The 2008 Annual Meeting will be held at the Camelback Inn Resort & Spa, a JW Marriott property, June 8-11, 2008, in Scottsdale, AZ.  The Program Committee is busy putting final details together but will share that Dr. Charlie Hall will be back for a more in-depth session focused on customer profitability, as per the request of many members!  You won’t want to miss this meeting!!  Details will be coming out early next year and registration will open in March.  Keep visiting the NAHSA website for more information! 

NAHSA’s 21st Annual Meeting Preliminary Schedule of Events

Official Meeting Dates: June 8 – June 11, 2008
(as of 12-7-07, subject to change)

Saturday, June 7, 2008

1:30 p.m. – 5:00 p.m.             Board of Directors Meeting
4:00 p.m. – 7:00 p.m.             Registration Open
6:00 p.m. – 8:00 p.m.             Informal Happy Hour

Sunday, June 8, 2008

7:00 a.m. – 7:45 a.m.            Golf Tournament Participants Depart
9:00 a.m. – 12:30 p.m.          Group Event
8:00 a.m. – 1:00 p.m.            Golf Tournament with lunch
3:00 p.m. – 7:00 p.m.            Registration Open
5:45 p.m. – 5:55 p.m.            Contact Booth Program Orientation
5:55 p.m. – 6:00 p.m.            Manufacturer Contact Booth Scheduling Session Set-Up
6:00 p.m. – 6:20 p.m.            Contact Booth Scheduling Session-Manufacturer Hosted
6:20 p.m. – 6:30 p.m.            Contact Booth Scheduling Session- Distributor Hosted
6:00 p.m. – 6:30 p.m.            Spouse Reception
6:30 p.m. – 8:00 p.m.            Welcome Reception

Monday, June 9, 2008

7:00 a.m. – 12:00 p.m.           Registration
7:00 a.m. – 8:00 a.m.             Networking Breakfast
8:00 a.m. – 9:00 a.m.             General Business Session
8:00 a.m. – 8:45 a.m.             Spouse Breakfast
9:00 a.m. – 11:30 a.m.           Keynote Speaker
9:00 a.m. – 1:00 p.m.             Spouse Tour
11:30 a.m. – 1:00 p.m.           Lunch on own
1:00 p.m. – 6:30 p.m.             Contact Booth Program
7:30 p.m.                                Departure for Dine-Around Dinners

Tuesday, June 10, 2008

7:00 a.m. – 7:30 a.m.             Networking Breakfast
7:30 a.m. – 9:30 a.m.             General Business Session II presented by Dr. Charlie Hall
9:00 a.m. – 10:00 a.m.           Spouse Breakfast
9:45 a.m. – 10:45 a.m.           Breakout Session I
9:45 a.m. – 10:45 a.m.           Breakout Session II
10:50 a.m. – 11:50 a.m.         Breakout Session I
10:50 a.m. – 11:50 a.m.         Breakout Session II
12:00 p.m. – 1:00 p.m.           Lunch on own
12:00 p.m. – 1:00 p.m.           Manufacturers Board of Advisors Luncheon
1:30 p.m. – 5:00 p.m.             Management Training Sessions
7:00 p.m. – 7:30 p.m.             Final Night Cocktail Reception
7:30 p.m. – 10:00 p.m.           Closing Dinner & Awards

Wednesday, June 11, 2008

7:30 a.m. – 8:30 a.m.             Distributor Breakfast Session
7:30 a.m. – 8:30 a.m.             Manufacturer Breakfast Session
8:30 a.m. – 9:30 a.m.             Manufacturers and Distributors Convene 
9:45 a.m. – 11:45 p.m.           Committee Meetings
12:00 p.m. – 2:00 p.m.           Board of Directors Meeting & Luncheon

Industry Advocacy Update

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The Industry Advocacy Committee (IA), chaired by Ron Eberly of American Clay Works, is comprised of three sub-Committees: Water Issues Sub- Committee, Government Relations Sub-Committee as well as the newly formed Publications Sub-Committee.  In light of the strategic plan of the Association as well as the addition of the Associate Membership class, we are looking to staff the Publications Committee to get it off the ground.  We are looking for individuals that would like to be involved with getting the NAHSA name “out there” in the industry.  Tasks include developing content for industry publications and NAHSA’s newsletter, The Landscape. Moreover, tasks will include setting up a network of outlets to our constituents, trade press, and other affiliate associations as well as determining which publications NAHSA developed content should be provided.  Please take some time to think about a candidate within your company that might make a good addition to the Committee; is there someone in your marketing department that might be willing to volunteer some of their time for NAHSA?   Please email Sarah Hagy, shagy@fernley.com or Ron Eberly, ron@americanclayworks.net to get involved! 

