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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!
What Is Finished Goods Inventory And Why Do You Need It
Finished goods inventory is the stock of products that have been manufactured and are ready for sale to customers. It includes all items available in your store, warehouse, or other sales locations.
Finished goods inventory is significant because it allows businesses to plan their production and track what they have in stock—significantly when demand fluctuates seasonally or unexpectedly. By knowing exactly how much-finished goods inventory you have on hand, you can manage operations more efficiently by ensuring that the right product is available at any time. Additionally, having an accurate estimate of finished goods inventory can help with budgeting for ordering costs, shipping costs, and other associated expenses with managing lists.
In addition to helping determine production levels and accurately estimating cost projections, keeping a record of finished goods inventory lets businesses identify slow-moving products so they can be cleared out through sales or discounts to free up valuable space in warehouses or stores. Furthermore, maintaining detailed inventories helps companies avoid stock outs while successfully meeting customer demands on time without delays due to backorders or unexpected increases in orders.
'Finished goods' is a relative term, as the seller's finished items might also be a buyer's uncooked materials. For example, a cloth factory may also produce materials that can be used in clothing, such as cotton or silk. While these may also be the textile factory's completed goods, they can sell them as uncooked materials to clothing outlets, creating them into new finished goods: clothing.
Related: How to Calculate Inventory Turnover?
How To Calculate Finished Goods Inventory?
Calculating your correct finished goods Inventory formula follows an easy method that requires your fee of goods manufactured (COGM) and value of goods offered (COGS). First, we'll go thru how you attain those two figures. Note: You will want the time duration to be constant at some stage in these formulae.
COGM: Beginning WIP Inventory + Total Manufacturing Cost – Ending WIP Inventory
COGS: Beginning Inventory + Purchases During the Period − Ending Inventory
When you have your COGM and COGS, you can put the finished items (FG) inventory components to use:
FG is calculated as (COGM – COGS) + the Value of the Previous Year's Finished Goods
Below we'll stroll through how to calculate completed items stock in more depth.
Step 1: Check your inventory documents for finished items stock from the preceding year
You can view this data in your warehouse administration system, stock administration software, or via your accountants. The previous year's inventory documents assist sets a basis for the finished goods inventory equation.
Step 2: Subtract the modern-day fee of items offered from the cost of items manufactured
Finding the difference between COGS and COGM helps you comprehend the price of your items for the cutting-edge year.
Step 3: Add the beforehand completed goods stock value to the answer from step 2
Once you add the previous year's completed goods value to the COGS and COGM difference, you'll recognize the cost of Inventory you currently have to work with. Once you have the completed goods stock value, you can decide if more Inventory needs to be ordered and if you have enough for the present-day period.
Factors That Can Affect The Stock Of Your Completed Goods:
Market Penetration
Market penetration is how well your product is being received in the market. If there is a high demand for your product, it will increase the stock of completed goods that you can store and sell. It's essential to consider the sales volume relative to your production capacity when determining what amount of stock should be kept in hand.
Market Size
The number of customers in a given area or region can also impact the number of products you have available for sale. If fewer people are living in a room, then it may not make sense to keep too much Inventory on hand since there will need to be more buyers to justify doing so. Additionally, if there are physical barriers to accessing markets, such as mountains or dense forests, it may be more practical to store fewer products.
Production Strategy
Your production strategy can also affect the amount of stock you have available for sale. If you use a Just-In-Time approach, you may only need to keep a little Inventory on hand since each product is produced just when needed instead of in batches or bulk orders. On the other hand, if your business has items in prominent collections and stores them until they are ready for sale, this will require a larger Inventory holding capacity to accommodate all of the products made at once.
Grants & Incentives
Depending on the industry, there may be government grants or incentives available that can help to support your supply chain design and production strategy. These programs can provide additional resources for businesses to store more significant amounts of Inventory to meet customer demands.
Transportation and Physical Barriers
The transportation and physical barriers to accessing markets can also affect the amount of stock you have available for sale. If there is rugged terrain or long distances between your production facility and the market, it may be more practical to store fewer products since they will take longer to transport across the land. Additionally, if regulations limit how much inventory businesses can keep on hand at any given time, this could also influence your supply chain design.
What To Do With Excess Or Obsolete Inventory?
Return for a refund or credit
If your excess Inventory was purchased from a vendor or wholesaler, you could return it for a full refund or store credit. Check the seller's policies before doing so, as some may require that the item is in good condition and have all original packaging.
Divert stock to new products
You can also choose to divert your excess Inventory into new products, provided they are related enough in production that they can be used in conjunction with one another. This is a great way to maximize profits and reduce waste since you don't have to scrap the product altogether.
Related: What Is The Difference Between Out-of-stock And Backorders?
Trade with enterprise partners
Another option is to trade your extra Inventory with an enterprise partner that could benefit from it, such as a retailer or supplier. This could help you save money by reducing overhead costs and the amount of Inventory that needs to be handled.
Sell to customers
One of the most common ways to dispose of excess Inventory is to sell it directly to customers at discounted prices. This can help move your product quickly, as well as ensure that you still get some return on your investment. However, this method requires a good understanding of customer demand to succeed.
Consign your product
You can also add excess items on consignment with retailers or third-party sellers. This allows them to sell the item without purchasing it upfront, and you will receive a percentage of any sales.
Liquidate extra Inventory
If you're looking to get rid of excess Inventory quickly, liquidation may be the right option. This involves selling your items at a drastically reduced price to move them out of your warehouse as soon as possible.
Related: How to Liquidate Amazon Inventory
Auction it yourself
You can also auction off your excess Inventory on online marketplaces such as eBay or Craigslist. This is a great way to generate some extra cash from items that would otherwise be collecting dust. However, this does require some effort on your part to set up and manage the auction process.
Scrap it
When all else fails, there's always the option of simply scrapping your excess Inventory. This ensures that you don't have to keep it in storage, and you may even be able to generate some extra cash by salvaging parts or materials from the item. However, this option should only be used as a last resort since it could be more environmentally friendly.
Related: How to Forecast Inventory?
Conclusion
An organized and well-managed inventory system is crucial for the success of any eCommerce business. Understanding what finished goods inventory is and utilizing some innovative management strategies can save time and money while ensuring that your customers are always happy. If you need help getting your Shopify orders fulfilled, Simpl is here to assist. We're experts in eCommerce order fulfillment and are so glad to assist however we can. Get in touch with us today to learn more about how we can help take your business to the next level!
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