How Healthy Is Your Business? These 5 Metrics Will Tell You
From labor ratios to GMROI, these Key Performance Indicators can reveal what’s working—and what isn’t—inside your hardware store.
These five KPIs go beyond the basics to help hardware store owners measure performance, spot inefficiencies and make smarter decisions on staffing, inventory and profitability—key insights for long-term business health.
By Austin Diehl
Oh, no, not another abbreviation! Our industry is full of them but there may not be one as important to the health of your business as KPI—well, other than PTO, of course.
Key Performance Indicators are metrics we use to help our businesses grow. Core KPIs including year-over-year sales, transactions, average sale and gross margin percentage will always be a staple of our analysis. Throughout my journey, I have found that these additional five KPIs have helped improve my business and may be a good starting point for you.
1. Percentage of Labor to Revenue
This metric helps determine how effectively we’re scheduling. It’s a simple formula: To determine percentage of labor to revenue, divide your total labor spend by your total revenue, then multiply that number by 100. Total labor spend includes both salary and hourly wages and any benefits, including insurance, that you offer.
The beauty of this metric is that you can apply it to any set period. I monitor it every month and have reevaluation checkpoints quarterly to determine whether I need to adjust our forecasted labor budget going forward. I also apply it to our forecasted yearly sales to set our weekly labor budget for the entire year.
Tracking employee productivity helps managers make informed staffing decisions by measuring revenue generated per full-time equivalent (FTE)—a key metric for aligning labor with real business needs.
2. Employee Productivity
Employee productivity helps you determine how productive your labor force is and if you need to adjust labor to match your business needs. This is not a one-size-fits-all approach, so you’ll have to pair this KPI with the labor-percentage-of-revenue KPI above to find the right balance for your store.
To calculate employee productivity, first determine your FTE number. FTE, or full-time equivalent, is a measure of total labor hours in relation to a 40-hour workweek. To determine your FTE, divide the total hours worked by employees in one year by 52. Then take that number and divide it by 40. Once you have your FTE number, divide your total yearly revenue by your FTE number. This will give you the revenue generated per FTE for that year.
You can calculate employee productivity over any period throughout the year. You will have to adjust the FTE number formula above if you want to track anything less than yearly. To do this, determine your average weekly labor over the given period, then divide that number by 40 to determine your FTE number. Then divide the revenue generated in the same period by your FTE number to show the revenue generated per FTE for that period. It is normal to have different productivity figures throughout the year; keep that in mind when comparing data.
3. Outs Percentage
The third important KPI is your percentage of active inventory that is out of stock. In our stores, we simply refer to it as Outs Percentage. We found that we have become exceptionally good at operating lean—sometimes too lean, in fact. Our turns were significantly higher than the industry average, but by operating too lean, we were missing sales due to insufficient inventory. We have started tracking our Outs Percentage in detail to try to raise the minimum order quantity on popularity code A, B and C SKUs.
To determine your Outs Percentage, you must define what an active SKU is for your store. In our stores, a SKU is considered active if it is currently available in inventory or will be reordered as sellable stock. Once you’ve determined the criteria for an active SKU, you need to figure out the number of active SKUs in your store. Then determine how many of those are currently out of stock. I created a report that shows me how many of our active SKUs are currently out of stock, but there are other ways to get this information. Once you know the number of active SKUs and how many are out of stock, divide the out-of-stock number by the total active SKUs and multiply that number by 100. When tracking this metric, it helps to run calculations on the same day each week so that you remove as many variables as possible.
4. Inventory Per Square Foot
Another KPI that goes along with Outs Percentage is inventory per square foot. This metric is what initially showed me that we had gotten too lean on inventory. To calculate inventory per square foot, divide your total inventory value by your total sales square footage. This metric helps you discern how well you’re using your sales space.
If your number is low, you might have opportunities to increase sales by bringing in additional inventory, whether new product categories or bulking quantity on hand of existing inventory. I use Inventory Per Square Foot along with our Outs Percentage strategy to increase our quantity on hand. If you think you’re in the same boat, remember that investing in inventory needs to be strategic. You can easily bring in inventory just to raise your Inventory Per Square Foot, but that doesn’t necessarily mean you’ll increase sales. The goal is to bring in the right amount of the right SKUs to increase sales. Keep in mind that your inventory value typically fluctuates, which will cause this metric to vary throughout the year.
GMROI (Gross Margin Return on Inventory) helps hardware stores assess the efficiency of their inventory management by measuring how much profit they generate for every dollar invested in inventory. A high GMROI indicates efficient inventory management, while a low figure might indicate overstocking or inefficient product selection.
5. Gross Margin Return on Inventory
The fifth KPI to consider implementing is Gross Margin Return on Inventory, or GMROI. This will help you determine if you have the right amount of inventory. If your GMROI is high, you might have room to increase the number of SKUs you stock to drive additional revenue. If it’s low, you may have too much inventory and might want to look at consolidating to bring in a new department or do an assortment review to see if you have the right mix of SKUs. To calculate GMROI, divide gross margin dollars by the inventory value and then multiply by 100.
GMROI is a versatile metric. You can look at GMROI by location, department or even vendor. You can drill down further into class and fine-line if you have the data available. I have used all of the above when evaluating our assortments. Recently, I consolidated 32 feet of product down to eight feet to make room for a new product category. By consolidating the underperforming locations to bring in the new department, we increased our gross margin by 20x and retained 80 percent of the margin generated by the consolidated locations in the new eight-foot footprint.
Benchmarking: Where the Numbers Start to Matter
One of the challenges with KPIs is figuring out a benchmark to measure against. I’ve been using the Cost of Doing Business Study from the North American Hardware and Paint Association for years to gauge our performance against that of other stores. This valuable business tool will help you start developing, tracking and benchmarking your performance against that of stores like you. An alternative: Look for a group of peers or a roundtable to compare against. If you have access to historical sales and labor data, you can create your own benchmarks. If not, you can start tracking now and keep a record of your performance to compare against in the years ahead.
Key performance indicators are metrics we develop that, when executed properly, will improve our business. One important thing to remember is that these metrics are indicators of positive or negative business behaviors. The strategies we use to improve these metrics must be based on a behavior change to deliver long-term business improvement.
Austin Diehl is the chief operating officer of Virginia-based Randy’s Hardware and a former North American Hardware and Paint Association Young Retailer of the Year. His mission is to share his knowledge and experience to help inspire fellow retailers to make effective changes to their business.