Water Issues Sub-Committee Update

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Water issues continue to give rise to major news stories, with severe drought conditions in Georgia, North Carolina and southern California, and various problems in a number of other states.  This link will take you to an interactive drought map that will allow you to zero in on specific regions or states:  http://www.drought.unl.edu/dm/DM_west.htm.  Some of our Water Issues Sub-Committee members will be attending this year’s Irrigation Association Show in San Diego, and plan to meet there with Andy Smith, the IA’s State & Affiliate Relations Director, among others.  One new development is an expressed interest from the USDA in forming a steering committee with ourselves, the NGMA and perhaps other industry organizations, to more effectively compile information and address water issues facing the greenhouse and nursery markets.  Stayed tuned for further details

 

Profit Improvement Report

Prepared for NAHSA | Vol. 16, No. 4 | December, 2007

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GMROI: Good Intentions Gone Awry
By Dr. Albert D. Bates
President, Profit Planning Group

GMROI is one of the foundations of inventory management for distributors. The term GMROI stands for Gross Margin Return on Inventory.  The enthusiasm for  GMROI rests upon the fact that it allows firms to make inventory decisions from a return on investment perspective. 

The sad truth is that despite the hoopla, GMROI actually produces biased financial results which can lead to counter-productive actions.  If anything, using GMROI makes inventory management decisions less accurate.

This report examines the GMROI issue from two perspectives.

The Computational Bias

The theory behind GMROI is unassailable.  The ratio attempts to measure the return (gross margin) produced from every dollar of investment (inventory).  In this way, individual items, departments and suppliers can be evaluated from an ROI perspective.

Computationally, GMROI is the gross margin dollars generated by a specific item (or department or supplier) during the course of the year divided by its average inventory investment over the year.  In practice, very few firms calculate GMROI directly.  Instead, most firms actually calculate an approximation of GMROI, more correctly called the Turn & Earn Ratio.  The two ratios share basic DNA, so the exact form of the computation is not a problem as long as the firm uses the same method consistently.

GMROI (via the Turn & Earn formula) is the Gross Margin Percentage times the Inventory Turnover Ratio.  The typical NAHSA member has sales of $15,000,000, and cost of goods sold of $11,625,000 resulting in $3,375,000 of gross margin.  It also has inventory of $2,900,000.  The firm thus has a gross margin of 22.5% ($3,375,000 ¸ $15,000,000) and an inventory turnover of 4.0 times ($11,625,000 ¸ $2,900,000).  Combining the two produces a GMROI of 90.2% for the firm.

For managers with experience using GMROI, the value of this form of the calculation is obvious immediately. If the firm wants to increase GMROI, it has two financial levers to work with—it can try to increase the gross margin percentage or increase the inventory turnover.  Either choice should lead the firm to a greater return on the inventory investment.

To get a feel for how GMROI is biased, it is necessary to examine Exhibit 1 which reviews three items, cleverly labeled Items A, B and C.  As the exhibit indicates, these three items all have identical sales levels.  However, they are very different in terms of both their gross margin and inventory investment.  

Item B in the middle has been designated as typical.  It has a gross margin of 22.5% and an inventory turnover of 4.0 times.  To understand what is happening in the firm, it is necessary to know that Item B really is exactly typical.  Since the typical NAHSA member has a total firm gross margin of 22.5% and turned its inventory 4.0 times per year, Item B is a microcosm of the total firm.

Item B is flanked by two items with somewhat unique characteristics.  Item A generates 20.0% more gross margin dollars than Item B on the same sales, but requires a 20.0% larger investment in inventory.  It is a classic high margin/low turnover SKU. 

In contrast, Item C is the mirror image of Item A with 20.0% fewer gross margin dollars than Item B, combined with a 20.0% smaller investment in inventory.  It is in the low margin/high turnover camp.  Clearly, these three items are not equal.

