In the past decade, products and brands have proliferated inexorably. Today, not only do we have the core product itself, but also multiple variants of the product, in different packaging, placed in different channels to satisfy particular consumer niches. To achieve this, product companies increasingly pour funds into new product R&D and efficient processes, segmenting consumer markets to find those niches where profitability lurks. In many cases product proliferation works and adds to revenue, profits, consumer satisfaction, increases brand strength, and other critical variables.
However, with the vastly increasing number of products and brands in the marketplace, the management of those products comes increasingly into the spotlight. With a broad selection of products, how can product companies, wholesalers, distributors and retailers ensure that product turns as efficiently as in the past? How can these players become more responsive to the marketplace? After all, managing the inventory of an increasingly diverse product base is more difficult than managing a single product.
Product organizations of all types constantly struggle with this dilemma and the importance of managing this diverse product base efficiently is only becoming more paramount. To manage product proliferation, companies throughout the supply chain employ varying tactics. Tactics differ between the types of industry players, but at least one tactic remains constant: the measurement of product effectiveness on the bottom line results of the company. Retailers have long known about measuring product categories, and even individual products down to the stock-keeping unit (SKU) level based on the Gross Margin Return on Investment (GMROI). Product manufacturers, wholesalers and distributors typically track product velocity in terms of raw turns and monitor other financial and balanced scorecard measures. What is recognized to a lesser extent, regardless of the industry player, is monitoring and managing product profitability on an ongoing and consistent basis.
How would a retailer know when profitability from the merchandise mix is maximized? How is this product profitability managed on an ongoing basis? What products from their entire portfolio should wholesalers and distributors emphasize to increase sales and profits? Which products should manufacturers choose to promote? The answer to these and other questions lies in more effective measurement and management based on those measures. Identifying the product or SKU-level GMROI is an area of performance measurement that is rapidly gaining in both relevance and popularity as an effective planning tool. GMROI recognizes the limitations of looking at sales, profit margins, and inventory turns individually and captures them in one inclusive measurement. Using GMROI effectively allows industry players to compare relative returns across categories and aids in optimizing the overall product mix for increased profitability. GMROI can be applied at macro or micro levels in any size organization. Minor changes to the merchandising mix can often have a dramatic impact on overall profitability while providing the critical marketing information needed to improve positioning for growth. Analysis based on GMROI can lead to sales increases through product rationalization or opportunities for cost reductions throughout the supply chain.
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