Productivity Parameters

Productivity Parameters- for tracking productivity and efficiency

Because of the rise in property value and increase cost of lease and rent analysing the productivity of space employed is of utmost importance to all retailers in India. The best way is to use sales/sq. ft/month (or day). Since most retailers pay a monthly rent. This measure when considered along with the rent/sq. ft/month gives actual productivity of the space.

For example:

At a particular store if
Sales=A= 3,112869
Area = B= 5000 sq ft
Then the sales per sq.ft.= C= A/B = 3112869/5000 = 622.57

And per day sales= D= C/30 = 622.57/30 = 20.75

To measure the productivity of staffs;
Assume there are five staffs, then

Sales/staff/month = 3112869/5
= 622574
And per day = 622574/30 = 20752.46


Efficiency is ratio of effective output to inputs. If we consider net sales as output then the effective output is the gross margin earned in amount. Using the above example returns/sq ft and returns/staff can be considered as the corresponding efficiency measures for the productivity measures of sales/sq.ft and sales/staff.

So,
Sales = A = 3112869
Gross margin % = B= 45%
Gross margin = C= A*B= 1400791
Area= D= 5000 sq ft
Then returns/sq ft/month = E= C/D = 1400791/5000= 280.15
And returns/sqft/day = F= C/D/30 = 9.33

Customer satisfaction:
The shopping culture in India is completely different compared to China, Brazil and rest of the emerging nations in retail. Here customers mostly shop with families and buy mostly during festival seasons and during weddings. Competition in the retail market is also rising and due to this retailers have understood the importance of customer service and providing customer satisfaction, which again is an output apart from sales for a retail outlet. Retailers have started treating this parameter very seriously and hence to improve productivity and efficiency on customer satisfaction various activities like Customer Relationship Management (CRM) and Customer Feedback Programmes have been developed to measure the satisfaction levels of customers.

It is not very easy to measure and quantify the effective output when it comes to customer satisfaction as the same varies from customer to customer and means different to different customers.


It’s very important for retailers to be updated about the market trends. They need to stock merchandise that is in-fashion and excites customers. Retailers get their profits from the margins that the suppliers provide them. These margins get realized when the merchandise gets sold in the market. No two merchandise category is the same, thus the returns expected from each category is different.
The three resources, space, finance and labor are limited and they need to be utilized in a manner, which leads to highest returns for the organization. In order to measure the productivity of these resources some standard measures have been devised. They are:
Gross Margin Return on Inventory Investment-GMROI for finances
Gross Margin Return on Footage-GMROF for space utilization
Gross Margin Return on Labour-GMROL for labor productivity

GMROI
To a retailer the merchandise is the most important aspect in his business. The profitability of the business is dependent on the productivity of merchandise sourcing and finally its sale in the store. A large part of investment of a retailer is in the form of inventory at the stores and warehouse. Under these conditions, it becomes important for a retailer to measure and track the productivity of the inventory investment.
The returns on inventory investments are mostly received in the form of margins.
There are two parts to GMROI, gross margin and the inventory levels attached to the product.

Gross margin % = Gross margin / Net sales

The inventory levels attached to a product can be calculated in the form of a ratio:

Sales to stock ratio = Net sales / Average inventory at cost

A combination of gross margin % and sales to stock ratio will give us the GMROI

GMROI = Gross margin / Net sales * Net sales / Average inventory at cost

i.e. GMROI = Gross margin / average inventory at cost

Inventory turnover is a more popular way to measure the inventory levels. The difference between sales to stock ratio and inventory turnover lies in the fact that a sale to stock ratio captures average inventory levels at cost, while inventory turnover includes average inventory at retail. Thus inventory turnover can be calculated as:
Inventory turnover = Net sales / Average inventory at retail price

Since the investment in inventory is only to the extent of the cost of merchandise, the stock levels must be taken at cost and not at retail price. Hence the average inventory value needs to be taken at cost.

Though GMROI gives an idea about the combined performance of GM% and inventory turnover, one can always argue that why don’t we look at these two separately. Is there actually a need to combine the two?

To understand this we will take an example.
Take two categories, vegetables and apparels where vegetables give 15% gross margin while apparels give 40% gross margin. A look at % will tell us that apparels are more profitable. Since percentage can be deceptive let us look at gross margin. On a sale of 150 lacs, vegetables will give a gross margin of 22.50 lacs while on a sale of 350 lacs in apparels it will give a gross margin of 140 lacs. Hence gross margin also shows apparels is more profitable.

