How is "return on investment" (ROI) defined in inventory management?

Return on investment (ROI) in inventory management is defined as the assessment of profitability relative to the investment costs incurred in maintaining and managing inventory. This concept quantifies how much profit is generated for every unit of currency invested in inventory. It goes beyond simply knowing how quickly inventory is sold or how satisfied customers are; instead, it focuses on evaluating the financial returns from inventory investments compared to the resources allocated toward them.

Understanding ROI allows businesses to make informed decisions about inventory levels, helping to optimize stock to increase profitability. By comparing the profits earned from selling inventory against the costs of purchasing, storing, and managing that inventory, managers can pinpoint effective inventory strategies that enhance overall business performance.