investment) $ 50.00
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© GJM Associates
George J. Mollo, Jr.
Gross Margin Audit: GMROI
� Gross Margin Return on InvestmentGM “per inventory dollar Invested”
� Combines into one number ....
Maintained Margin
Inventory Turnover
Total Dollars on hand in Inventory
� Provides ROI on this major asset
� Indicates profitability variations due to product category differences only
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© GJM Associates
George J. Mollo, Jr.
Gross Margin Audit: Gross Margin per Inventory Dollar Invested
Gross Profit = Gross
Inventory Investment Return
Gross X Ratio of = Gross
Profit % Sales to Return
Inventory
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© GJM Associates
George J. Mollo, Jr.
Gross Margin Audit: GMROI(examples)
Turns X Maintained Margin / COGS =GMROI
Basics Import Branded Licensed
Mix Private Label Merchandise Goods
Product Cost 43.5% 40.0% 50.0% 55.0%
Initial Mark on 56.5% 60.0% 50.0% 45.0%
Discounts/Allow 4.5% 1.5% 4.0% 4.0%
Freight (IN) -1.5% -3.0% -1.5% -1.5%
Markdowns -8.0% -10.0% -8.0% -5.0%
Total Cost of Goods 48.5% 51.5% 55.5% 57.5%
Maintained Margin 51.5% 48.5% 44.5% 42.5%
Inventory Turn 3 2.5 5 6.6
GMROI 319% 235% 401% 487%
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© GJM Associates
George J. Mollo, Jr.
Gross Margin Audit: GMROI(examples)
Turns X Maintained Margin / COGS =GMROI
Example: 3.0 x 51.5% /48.5% = 318.6%
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© GJM Associates
George J. Mollo, Jr.
Gross Margin Audit: Inventory Turns(formula)
Inventory Turns = Annual Cost of Goods Sold / Average Inventory (at cost)**
**Average includes 13 periods……
Example: $10.0mil COGS / $ 3.1mil Avg. Inv = 3.23 annual turns
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© GJM Associates
George J. Mollo, Jr.
Gross Margin Audit
Negative Impacts
to Profitability
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© GJM Associates
George J. Mollo, Jr.
Gross Margin Audit:Margin Erosion
� Markdowns (Overstock)
� Damages, Write-Offs
� Operational Costs of Backorders & Returns
� Shrinkage
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© GJM Associates
George J. Mollo, Jr.
Gross Margin Audit: Backorder Costs
� Split packages
� Postage Expedited delivery expense (in & out)
� Packing Supplies expense
� Manpower - multiple handling
� Additional Phone Costs
� Additional Cancels
� Customer Retention Rates
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© GJM Associates
George J. Mollo, Jr.
Gross Margin Audit: Backorder Improvements
� Better forecasting
� Improved inventory flow
� Communication to DC on priorities
� Profitable backorder chasing
� Recover costs thru vendor chargebacks
� Buy overstock on low price items
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© GJM Associates
George J. Mollo, Jr.
Gross Margin Audit: Backorder Improvements
Example:
Cost 4.50$
Retail 10.00$
Margin 55.0%
Backorder Cost 5.00$
Liquidation Costs @80% 3.60$
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© GJM Associates
George J. Mollo, Jr.
Gross Margin Audit: Canceled Demand(including credit rejects)
� Costs associated with processing the order
• Phone time & costs
• Keying
� Potential Overstocks
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© GJM Associates
George J. Mollo, Jr.
Gross Margin Audit: Cancellation Improvements
� Better forecasting (Planning!)
� Improved inventory flow, etc.
� Credit rejects analysis
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© GJM Associates
George J. Mollo, Jr.
Gross Margin Audit: Returns
� Reduction of sales
� Warehouse handling
� Potentially missed sales
� Returns postage - customer requests
� CSR time
� Postage (customer confirmation)
� Damaged returns
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© GJM Associates
George J. Mollo, Jr.
� Analysis of top reasons for returns
– Attack top reasons - returns will probably drop by more than 25%
� Establish “up-front” QC efforts
Gross Margin Audit: Returns Improvements
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© GJM Associates
George J. Mollo, Jr.
Gross Margin Audit: Overstocks
� Cost of liquidation - recovery costs are generally low
� Warehouse space
� Handling Inefficiencies
� Carrying cost of inventory
� Extra manpower to coordinate liquidation
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© GJM Associates
George J. Mollo, Jr.
Gross Margin Audit: Overstock Improvements
� Implement Assortment Planning
� Implement Open-To-Buy controls
� Project overstocks and liquidate “in season”
� Cancel Open PO’s
� NEGOTIATE with vendors
� In season bouncebacks, “add-on programs”, sale books
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© GJM Associates
George J. Mollo, Jr.
Gross Margin Audit: Cost of Goods Sold (COGS)
� Have all merchandise costs been considered?
� Additional prep charges?
� All inbound freight costs included?
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© GJM Associates
George J. Mollo, Jr.
Gross Margin Audit: Cost of Goods Sold (COGS)
� Imports -- Complete landed cost
• FOB cost
• duty
• ocean/air freight
• broker’s fees, agent’s fees
• insurance
• bank L.C. costs (amendments)?
• local freight from POE to dock, etc.
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© GJM Associates
George J. Mollo, Jr.
Gross Margin Audit: COGS Improvements
� Margin check
� All factors included?
� What is the assortment plan by department?
� Set thresholds
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© GJM Associates
George J. Mollo, Jr.
Gross Margin Audit: COGS Improvements
� Negotiate costs
� Adjust retails
� Negotiate lowest base price (contrary to earlier statements)
� Review costs of “Inbound Freight”& small package shipments
� Vendor “Drop” Shipments – Review how shipping charges are applied
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© GJM Associates
George J. Mollo, Jr.
Gross Margin Audit: Production/Marketing Costs
� Are we developing merchandise to fill the allocated pages? Or are we building pages based on merchandise availability?
� Item level space cost analysis -- Sell Ratio
� Proper list analysis
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© GJM Associates
George J. Mollo, Jr.
Gross Margin Audit: Distribution Costs
� Information flow for:
• Receipts flow
• BO priorities
• Item estimates for proper pick set-up
� Is merchandising arriving in a ship ready condition?
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© GJM Associates
George J. Mollo, Jr.
Gross Margin Audit: Distribution Costs
� Are inbound/outbound freight shipments efficiently consolidated ?
� Are automated procedures up to date? Are they relevant to today’s business?
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Understanding Gross Margin Impacts on Profitability
Annual Catalog Conference
June, 2001
Presented by:
George J. Mollo, Jr.
GJM Associates