GMROI is almost always used as to identify problem items.  It is a “what should we worry about” sort of ratio.  The answer, based upon GMROI, is to worry about the items with the lowest return.  In Exhibit 1 this turns out to be Item A, with a GMROI of only 85.0%.  At the extreme, Item A might even be considered a candidate for elimination given its low GMROI.  If not a candidate for elimination, at least a candidate for corrective surgery.  However, Item A actually produces the most gross margin dollars of the three items shown. 

At the other extreme, Item C with the highest GMROI would be designated as a superstar item.  It is the sort of item that management might want to emphasize in its marketing programs.  The firm would try to sell all it can to enjoy the benefits of the item’s great GMROI of 95.4%.

It should be remembered that the typical NAHSA member has an overall gross margin of 22.5%.  It also has operating expenses that equal   21.0% of sales.  Assuming that all three items have about the same cost structure (they are all in the same merchandise category), then Item C could be well under water as operating expenses actually exceed gross margin.  Probably not an item to push.

GMROI will always make low gross margin items look better than they are and make high gross margin items look worse than they are.  It is a bias that leads the firm down the wrong profit path.  GMROI continues to be a ratio that is based upon a brilliant concept, but is flawed beyond repair in operation.

Suggestions for Action

The real advantages of GMROI are that it is quick to calculate and easy to understand.  However, quick and easy but inaccurate is not necessarily a formula for success.  Something else is needed, but that something else is almost always a lot more effort.

The real solution is to move to measuring direct product profit (DPP).  Such an approach involves measuring the actual dollar profit generated on every individual product, department and supplier.  This requires determining not only the gross margin produced on each item, but the expenses associated with buying, stocking, selling and distributing that item. 

The real advantage of DPP is that it opens up a wide array of different ways to improve the profitability of individual items.  The answer may not be just more gross margin or less inventory, but rather lowering handling costs, selling in different quantities or any of a myriad of different actions.  If there are lots of things that drive profit, there is no real reason to focus on only two of them.

GMROI was invented before computers of any sort existed.  This made the ease of calculation always more important than the level of sophistication of those calculations.  With today’s incredibly low cost of computing power, the trade off should now favor sophistication. 

Beyond information systems, there is also the need for education of the management team.  GMROI is ingrained into the collective thinking of virtually every distribution organization.  Replacing GMROI with something more difficult to understand will not be easy.  If done correctly, though, the something new will lead to much better decision making.

Dr. Albert D. Bates is founder and president of Profit Planning Group, a distribution research firm headquartered in Boulder, Colorado.

©2007 Profit Planning Group. NAHSA has unlimited duplication rights for this manuscript.  Further, members may duplicate this report for their internal use in any way desired.  Duplication by any other organization in any manner is strictly prohibited.

A Managerial Sidebar:
GMROI Versus Turn & Earn

True GMROI and the Turn & Earn Ratio both attempt to measure the return on the firm’s investment in inventory.  However, they do involve two somewhat different ratios.  When comparisons are being made across industries, it is essential to ensure that the same calculation is being employed in all cases.

The basic difference between the two ratios is as follows.  All figures are for a typical NAHSA member.

 

 

	Exhibit 1
	GMROI Results for
	Three Different SKUs
	Financial Results		Item A		Item B		Item C
	Dollars
	Net Sales		$50,000		$50,000		$50,000
	Cost of Goods Sold		36,500		38,750		41,000
	Gross Margin		$13,500		$11,250		$9,000
	Average Inventory		$11,600		$9,667		$7,733
	Percent of Sales
	Net Sales		100.0		100.0		100.0
	Cost of Goods Sold		73.0		77.5		82.0
	Gross Margin		27.0		22.5		18.0
	Operating Expenses		21.0		21.0		21.0
	for the Total Firm
	Performance Ratios
	Inventory Turnover		3.1		4.0		5.3
	GMROI (GM% x Turnover)		85.0		90.2		95.4

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NAHSA Distributor Members only have until January 15 to participate in the 2008 Profit Report.  The association's goal is for all Distributor Members to submit data so NAHSA can provide the best benchmarking data in the industry.  Remember, information goes directly to a third party, The Profit Planning Group as to maintain confidentiality.  This is a NAHSA member benefit, please be sure to make this a priority!

If you need any materials to participate, please contact a member of the NAHSA Headquarters Team.