Finally, let's look at some misconceptions about using the most popular yardstick: return on investment (ROI). That is annual gross profit made on your money put into stock item or product group. If products are judged only on percentage gross profit made per month on own money invested in them, you could easily end up with a shop filled with big, low value products needing lots of selling attention - from suppliers giving long credit lines!
Intuitively we know customer satisfaction is really what keeps a hardware store going. One of the fundamentals of a satisfied customer is having in stock what he or she needs! Customers are satisfied if 'their' hardware retailer has the products available they expect him to stock. Undeniably this temps the retailer to stock too many low value, low profit, slow-moving, time-consuming and even space-wasting products that don't make enough money!
This is unacceptable if your goal is to keep the customers happy and make money. So far we've discussed guidelines to judge whether a product/range is good or bad (value-adding or destructive) to have in your shop.
Walk through your store and identify the characteristics of each product: the enablers with low margins, the slow-movers with high-value, the self-servers, the fast popular products with good margins just walking onto and flying off the shelves, the add-ons, the impulse lines and so on. You will also realise that without these guidelines it is impossible to make sensible decisions about the optimal range for you.
Talking of money: money is an animal that regularly changes shape. We tend to use 'money', 'profit' and 'investment' to sometimes mean the same and some quite different things.
Return on Capital Employed (ROCE) means you differentiate between how you invest and where you get the money to finance the stock. If you invest a relatively small amount of your own capital but get a large %, or even 100%, it might look like a jolly good decision because of the high return on investment. In real life there is no free lunch - and so there is no free capital! If you borrow too much, cost of capital goes up - and of course there is a limit to how much can (safely) be borrowed
To make the best decision, calculate the return on the total amount invested, including money borrowed from the bank or financed by supplier credit (ROCE) - and not only on your own money (ROI). Only if you have extremely severe limitations on getting credit/capital (meaning you are in serious trouble and should not take out more debt!) is ROI the single or best norm to use when making stock range decisions. Typically consignment stock always gives you infinite ROI - because you don't invest any of your own money any profit will be an infinite return! But we all know this is patently not always a good idea - the cost of money is usually a very small expense compared to the cost of space utilised or the cost of the staff needed to sell the item.
Measuring ROCE instead of only the ROI means that you are making better decisions about the profitability of different retail products
Combine the insight you get from considering the ROME, ROSE and ROCE you get from different product groups and you are closer to a highly profitable hardware retail environment. Instead of sacrificing the return you get on time or space in a effort to optimise only the ROCE, or even worse ROI, you should try to balance all three.
As rule identify, stock and assertively sell products that score high on all three these benchmarks, but especially those giving you the best return on your most expensive and limited resources such as your time and your shop space.
The perfect mix for a hardware store is therefore the best mix of products to satisfy most of your customer's needs and make you the most Rands profit per month taking into account the time, floor space, own capital and credit you have available