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ROI: Definition & important points for buyers
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Return on investment in a nutshell:
Return on investment (ROI) is a key figure that expresses the percentage ratio between the capital invested and the profit generated. In purchasing, ROI serves as an important decision-making criterion for evaluating investments and projects and for measuring the efficiency of purchasing measures.
Example: A purchasing project to implement an e-procurement system costs EUR 100,000 and generates savings of EUR 30,000 in the first year through process optimization, which corresponds to an ROI of 30%.
Contents
What is return on investment (ROI)?
The return on investment (ROI) is a key performance indicator in business administration that expresses the relationship between the capital invested and the return generated. It provides information on how efficient an investment is and how long it takes to amortize the capital invested. In procurement, ROI helps to evaluate the profitability of investments such as new supplier relationships, procurement technologies or optimization projects.
Core elements of the ROI
Importance of ROI in purchasing
In strategic purchasing, ROI is an essential tool for evaluating the profitability of procurement decisions. By analyzing the ROI, buyers can determine which investments generate the greatest added value for the company. This supports the prioritization of projects, optimizes the budget and strengthens the negotiating position with suppliers.
Return on investment: from static key figures to dynamic analyses
The return on investment (ROI) has formed the basis for investment decisions for decades and measures the efficiency of capital employed. In practice, it enables companies to evaluate the profitability of projects and measures. However, in view of increasing market complexity and rapid technological developments, the traditional ROI is reaching its limits. There is a growing need to modernize the ROI calculation in order to make more informed and forward-looking decisions.
Old: Traditional ROI calculation
Traditional approach: Traditionally, ROI is calculated as a simple ratio between profit and investment costs. Companies often use static models and manual calculations to evaluate individual investments. This method provides a quick overview and is easy to understand. However, it does not take into account time aspects or dynamic market analysis. This can lead to important factors such as inflation, risk management or long-term effects not being taken into account, resulting in suboptimal investment decisions.
New: Advanced ROI Analytics
Advanced ROI analytics: Modern approaches rely on advanced analytics and digital tools to calculate ROI more comprehensively and dynamically. By using big data and artificial intelligence, companies can now incorporate real-time data and predictive analytics into their ROI calculations. This allows factors such as market trends, customer behavior and technological developments to be taken into account. Such in-depth analyses lead to more precise forecasts and enable investments to be managed in a more targeted and efficient manner.
Practical example: Implementation of a new production line
A leading automotive supplier was planning to introduce a new automated production line. With the traditional ROI calculation, the investment seemed risky due to high initial costs and a longer payback period. However, by using Advanced ROI Analytics, additional factors such as forecasted market demand, efficiency gains of 25% and cost savings from reduced error rates were taken into account. Within 18 months, profitability improved by 15% and the investment paid for itself a year earlier than originally planned.
Conclusion on the return on investment analysis
The return on investment is an indispensable tool in modern purchasing that makes the profitability of investments transparent. Systematic ROI analysis enables well-founded decisions to be made on procurement projects and helps to optimize the use of resources. Despite certain limitations in the recording of qualitative factors, ROI remains a key instrument for strategic purchasing decisions. With the integration of new technologies and ESG criteria, ROI analysis is constantly evolving and becoming increasingly important for forward-looking companies.