Let’s look at the inventory levels for both the categories. If vegetables need a stock level of 2 lacs at cost and have a sale to stock ratio of 87.5 while apparels need a stock level of 50 lacs at cost and have a sale to stock ratio of 6 only then -
GMROI for vegetables = 22.50 / 150 * 150 / 2 = 11.25x or (1125%)

GMROI for apparels = 140 / 350 * 350 / 50 = 2.80x or (280%)

Hence, even though the margin % for vegetables is very less, the category is more productive as far as GMROI is concerned. Hence GMROI is a much better measure to evaluate inventory productivity than inventory turnover or gross margins alone.

Vegetables do not look profitable if only gross margins are considered, and apparels do not look profitable if inventory turnover is considered as it needs more inventory investment than vegetables. A composite of these two GMROI gives us a better picture that vegetables actually give higher returns than apparels.

Sales to stock ratio for apparels is 6 and for vegetables it is 87.5
So the inventory turnover for vegetables can be calculated as
87.5*(100%-15%) = 87.5* 85% = 74.38
And inventory turnover for apparels is
6*(100%-40%) = 6*60% = 3.6

GMROF
It is a measure of gross margin returns on the space occupied by a particular category. GMROF gives an idea about the productivity of space for a category or for an entire store. It helps a lot during space management and placement of goods of particular categories during store layout changes or during a set-up of anew store.

GMROF = Gross margin (Rs.) / Selling space (sq.ft.)

Average inventory at cost / Selling space (sq.ft.) = Inventory intensity which means how much inventory investment is needed per square feet of selling space. It varies across categories.

So, GMROF = GMROI * Inventory intensity

Calculating GMROF is important for a retailer because GMROI gives an idea of only returns on inventory and does not take space required to display stock into consideration. Utilization of space should be managed very efficiently for more profitability as space also comes at a cost.
GMROI is more a measure of profitability while GMROF is a measure of productivity.




To see how GMROI on its own is misleading lets continue with the same example.
Vegetables had a GMROI of 11.25x and Apparel had a GMROI of 2.80x. From GMROI point of view Vegetables look profitable than Apparel. Space however required is 200 sq.ft. for vegetables and 600 sq.ft. for apparels.

Hence inventory intensity for vegetable = 2, 00,000 / 200 = 1,000
And inventory intensity for apparels = 50, 00,000 / 600 = 8,333

Inventory intensity is higher for apparels because the average sale price of a single keeping unit (SKU) of apparels is higher than that of vegetables.

Now,
GMROF for vegetables = 1,000 * 11.25 = 11,250 (Rs./sq.ft.)
GMROF for apparels = 8,333 * 2.80 = 23,332.4 (Rs./sq.ft.)

Hence, even though vegetables have a higher GMROI than apparels it is less productive because apparel has higher GMROF. In other words, apparel is more space productive than vegetables and thus compensates for lower GMROI.

All SKU’s can’t be expected to have high space productivity. There can be few SKU’s that yield less GMROI and GMROF. But one cannot avoid these SKU’s in the store as they are helpful in driving customers into the store. A category like vegetables offers low GMROF, but still needs to be present within a store as it pulls traffic into the store, in supermarkets. Hence a retailer needs to plan his merchandise mix within categories in such a way that the overall profitabitlity of the store is not affected.

Another way of measuring the space productivity is

Net sales / Selling space (sq.ft.)

GMROL
The frontline team management staffs in a store have complete control over the number of people employed at the store level.

GMROL = Gross margin / FTE Employees

Where FTE stands for Full Time Equivalent

Since retail has lot of manpower, which is working on part time basis with the industry we need to calculate the full time equivalent for these employees.

FTE employees = E1*H1*D1 + E2*H2*D2 + E3*H3*D3 + ……
Hours in regular shift * No.of working days in a week

E = Employees
H = Hours worked
D = Days worked

For eg:
If there are 200 employees in a store, out of which 100 do a eight hour shift and 50 do a four hour shift in a day and the rest 50 work for 3 days in a week for eight hours per day and suppose the employees work for six days in a week, then

FTE employees = 100*8*6 + 50*4*6 + 58*8*3 = 7200 / 48 = 150
8*6
Thus, though the store has 200 employees, the FTE employees is only 150

Note: OT is not to be included while calculating FTE

Labour productivity can also be measured as:
Service intensity = Selling feet / FTE employees

Employee productivity can be measured as:
Sales per employee = Net sales / FTE employees

However this does not consider the profitability of a category