What is the importance of ROI?
It is essential to understand the ROI of the different decisions your business makes to identify which are likely to be the most fruitful.
Furthermore, this indicator also allows companies to define their goals based on possible results they hope to achieve. By exploring expected performance and how long it will take before we see results, we can make business decisions with confidence. We can also use this insight to optimise our operations.
ROI is an effective indicator when it comes to calculating the monetary return of an action and can be applied to all investments, from those made in marketing campaigns and events, to improvements in the company’s infrastructure.
Therefore, keeping ROI is extremely important for helping customers answer questions about their business, such as:
- What are the company’s main sources of profit?
- What are the most effective communication channels?
- Are our initiatives, investments and decisions performing as expected?
- Is the sales process efficient?
- Does customer service contribute to customer loyalty?
- Are our processes efficient?
- Are we profitably fulfilling our customer’s expectations?
How to calculate ROI?
The easiest way to calculate ROI is by following this formula:
ROI = [(benefit – costs) / costs] x 100
The “benefits” in this formula are typically revenues generated from sales. The “costs” are the expenses necessary for the investment to be made.
The final result is a percentage. Therefore, it makes it easy to compare different actions and strategies both in terms of potential costs and income.
How do I measure the ROI of my supply chain project?
Let’s imagine we are reviewing a potential supply chain investment.
In terms of cost, we need to think about the following:
- Inventory costs
- Storage & logistics costs
- Waste costs
- Labour & admin costs
- Financial costs (e.g., the interest rates & insurance)
- Equipment & software costs
However, the benefits are a little more complicated. After all, while some benefits are easy to quantify, some are more difficult to put a number on.
Examples Tangible supply chain benefits
- Sales revenue increase attained through better availability
- Reduced purchasing & freight costs through making smarter order
- Reduction of working capital tied up in inventory
Examples of intangible supply chain benefits
- Reduced pressure on the planning team
- Greater internal collaboration
- Better supplier communication