The inventory goes through various phases in a single manufacturing process. For every stage, the inventory management practices will differ. It is the last stage that the raw materials are turned into finished goods. Finished goods are a result of an exhausting supply chain, ready to go on the shelf so consumers can buy.
What is the Finished Goods Inventory?
Finished goods are the type of stocks that do not require any further form of manufacturing or assembly. They are ready to be sold by retailers and bought by customers. For example, if you’re a car manufacturer, rubbers, steel, and engines are all raw materials and a full-fledged car is a finished product. Basically, anything that is sold as is, is a finished good.
Finished goods inventory is the last classification of inventory that is used for accounting purposes. The products begin with raw materials, move to the work-in-progress stage, and finally towards finished goods as they are being produced. The end products include the finished goods inventory.
Defining the finished goods inventory is essential to understand the total value of all types of inventory for warehouse management. The results ultimately influence production rates and profitability.
Importance of Finished Goods Inventory
1. Identifies Gross Profit
Inventory is an asset to a manufacturing unit. On the balance sheet, it is considered the biggest current asset and profit driver. If you can tally the finished goods inventory, you can get insight into the gross profit. It helps you make decisions about your operating budgets and financial budgets. It shows how many inventory accounts are short-term assets and soon generate profits.
2. Reduces Waste
Maintaining accurate data on finished goods inventory is the key to running a successful supply chain from start to finish. You can know your business's optimal inventory levels, which ultimately helps you save money in the long run and optimise your resources.
You can use this data to your advantage and make necessary changes based on your calculations. It helps you know exactly how much inventory your business is capable of producing, adjust your safety stock levels and reduce the amount of inventory that is sitting around in the warehouse. It reduces your need for excessive storage and saves costs on idle goods.
3. Allows you to Meet Customer Expectations
Since finished goods inventory is at the last stage of the production process, it helps businesses meet final (last-mile) delivery expectations. Customer expectations are changing and they expect quick and seamless deliveries at their doorstep.
By knowing the finished goods inventory on hand, businesses can ensure they have the goods they need for deliveries, meet the required expectations, and avoid disappointing their customers.
4. Optimizes Inventory Management Processes
It’s common to experience a sudden spike in demand in supply chains. By knowing how much finished goods inventory a business has on hand, it becomes easier for them to avoid costs and disruptions caused by the sudden spike.
Finished goods also give an insight into the overall production process and where and how a unit should optimise the inventory management process. You can track labour costs, direct costs, and other manufacturing costs to improve production and identify automation opportunities. This insight into historical numbers allows you to iterate processes, leverage automation, and practice seamless inventory management.
How to Calculate Finished Goods Inventory?
It’s fairly simple to calculate finished goods inventory. The formula to do so is as follows:
Finished Goods Inventory = Beginning finished goods inventory + Cost of Goods Manufactured - Cost of Goods Sold
Let’s take a closer look at these factors:
Beginning Finished Goods Inventory
This includes the stock of finished goods a manufacturing unit had on hand at the beginning of the month.
Ending Finished Goods Inventory
This includes the stock of finished goods a manufacturing unit had on hand at the end of the month.
Cost of goods manufactured (COGM)
This includes the total costs of the raw materials, direct costs, and indirect costs that went into producing the finished product. Unlike COGS, it calculates the finished goods a manufacturing unit produces at a specific time, regardless of the number of sales. It also includes the manufacturing overhead apart from the raw materials and labour costs.
Cost of goods sold (COGS)
This includes the total costs of the finished goods inventory that were sold to customers during a period. It comprises all the costs of materials and labour but doesn’t include indirect expenses related to distribution and sales. COGS provides insight into the true cost of the product and is the primary indicator of deciding the end price and ensuring a sufficient profit margin.
If you were to calculate finished goods, the first number you need is the finished goods inventory of the previous period. The ending finished goods inventory of last month will be the beginning inventory of this month. The next step would be to find the difference between the cost of goods sold and the cost of goods manufactured. Lastly, you add the inventory value of the finished goods from the previous month.
Managing inventory in real-time gives you the value of finished goods on hand and it’s the prime indicator of success for manufacturing and retail companies. It reflects on your areas of improvement and prevents stockouts ultimately leading to higher customer satisfaction.
However, a lot of accounting and calculations go into managing inventory at multiple levels and getting the right data. To avoid this hassle, eCommerce companies and other retail businesses outsource their supply chain management, order fulfilment, and logistics to a 3PL (third-party logistics) provider. 3PL providers have the necessary expertise and are technologically equipped to perform efficient inventory audits, monthly, quarterly and yearly.
PACK & SEND has just the kind of experience and expertise you’d expect from a 3PL provider. Get in touch with us on how we can help you streamline your inventory management and set you on the path to an optimised supply chain and meet the final (last-mile) delivery expectations of your customers.