A comparison of the money earned or lost to the amount of money invested. The fundamental measure of success for any investment, for information systems the calculation requires an estimate of the TOC (Total Cost of Ownership).
Inventory is the largest single financial investment for distributors. Although a new system should result in both new efficiencies and enable tasks not performed before, for distributors ROI and TOC analysis inevitably include a look at improving inventory management.
Inventory not producing profit falls into the following categories:
Losses due to damage and theft are particularly expensive because the loss is from net profit. A damaged item valued at $20 will require $1,000 in sales to recover for a distributor operating at a two percent net margin.
One area difficult to quantify are the costs associated with being out of stock. Besides the immediate loss of the sale there is a potential loss of goodwill and the forming of a new customer buying habit at a competitor.
The calculation of money earned or lost can be more difficult to quantify than might first be apparent. A new distribution system affects the organization in many ways. For examaple, the effect of improved customer service will be negligable if the competition also improves customer service simultaneously. However, the effect of failing to improve customer service will be noticed if only the competition does so.