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?

Question

Ryker Huerta

Biology

26 December, 13:05

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?

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Answers (1)

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Terry Poole · Answer 1

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.