Finished Goods Inventory Classifications and Terminologies

Finished goods inventory refers to the number of saleable finished products in hand for sale. For raw materials, inventory classification is done using the ABC classification, but the classification is based on aspects like sales channels, functional and operational conditions, etc.

Why is Finished Goods Inventory Classification Required?

Finished goods are considered one of the most valuable assets of a business. Neither are all finished goods manufactured for the same purpose nor do all of them have the same value. While some are manufactured for domestic markets, the others are produced for export to different countries.

This makes it important for businesses to classify the finished goods inventory to ease the process of assessment and identification. A proper finished goods inventory classification can improve both productivity and efficiency.

Finished Goods Inventory Classification

Based on sales channels and business units, the finished products are manufactured and stocked separately.

• Classification based on Export SKU and Domestic SKU is the most basic and common categorisation for almost all finished products. Another classification in finished goods inventory includes finished goods stocks, additional components, and parts.

• Under sales channels, finished goods can be classified into the following :

1. SKUs for institution sales
2. SKUs for channel sale
3. SKUs for direct delivery
4. SKUs for delivering to governments, NGOs, and other similar projects.

SKUs or stock-keeping units refer to a distinctive type of item that can be either raw material or finished products. Most of the classifications mentioned above usually have similar products but with extra kitting items, bundling, etc., depending upon the categorisation. The computer industry happens to follow this type of classification.

• Listed below are the three types of classification available for automotive goods and accessories :

1. Stock keeping units produced for delivering to original equipment manufacturers, also known as OE Supply SKUs
2. Stock keeping units produced for delivering to Spares Market via Dealer Market, also known as After Market SKU
3. Export SKUs or the stock-keeping units produced for exporting to other countries.

• Based on frequency and quantity of sales, finished goods inventory can be classified into three categories to evaluate the sales performance of different classifications of products.

1. Slow-moving
2. Fast-moving
3. Non-moving

• The finished goods inventory of a business does not always contain items produced in-house. They might have warehouses located in other countries for the same. They might also be sourcing their products from different vendors located at different locations. When these products are imported, the tax liability and import duties might change their valuation, prices, or profit margins from other inhouse products. This makes it necessary for businesses to categorise these items separately for easy spotting and assessment.

• The finished goods inventory can further be classified into several other categories for facilitating identification and evaluation. Below mentioned are two such important categories:

1. Stock on hold or the inventory/finished products blocked or put on hold from selling to the customers.
2. All SKUs or finished products have an expiry date/shelf life beyond which they start depreciating to the point that they cannot be sold. All these damaged and rejected products, along with those that are no longer required/demanded by the customers, are included in a category called Scrap and Obsolete.