Inventory days on hand (DOH) is a key inventory management metric used to measure how long it takes a company to sell or use its inventory. It is an important KPI for companies to understand, as it helps them to determine if their inventory levels are adequate, or if they need to adjust their stocking levels in order to meet customer demand. This article will explain the concept of inventory days on hand, and how it can be used to measure inventory performance.
What is Inventory Days on Hand?
Inventory days on hand (DOH) is used to measure the number of days it takes a company to sell or use its inventory. It is calculated by dividing the average inventory per day (AIPD) by the cost of goods sold (COGS). This gives the number of days it would take the company to sell or use its current inventory.
If a company has an average inventory per day of $50,000 and a cost of goods sold of $100,000, then the inventory days on hand would be 50 (50,000/100,000 = 0.5). This indicates that it would take the company 50 days to sell or use its current inventory.
Why is Inventory Days on Hand Important?
Inventory days on hand is an important supply chain metric for companies to measure, as it helps them to understand their inventory performance. It can indicate if a company’s stock levels are adequate to meet customer demand, or if they need to adjust their stocking levels.
If a company has an inventory days on hand of 50, but customer demand is such that they need to have an inventory days on hand of 30, then they need to adjust their stock levels. On the other hand, if a company has an inventory days on hand of 30, but customer demand is such that they can increase their stocking levels, then they may want to do so in order to better serve their customers.
In addition, inventory days on hand can also be used to benchmark a company’s performance against other companies in the same industry. By comparing their inventory days on hand with other companies, a company can determine if they are performing better or worse than their competitors. This can help them to identify areas where they can improve their performance.
Inventory days on hand can also be used to anticipate future inventory needs. By looking at historical sales data, a company can determine the average inventory days on hand that they have experienced over a given period of time. This can help them to anticipate future inventory needs and adjust their stocking levels accordingly.
3 Reasons Why Ecommerce Businesses Should Care About Inventory Days on Hand
1. Inventory Days on Hand is Important for Inventory Management
A business can use the backward-looking formula to see how it did in the last quarter or year, but applying the same logic to sales projections and current inventory levels, especially when tracked precisely in an enterprise resource planning (ERP) system. It also offers a window into where the business is heading.
2. Inventory Days on Hand is an Important Component of Cash Management
Too much cash tied up in inventory can cause problems elsewhere, such as the inability to pay a supplier on time or invest in a new opportunity because all your money is tied up in inventory. For many businesses, storing inventory may be costly, too. Monitoring DOH can help prevent those kinds of issues from happening.
3. Inventory Days on Hand is a Measure of Efficiency
A single number for a single time period may not mean much in isolation, but when DOH is tracked over time, it may uncover changes and trends that, in turn, could provide signals about inventory management. For example, a slow and steady decline in DOH may be a sign that a new sales strategy is working, while a sudden jump may indicate an inventory problem. (Remember not to diagnose a red flag solely on DOH.) Days in Inventory can also be used to compare similar companies in the same industry during the same time period.
DOH calculations matter more for companies that deal primarily or exclusively in physical goods, and especially so for those that sell perishable inventory. Days in inventory drifting too high for products that go bad and become worthless could result in huge monetary losses, as opposed to more standard inventory, where upward DOH means the business will likely incur slightly too high carrying costs and slightly too low liquidity.
Inventory days on hand is an important metric for companies to understand, as it helps them to determine if their inventory levels are adequate, or if they need to adjust their stocking levels in order to meet customer demand. It can also be used to benchmark a company’s performance against other companies in the same industry, as well as to anticipate future inventory needs. Measuring inventory days on hand is relatively straightforward and simply requires dividing the average inventory per day by the cost of goods sold.
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