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As well as a target production level for each product a target finished goods inventory level should be set. This inventory level is set in "weeks of demand" and thus the actual holding in units will vary depending upon the levels of demand.
Similar to the target production volume decision, this is only a desired level of finished goods. Actual finished goods inventories will vary depending upon the demand for the product and actual production levels. For example if demand outstrips production then a firm may be left with no stock in its finished goods warehouses despite desiring to hold a month’s worth of inventory.
The target finished goods inventory decision is important as these goods are held in warehouses throughout the country and hence can be used to significantly reduce the delivery time to distributors. However, there is a warehousing cost of around $100/unit of finished goods inventory. Firms with long production lead times may choose to hold large finished goods inventories to improve their delivery responsiveness. But it must be remembered that the most important determinant of responsiveness is having sufficient production capacity.