Question

A manufacturing company has entered into a new contract with a major supplier of raw materials used in the manufacturing process. Under the new arrangement, called vendor managed inventory, the supplier manages their raw material inventory inside the manufacturer's plant, and only bills the manufacturer when the manufacturer consumes the raw material. How is this likely to affect the manufacturer’s inventory turnover ratio?

Answer 1

Answer:

It allows the plant to function more efficiently, as it increases the inventory turnover ratio.

Explanation:

Vendor Managed Inventory (VMI) is a kind of business model in which the buyer of a certain products gives information to a vendor of that same product and the vendor acquires total responsibility for holding on to the agreed inventory of that same material, majorly at the buyer's consumption location as we can see from this question.

Vendor managed inventory contract permits manufacturer to have a close instant entry to inventory. This immediate connection permits the customer to pull inventory as when due and only make payment for what is consumed. This will in turn reduce inventory investment and cause a higher inventory turns.

The VMI is known to provide vendors more control in order to rightly forecast demand, Boost Customer-Vendor Relationships, decrease Inventory Costs, Reduced Inventory Overstocks and Stock Shortage with an improvement in Sales.

Answer 2

Vendor based inventory includes the sharing of the information from the buyer to the vendor about certain products he or she is purchasing.

It lets the manufacturing plant operate more efficiently, as it raises the inventory turnover ratio.

What is the inventory turnover ratio?

• The ratio of the goods or inventory sold over time is called the inventory turnover ratio. The managed inventory allows the manufacturer to connect the payments of what is consumed and is easy for the customers.

• The vendor managed inventory provides more excess to control and know about the demands and the needs of the customer and the markets.

Thus, it allows efficient manufacturing.

Learn more about Vendor Managed Inventory here:

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