Author: Extensiv Apr 17, 2024 6 Min READ

Days in Inventory & How to Calculate It

6 Min READ
Days in Inventory & How to Calculate It

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Days in Inventory Formula, Definition & More

Your warehouse shelves are full. Your distribution center is quickly fulfilling orders as they come in. Sales are exceeding your forecast, and your customer satisfaction rates have never been higher. It’s a great feeling, but how long will it last? Without accurate, real-time insight into how much inventory you have on hand, all your good fortune could come to a screeching halt.

So, how do you know? How can you determine how much inventory you have in stock, how it correlates with current and anticipated orders, and how many days are left before you have to reorder?

Manage your Inventory with Extensiv

The key is understanding your days in inventory (DSI) metric, which can significantly impact your bottom line, overall profitability, customer satisfaction, and ability to scale.

What is Days in Inventory?

Days in inventory is a metric to determine how efficiently you manage your inventory. It measures the average number of days to sell or use inventory during a given period. Retailers can use inventory analysis like this in many ways, such as tracking the timely turnover of seasonal items, preventing overstocking, and ensuring that any perishable or similar products are sent to customers before they perish or become obsolete inventory.

How many days in inventory are ideal? That depends on a range of factors unique to your business, but you can research industry benchmarks to find peer and competitor days in inventory rates to set your own goals.

What is the Days in Inventory Formula?

The days in inventory formula helps you determine how many days you keep stock on hand before you use or sell it.

Before beginning, you need to determine the period you’re examining, such as a month, quarter, year, or similar metric.

Next, you need to know the cost of goods sold (COGS) during that period. The COGS formula looks like this:

cost of goods sold (COGS) formula

Here’s an example: You begin the year with $20,000 of inventory. Throughout the year, you have an additional $15,000 in inventory costs. At the end of the year, you have $7,000 worth of stock left. Your COGS is $28,000.

Once you know your COGS, you need to know your average inventory value. The average inventory formula is:

average inventory value formula

In our previous example, we determined that our beginning inventory value was $20,000, and in the end, you had $7,000 of inventory left.

$20,000 + $7,000 = $27,000

$27,000 / 2 = $13,500 average inventory value

This means the average inventory you held during the first six months was $13,500.

Once you know your average inventory, you can now determine your inventory days. The days in inventory formula is:

days in inventory formula

Using our previous examples:

$13,500/$28,000 = 0.48

0.48 x 365 days = 175 days in inventory during the year

Why Your Business Should be Measuring Days in Inventory

There are many reasons why your retail or ecommerce business should measure days in inventory. Primarily, it’s because it’s key to determining just how effectively you’re managing your company’s inventory turnover and carrying costs.

It’s important to note here how important accurate, real-time inventory data is in ensuring your calculations are correct. If you aren’t already, consider using specialized fulfillment and order management software with inventory management capabilities to collect this critical data. These tools can give you real-time insight into your stock levels and align them with sales, order fulfillment, and returns. It may also be a good idea to periodically reconcile physical inventory counts with recorded counts.

Accurate inventory counts ensure your team can accurately and quickly fulfill orders as they come in. Fulfillment software with data analytics gives you more comprehensive visibility into your inventory. Accurate inventory insight can help you set days in inventory targets. With these goals and data, you can proactively identify potential issues and optimize days in inventory over time.

Days sales in inventory calculations can also help businesses identify sales trends. Are sales going up or down during a specific time period? Do you have overstock or understock? This information can help you more effectively manage inventory orders and more methodically choose the best restocking model for your business.

When you have a low number of days in inventory, that’s generally a good sign that your products are selling quickly. That means less overhead and inventory storage costs. When you’re not dumping money into excess stock, you can invest that money in other business areas.

When your formula for days sales in inventory computes a lower number, you can also reduce warehousing and storage costs to optimize storage needs, such as freeing up more space or reducing rental or lease costs.

And finally, if your business deals with perishable products, understanding your days in inventory can help decrease spoilage and reduce the risk of product obsolescence through closely monitoring aging inventory. With this knowledge, you can adjust inventory orders to minimize waste and decrease negative impact on your profit margin.

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Expert Tips for Optimizing How You Use Days in Inventory

If your employees don’t understand days in inventory and why it’s important to your business, it can be challenging to implement changes that optimize this metric. So, it’s important to educate your employees not just on why it matters but also on the role they play in reaching your targets and why meeting those goals will positively impact the work they do. It may also be helpful to gradually introduce process improvements to your team and monitor change impact on inventory measurements over time.

