Finished Goods Inventory: What You Need To Know

Virginia Miller

June 14, 2024

In this article

If you're an eCommerce business owner, you know how vital Inventory is for keeping your business running smoothly. When it comes to the success of your store, many factors must be taken into consideration; finished goods inventory is undoubtedly one of them. Having a well-managed and accurate finished goods inventory can mean the difference between winning or losing customers and fulfilling orders on time or missing deadlines. In this blog post, we'll look at what exactly finished goods inventory is, some tips on proper management strategies, and advice on why having an organized system can save time and money. Let's get started!

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The Importance of Managing Finished Goods Inventory

Finished goods inventory refers to products that have completed the manufacturing process and are ready for sale. Properly managing your stock of finished goods is crucial for meeting customer demand, controlling costs, and ensuring efficient operations.

What is Finished Goods Inventory?

Finished goods are products that have passed through all stages of production and are ready to be sold to customers. This includes all items available in your warehouse, stores, or other retail outlets. Some examples of finished goods are clothes, electronics, toys, and packaged foods.

Monitoring your finished goods inventory allows you to plan production schedules, budget for expenses, identify slow-selling items, avoid overstocking or understocking, and ensure you can meet customer orders. It provides vital insight into the health of your operations.

How to Calculate Finished Goods Inventory

You can calculate finished goods inventory using this formula:

Finished Goods = (Cost of Goods Manufactured - Cost of Goods Sold) + Prior Year's Finished Goods

Where:

Cost of Goods Manufactured = Materials used in production + Direct labor costs + Factory overhead costs
Cost of Goods Sold = Beginning inventory + Inventory purchases - Ending inventory

Follow these steps:

Look up last year's finished goods inventory value
Subtract current Cost of Goods Sold from Cost of Goods Manufactured
Add the prior year's finished goods inventory value

This gives you your current finished goods inventory valuation. Compare to sales data, production capacity, and storage space to identify any excess stock.

Factors Impacting Finished Goods Inventory Levels

Several key factors can influence the ideal amount of finished goods inventory to keep on hand:

Demand forecasts - Projected sales volume for a given period
Lead times - The time it takes to receive inventory from suppliers
Seasonality - Fluctuations in demand during different seasons or holidays
Supply chain disruptions - Delays from natural disasters, transportation issues, etc.

Consider these elements when planning inventory and production schedules to ensure optimum stock levels.

Managing Excess or Obsolete Finished Goods

If you end up with too much finished goods inventory, you have several options to clear it out:

Liquidate through sales, promotions, or clearance events
Return to vendors for credit
Donate and write off for tax purposes
Sell to a liquidator at a discount
Salvage usable components if possible

Avoid accumulating excess finished goods by accurately forecasting demand, coordinating with suppliers, and tracking inventory turnover.

With an effective finished goods management strategy, you can optimize cash flow, reduce carrying costs, and improve customer service. Partnering with a 3PL logistics provider can also give you greater visibility and control over your finished goods inventory.

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FAQs

What are finished goods?

Finished goods refer to products that have completed the manufacturing process and are ready to ship to customers. This includes all items stored in your warehouse, retail outlets, or other facilities awaiting sale.

Why is managing finished goods inventory important?

Tracking your finished goods inventory allows you to coordinate production schedules, meet customer demand efficiently, identify slow-selling products to discount, and avoid overstocking or stockouts.

How do you calculate the value of finished goods inventory?

Use the formula: Finished Goods = (Cost of Goods Manufactured – Cost of Goods Sold) + Prior Year’s Finished Goods. Determine the manufacturing and sold costs for the period first.

What impacts finished goods inventory levels?

Key factors like demand forecasts, lead times, seasonal fluctuations, and supply chain disruptions can all influence appropriate finished goods stock levels.

How can you avoid accumulating excess finished goods?

Accurate demand planning, coordination with suppliers, monitoring inventory turnover rates, and partnering with a 3PL for oversight can help minimize excess finished goods.

What can you do with obsolete or overstock finished items?

Liquidate through sales and promotions, return to vendors, donate, sell to liquidators at a discount, or salvage usable components if possible.

How can a 3PL provider help with finished goods management?

A third-party logistics provider can give you greater visibility and control over your entire inventory with warehouse management and order fulfillment services.

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Finished Goods Inventory: What You Need To Know

FAQs

What are finished goods?

Why is managing finished goods inventory important?

How do you calculate the value of finished goods inventory?

What impacts finished goods inventory levels?

How can you avoid accumulating excess finished goods?

What can you do with obsolete or overstock finished items?

How can a 3PL provider help with finished goods management?

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