Gross Margin

 Profit divided by sales.

Gross Margin Return on Investment (GMROI, or on Inventory Investment, GMROII) ?Gross margin dollars per year on sales from stock only divided by the average inventory value throughout the year.

Costs of inventory include replenishment costs (purchasing, transferring, receiving, handling, transporting and accounts payable) and carrying costs (storage, insurance, security, spoilage and obsolescence). Replenishment and carrying costs typically combine to add another thirty percent to the total cost of inventory each year.

Opinions vary on the optimum GMROI.  Optimal GMROI is between 1.25 and 1.75. Lower than 1.25 indicates margins are too low and above 1.75 could mean that not enough inventory is being carried.

An effective distribution system should help to hold fulfillment at target levels while increasing turns and decreasing transfers and buys from the competition, positively impacting GMROI.