Here are some other tips that can help improve your days in inventory metrics:

Categorize inventory systematically based on product value and how quickly it sells. One way to do that is to use the ABC method. In retail, the ABC method helps you prioritize high-value, fast-selling (A items) so you can ensure you’re tracking and monitoring them closely. B items are moderately important, with C items being less crucial. This information can help guide your inventory management decisions.

Consider conducting promotions or having special sales when you’re overstocked. This can help you move slow-moving stock out of your warehouse by offering customers discounts or other incentives. In many cases, if you can speed up movement of these products, you can decrease your days in inventory. However, you should consider the impact of a sale or promotion on your profit margin compared to inventory holding and other costs.

Use data analytics and forecasting to help you anticipate customer demand to order the right amount of inventory at the right time. Accurate demand forecasts reduce the risk of excess inventory, which can increase days in stock. This can help you avoid potential stockouts to avoid lost sales.

Implement just-in-time inventory management to decrease the amount of stock you hold at any given time. When you receive products closer to the point of sale, you can decrease storage costs and shorten the number of days your inventory is waiting.

Streamline and optimize wherever you can, across all aspects of your supply chain. You may find it helpful to work with a third-party logistics (3PL) or fourth-party logistics (4PL) provider who can manage warehousing, order fulfillment, transportation, and other supply chain procedures for you. Because they may have access to technologies and resources you don’t, logistics networks are a great way to reduce lead times and decrease supply chain delays. When products arrive accurately and quickly, your customers will also be happier.

Ultimately, accurate inventory management is the most important step you can take to ensure you’re properly measuring days in inventory and making the metric work for you. Since days in stock reveal average inventory age, always think about your lead times, especially if you’re using omnichannel sales or multiple warehouses and order fulfillment locations. These can also directly impact the amount of days you hold inventory.

Make Better Use of Your Days in Inventory Metrics with Extensiv

Extensiv’s solutions for brands–including warehouse and order management platforms–can help you accurately calculate and leverage your days in inventory data effectively, leading to business gains such as better inventory turnover rates, accurate safety stock, and reductions in stockouts and backorders.

Here are some other ways Extensiv can help your brand make better use of your days in inventory data:

  • No more manual calculations: Extensiv automates data collection and analysis of relevant data such as sales, order fulfillment, inventory, pricing, costs, and other variables from multiple integration sources–all within a single platform. The software also helps decrease potential errors that negatively impact days in inventory measurements, while ensuring consistency across your operations.
  • Real-time monitoring: Extensiv has real-time dashboards to track and monitor days in stock alongside other inventory-related metrics. With this information, you always have insight into inventory levels and performance to identify trends and quickly address potential issues like excess inventory or stockouts.
  • Alerts and notifications: Extensiv enables automatic alerts and notifications for abnormal days in inventory levels so you can proactively identify and resolve potential problems.  The platform can also recommend corrective actions, such as adjustments to reorder points and stock prioritization.
  • Optimize shipping processes: Extensiv’s insight into your orders and customer behaviors can help you optimize your warehousing and shipping processes. For example, suppose you have a product that sells quickly and often has expedited shipping, like next-day delivery. In that case, Extensiv can help you accurately forecast necessary stock levels to avoid stockouts and ensure customer satisfaction. Extensiv’s shipping tools can also help you select the best carriers, routes, and rates to keep inventory moving out of your warehouses and to your customers.

Interested in learning more? Request a demo today, and subscribe to our blog above for more tips to maximize your ecommerce business’ profitability.

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Days in Inventory FAQs

What are the implications of high and low days in inventory?

High and low inventory days can directly impact retailers. A high volume can tie up cash flow, increase storage costs, and risk obsolescence. However, too low of an amount of days could lead to stockouts, more frequent reorders, increased costs, and missed sales.

How often should businesses calculate days in inventory?

How often you should calculate days of sale inventory is based on several factors unique to your business. If you have high inventory turnover ratios, for example, you may need calculations as frequently as weekly or more. Retailers with long lead times might calculate monthly or quarterly. Businesses that operate more seasonally or slowly might adjust calculation frequency based on peak business and demand surges.

What are some common challenges in calculating days in inventory?

Some common challenges for calculating days in inventory include inaccurate inventory data, inconsistent COGS calculations, and failing to consider lead times or omnichannel sales.

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