The Inventory Days of Supply metric is an efficiency ratio that’s usually known as Days in Inventory, the Inventory Period, or Days Inventory Outstanding. It is used to measure the average time – in days – it takes for a company to sell its entire inventory.
In short, Inventory Days of Supply shows the average time between your company purchasing the products/ items and selling them to customers. In case of a manufacturer, this metric measures the average time between the purchase of the raw materials and the sale of the finished product to a distributor.
Beside this metric, a company’s management team will have to balance a few inventory policy holding aspects, such as bulk discounts, lead times, alternative use of warehouse space, seasonal fluctuations in orders, and the likelihood of the inventory becoming obsolete or perishing.
The Formula of Inventory Days of Supply
In order to calculate the Inventory Days of Supply you just have to divide the average inventory by the COGS (Cost of Goods Sold) in a day. The average inventory is calculated by coming up with the average between the inventory levels at the beginning of an accounting period and the inventory levels at the end of the said accounting period.
Then, the COGS (Cost of Goods Sold) can be calculated by dividing the total cost of goods sold in a single year by 365 days. On the other hand, the Average Days to Sell the Inventory metric is calculated by dividing 365 (the number of days) by the Inventory Turnover Ratio.
The Basics of Inventory Days of Supply
Naturally, the smaller the number of Inventory Days of Supply is, the better your company is at selling its goods – basically, this is what companies are after: selling their goods/ products in the shortest time possible.
If the products are being sold at a fast rate, it means that you are making a profit faster and that there isn’t the risk for the inventory to become obsolete. It also means that you will be required to purchase new inventory faster – speeding all of the aforementioned processes means that, essentially, your business is doing very, very good.
A Large Number of Inventory Days of Supply
However, there might be times when your company isn’t quite effective at selling its inventory. In this case, you have to determine the problem and fix it as soon as possible.
When the Inventory Days of Supply metric is displaying a big number, it’s usually because the trading is experiencing a slowdown. In this case, you may want to rethink the marketing strategy of your company – for example, you might be selling the wrong items for the season or might have chosen the wrong products for your target audience.
The aforementioned can be fixed easily – but, on the other hand, your company may be building in inventory levels. Basically, your inventory is becoming excessive because you keep on restocking even if you don’t have enough sales.
Again, this calls for some change within the company’s procedures – order products less often; wait for more than 50% of those that you have on stock to be sold and you should not experience an excess in inventory.