Understand Finished Goods Inventory – inventory | finished goods | stock keeping unit
Understand Finished Goods Inventory
When managing your inventory of finished goods, that’s the goal. There was an incident a few years ago that serves as a good example of what not to do. A well-known shoe company switched to a new software system just before the Christmas holiday season, a time when retailers in many markets make most of their sales. The new software matched supply and demand and the company pretty much made all the right products. But they were sent to the wrong places. Customers in Europe had plenty of shoes to choose from but they were not the styles Europeans wanted. People in North America preferred those styles but had none. They had the styles wanted by customers in Brazil. This went on and on throughout every major market.
Like I said, all this happened during the peak buying season. The company had the right products in the wrong places at the very worst time. Finished goods must be managed very carefully to ensure you meet your customers’ demands. But at the same time, you can’t hold too much because finished goods are the most expensive inventory in the system. All the money you have invested in inventory is represented in your final product.
You want to keep that inventory low and you want to sell it as quickly as possible. But today’s customers demand greater variety in products, which means most companies maintain inventories of a large number of finished goods, all having to be managed and controlled effectively. You do this by designating each product with a unique stock-keeping unit or SKU. A SKU assigns a number to each single item and shows where it is stored. For example, each color of a shirt and each size of jeans is assigned a unique SKU. This allows you to track, control, and manage your finished goods at the unit level.
The key to controlling your finished goods inventory is to manage two aspects of time. First is your production lead time. This is the time it takes to make your product. Long production lead times means you must stock higher levels of finished goods to ensure you have a product to meet customer demand. You can overcome this by staging inventory within the factory towards the end of the production cycle. This allows you to finish goods quickly if you run low on finished goods inventory. Many times you have similar products within the same family that are processed generically through part of the production cycle and at some step begin a different set of processes. By postponing this point of differentiation as late as possible, production managers can stage inventory for quick completion.
The second concern with time is your supplier’s lead time. In general, the further away your suppliers are, the more inventory you must carry, including finished goods. Recently, some companies are addressing this by implementing regional supply chains.
With this strategy, you make your product close to the customer and source all your requirements as locally as possible. Remember, finished goods are the most expensive inventory you can carry. Implementing any of these best practices can help you to control your finished goods while still meeting your customers’ expectations.