In 1979 International Business Machines Corp. (IBM) was one of the world's largest companies, and it dominated the market for huge mainframe computers. Back then, IBM's inventory turnover ratio was about 3.3. Through the years, IBM switched from mainframe to personal computers, and today the company earns most of its revenues from a variety of services rather than from selling hardware. By 2017,
IBM's inventory turnover ratio had risen to 23.9. What do you think might account for the tremendous increase in IBM's inventory turnover between 1979 and 2017?
What will be an ideal response?
In the late 70s, IBM's turnover ratio was relatively low because they built a product that took a long time to make, and therefore the company's inventory balances were high. As the firm shifted to personal computers, which took less time to build and sold more rapidly, the inventory turnover ratio increased. Today, IBM is mostly a services business, so there is little need for the company to hold much inventory.thus making its inventory turnover ratio quite high.
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