Introduction
Do you know how long it takes for your business to sell its entire inventory? Imagine having the insight to gauge the average time your products take to fly off the shelves. Understanding this metric can unlock a world of possibilities for your inventory management strategy.
Welcome to the world of Inventory Days of Supply, a powerful metric that reveals the efficiency of your inventory turnover. From Days in Inventory to Inventory Period, this metric is key to optimizing your operations and boosting your bottom line.
But here’s the kicker: inventory management isn’t just about crunching numbers and calculating averages. It’s a delicate dance of forecasting, supply chain collaboration, and staying ahead of market demands.
In this blog, we will demystify the concept of Inventory Days of Supply and dive into the formula that reveals your inventory’s selling speed.
Inventory Days of Supply
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.
Inventory Days of Supply = (Average Inventory / COGS per 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.
Average Inventory = (Inventory at the beginning of the accounting period + Inventory at the end of the accounting period) / 2
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.
COGS per day = Total Cost of Goods Sold in a year / 365 days
The Average Days to Sell the Inventory metric is calculated by dividing 365 (the number of days) by the Inventory Turnover Ratio.
Average Days to Sell Inventory = 365 days / Inventory Turnover Ratio
The Inventory Turnover Ratio is calculated by dividing the Cost of Goods Sold by the Average Inventory.
Inventory Turnover Ratio = Cost of Goods Sold / Average Inventory
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.
Best Practices for Inventory Days of Supply
Data accuracy in real-time
Ensure that inventory levels and cost of goods sold (COGS) are accurately recorded and regularly updated.
Forecasting and planning
Utilize forecasting techniques and historical data analysis to estimate demand accurately.
Supplier collaboration
Work closely with suppliers to establish efficient lead times, minimize order delays, and optimize inventory replenishment schedules
Seasonal trends
Recognize seasonal fluctuations in demand and adjust inventory levels accordingly. Anticipating demand during peak periods allows for appropriate stock availability while avoiding excess inventory during slower seasons.
Efficient order fulfillment
Streamline order processing, warehouse operations, and fulfillment processes to minimize order-to-delivery time.
Safety stock
Incorporate the concept of safety stock into inventory management that acts as a buffer to mitigate unforeseen fluctuations in demand or supply chain disruptions.
Just-in-time (JIT) inventory
JIT focuses on minimizing inventory holding costs by ordering and receiving inventory only when needed, reducing storage space requirements and potential obsolescence.
Technology and automation
Inventory management software, barcode scanning, and real-time tracking systems can streamline processes, improve accuracy, and provide valuable data for inventory optimization.
Cross-Functional Collaboration
Cross-functional collaboration ensures that inventory decisions align with sales forecasts, production capacities, and customer demand.
Demand Segmentation
This approach allows for more targeted inventory management strategies, optimizing stock levels and reducing the risk of excess or inadequate inventory.
Conclusion
Mastering inventory management and harnessing the power of Inventory Days of Supply can revolutionize your business. You can optimize operations and boost profitability by understanding the time it takes to sell your inventory and implementing best practices like accurate calculations, forecasting, supplier collaboration, and efficient order fulfillment. With streamlined operations, reduced waste, and improved customer satisfaction, your inventory becomes a powerful asset driving growth and success. In a world of fierce competition, mastering inventory management and unlocking the power of Inventory Days of Supply can be the game-changer that propels your business to new heights of success.