In this article, we explain what finished goods inventory means and why it’s important. We also provide a simple 7-step framework to help you manage it efficiently, with real-world examples. Read on to learn more.
Finished goods inventory refers to the stock of completed products that a company has on hand and are ready for sale. These are items that have undergone all stages of production and are awaiting dispatch to the end customer.
Example: For example, Fashion Flow Fabrics might have 10,000 pieces of their summer collection dresses in their finished goods inventory, awaiting distribution to boutique stores.
The management and analysis of finished goods inventory play a pivotal role in determining a company's financial, operational, and strategic positioning. We list some key reasons why:
Liquidity Management: Excessive finished goods inventory can tie up substantial capital, thereby impacting the financial flexibility of a business.
Sales Forecast Accuracy: The state of finished goods inventory directly mirrors the accuracy of a company's sales forecasting. Persistently high or low inventory indicates discrepancies between predicted and actual market demand.
Customer Satisfaction: Optimal management of finished goods inventory ensures that desired products are always available for immediate delivery, promoting consistent customer satisfaction.
Operational Efficiency: Regularly assessing finished goods inventory can reveal inefficiencies in the production process, such as overproduction or lagging sales strategies.
Competitive Advantage: Maintaining an appropriate level of finished goods inventory ensures that a company is always prepared to capitalize on market opportunities, providing an edge over competitors who might experience stockouts.
Finished goods inventory valuation can be determined by tracking production costs.
Formula: Finished Goods Inventory = Beginning Finished Goods Inventory + Cost of Goods Manufactured - Cost of Goods Sold.
Suppose Fashion Trend Ltd. starts the month with a finished goods inventory of $20,000, manufactures goods costing $100,000, and sells goods costing $80,000. Their ending finished goods inventory would be $20,000 + $100,000 - $80,000 = $40,000.
This means Fashion Trend Ltd. has $40,000 worth of completed products ready for sale at the end of the month.
Effective management of finished goods inventory hinges on precise techniques to ensure stock corresponds with sales forecasts and minimizes holding costs.
Simply follow our 7-step framework below to get started:
Categorize inventory based on sales velocity.
Example: "Lux Jewels" segments its jewelry into fast-moving, moderate-moving, and slow-moving jewelry. This helps allocate resources effectively to high-selling items.
Maintain a buffer for unexpected sales spikes or supply chain disruptions.
Example: "Clean Waters Ltd.", a bottled water company, always keeps an extra 5,000 bottles as safety stock to handle sudden demand.
Adopt systems that synchronize stock replenishment with actual sales.
Example: "Tech Makers Inc." manufactures its tablets based on confirmed retailer orders, drastically reducing unsold finished goods.
Monitor the rate at which stock is sold and replaced over a given period.
Example: "Fashion Front" tracks that its jeans collection turns over 10 times a year, indicating high demand and the need for frequent restocking.
Integrate sales data, market trends, and economic indicators to predict future sales.
Example: "Sporty Gear" analyzes gym membership sign ups and sports events to forecast demand for their athletic wear.
Set regular intervals to review and adjust inventory levels based on sales and forecast data.
Example: "Red Leaf Tea" reviews its tea inventory bi-weekly, adjusting production schedules according to the previous fortnight's sales.
Keep channels open with the sales and marketing team for promotional updates that might influence demand.
Example: Before "Novel Books Inc." launches a major discount campaign, they ramp up production to accommodate expected sales spikes.
GreenLeaf Tea Co. is a renowned tea manufacturer, but recently they've noticed discrepancies between their finished goods inventory and market demand.
They decided to implement a system for managing their finished goods inventory following our framework:
GreenLeaf Tea Co. starts categorizing its teas based on sales velocity. Their herbal teas are "fast-moving," while specialty blends are "moderate-moving" and seasonal teas are "slow-moving." This helps them focus production resources effectively.
After analyzing their sales trends, GreenLeaf decided to maintain an extra stock of 3,000 tea boxes to handle unexpected demand, especially during the flu season when herbal tea sales spike.
GreenLeaf initiates a JIT system where they begin producing certain tea blends based on confirmed orders from major retailers. This helps reduce the instances of unsold seasonal teas.
They discover that their green tea collection turns over 8 times a year, indicating its popularity and consistent demand. This insight prompts them to adjust production schedules accordingly.
Using market trends, GreenLeaf identifies a growing trend in health and wellness, predicting an increased demand for their detox teas. They ramp up production in anticipation.
Setting a monthly review schedule, GreenLeaf starts adjusting its inventory levels based on the previous month's sales and upcoming market predictions.
The marketing team at GreenLeaf informs the production department of an upcoming promotion for the holiday season. Armed with this information, the production team increases the batches of specialty blends in preparation.
By following these specific steps, GreenLeaf Tea Co. aligns its finished goods inventory more closely with market demand, ensuring optimal stock levels and maximizing profitability.
We hope you now have a better understanding of what finished goods inventory means and why it's important to manage it.
If you enjoyed this article, you might also like our article on inventory preparation or our article on types of inventory.
