ROE (Return on Equity) has been gradually improving and is drawing attention in Japan these days.

According to the Ito report announced by the Ministry of Economy, Trade and Industry in August 2014, it was pointed out that the issues of Japanese companies are not in asset turnover rates and financial leverage, but in terms of their ability to make earnings, compared to western companies. However, I believe that both accounts receivable turnover and inventory turnover are generally lower than those in Europe and the United States, among asset turnover rates, which is an issue for CCC (Cash Conversion Cycle) management.

As for inventory, we position inventory turnover days as company-wide common control index for decision-making, not traditional inventory turnover rate and inventory turnover period, and we propose integrated activities of management team and operation site to improve ROE and ROIC (Return on Invested Capital).

Inventory is an important management resource

Inventory is said to be a source of profit for business, at the same time, to cause loss. Especially in manufacturing, retail and wholesale business, management indicators are used to measure whether product inventory is being converted into sales efficiently.

In general, the following two are used.

1. Inventory turnover rate

Inventory turnover (times) = sales · cost of sales (annual) ÷ inventory amount

2. Inventory turnover period
The inventory turnover period is an indicator that shows how long it takes to have inventory for days or months, or to consume (sell) all inventories.

Inventory turnover period = inventory amount ÷ sales or cost of sales (monthly or daily)

Both are said to be indicators to see if inventory is appropriate. It is enough to tell about past and current situation of inventory, but I think that it is inappropriate as an indicator for future decision making. In other words, it is an index for financial accounting, not inventory turnover as management accounting.

I am convinced that inventory turnover management is an indicator that can assist decision-making to be shared by management, sales department in charge of operations, manufacturing, procurement, and logistics personnel as inventory-based management consultant.