Figure 3.1 The makeup of return on capital employed (investment)
Working capital
Note that the combination of inventory, cash and debtors less creditors is called working capital. Each of the elements of working capital is considered in turn.
Inventory
This is a major asset in many businesses. It is there to buffer uncertainty of supply and demand, and to permit immediate availability when replenishment times are too lengthy. However, inventory is often regarded as a hindrance rather than a help: it ties up cash, it needs resources to be stored and it becomes obsolete.
A primary goal for supply chain management is to replace inventory with information. Try to minimise the use of forecasts and to increase the use of real demand.
Question any means for automatically replenishing inventory.