Question

Q1. Spartan Auto Group is going to purchase an auto parts component from one of two competing suppliers and it is going to base its decision, in part, on the supply chain performance of the two suppliers. The company has obtained the following data for average raw materials, work-in-process, and finished goods inventory value, as well as cost of goods sold for the suppliers. Assume each supplier operates 50 weeks per year.

	Supplier 1	Supplier 2
Cost of goods sold	$8,500,000	$14,800,000
Raw materials	255,000	870,000
Work-in-process	62,000	550,000
Finished goods	33,000	180,000

1. Determine which supplier has the best supply chain performance according to inventory turns and weeks of supply.
2. What other factors would the company likely take into account in selecting a supplier?

Answer 1

Inventory turnover ratio is nothing but the ratio that measures the number of times inventory is sold or used in a given time period and is calculated by dividing net sales by average inventory.

It measures how fast the company is able to sell its inventory, so low turnover means less sales and high ratio means strong sales. Inventory turnover ratio is an important component for calculating return on assets so if a company makes return on its assets then it signifies that it is selling its inventory more quickly at a profit.