Inventory Days on Hand is one of the most important metrics that merchants use for inventory management – and in this guide, we’ll help you understand it better. Learn about optimization strategies, how to calculate it, the benefits of optimizing it and more.
What are Inventory Days on Hand?
Inventory Days on Hand is a metric that measures how long a business can sell through its inventory or stock. It’s an important measurement for a few reasons. For starters, if inventory isn’t a retail company’s biggest single investment, it’s certainly a close second, and generally the faster a business can sell through its inventory, the better it is doing.
Additionally, Inventory Days on Hand (DOH) can help measure inventory efficiency and help a company determine how long capital is accounted for in inventory. Efficient inventory management, indicated by a lower DOH number, is preferred as it signifies faster turnover and reduced capital investment. Again, the shorter the time period, the better it is for cash flow and overall business operations.
The DOH metric can also help a business make predictions and reorder stock accordingly. Maintaining stock levels to meet customer demand is crucial for minimizing inventory holding costs and maximizing profitability.
Why Inventory Days on Hand Matter
Inventory Days on Hand is an important metric to track for several reasons. Not only is tracking inventory important for a well-functioning business, but tracking the DOH number – and tracking it at different periods of the year – can help merchants better anticipate demand and predict when they’ll need what (and when). If your business doesn’t have an accurate DOH number, it won’t be able to easily adjust to the ebbs and flows of demand throughout the year. Effective inventory performance is crucial in this context, as it enhances DOH and overall inventory management.
The last thing that any business wants is to have to delay orders because inventory levels aren’t well understood and items aren’t restocked accordingly. It leads to unhappy customers, angry reviews and potentially even lost business.
There’s also a direct relationship between DOH and cash flow. When inventory is going out the door, revenue from sales is coming in. That’s why a low DOH number tends to be preferred, as it’s indicative of a business that’s making money from selling products. Excess inventory, on the other hand, ties up working capital and negatively affects cash flow.
How to Calculate Inventory Days on Hand
The average inventory value is crucial as it represents the typical amount of inventory held over a period, helping to smooth out fluctuations. It is important to know how to calculate Inventory Days on Hand, and there are two formulas you can use. One uses the average inventory as a key metric, which involves beginning inventory and ending inventory, while the other uses inventory turnover as the key metric. Here’s a look at each of them:
DOH = (Average annual inventory/cost of goods sold) x 365
Say you’re a small business and you have an average inventory value of $50,000 and your cost of goods sold, or COGS, is $375,000. Using the average days in inventory formula above, your DOH is 48.67 days.
DOH = Number of days in your accounting period/inventory turnover ratio
To use this Inventory Days on Hand formula, you’ll need to know your inventory turnover ratio. Let’s say for this example it is 3.8. Let’s say there’s also a full year in your accounting period. Using the formula above, your Inventory Days on Hand would come to 96 days.
Benefits of Optimizing Inventory Days on Hand
In most cases, the lower your Inventory Days on Hand, the better it is for your business, as businesses strive for high inventory turnover, which translates to sales, revenue and, ideally, growth. An efficient supply chain plays a vital role in optimizing DOH. By collaborating with responsive suppliers and managing inventory levels effectively, businesses can improve operational performance and reduce the risk of supply chain disruptions. Here’s a look at some of the key benefits of optimizing your DOH number:
Increased Capital for Business Investment
Cash is king. If inventory is sitting in your warehouse, you’re not selling it and not making any money. Conversely, if you’re turning over your inventory quickly, your business is probably making money – and that means you can allocate capital to further growing it. Making a capital investment often consists of acquiring physical assets to meet any short or long-term business goals or objectives. It could include merging with or acquiring another company, investing in new technology to streamline operations or opening up more locations. Capital makes it all possible.
Improved Responsiveness to Consumer Demand
When you’re holding less stock, it’s easier to pivot and shift to meet any changing consumer demands. For example, if your business has a low DOH and a new hot trend emerges, you’ll be able to order it sooner than if you had high stock levels and had to wait for more of your inventory to clear.
If you’re not adapting and continuously improving, chances are it won’t be long before you fall behind. Another big benefit of having capital on hand is the ability to invest in new products and trends before your competition can. This can put you ahead of the game – and your customers will be the ones who benefit most from it.
Reduced Risk of Obsolescence
Obsolescence is the process of becoming obsolete, outdated or no longer used. The higher your DOH, the better the chance of your inventory becoming yesterday’s news. Reducing the risk of obsolescence goes hand-in-hand with being responsive to consumer demand. If Item A is no longer desired and you have plenty of it in stock, you’re likely to be sbsorping some – if not all – of the costs associated with this inventory. When your DOH is high, there’s always the chance that consumer demand will change faster than you can turn over your inventory. If your DOH is low, your business is able to be much more flexible and there’s a significantly reduced risk of obsolescence.
Lower Inventory Carry Costs
Inventory carry cost is the total cost of all expenses related to storing any unsold products. This metric factors in variables such as depreciation, warehousing, transportation, taxes and more. The less inventory you have, the less money you’ll have to allocate to carrying it. It’s a benefit to your bottom line.
Drawbacks of Low Inventory Days on Hand
While a low DOH is generally preferred, it’s important to be aware of potential drawbacks:
Risk of Stockouts
If your DOH is too low, you might not have enough inventory on hand to meet unexpected spikes in demand. This can lead to stockouts, delaying order fulfillment and causing customer dissatisfaction. Balancing inventory levels is key to avoiding stockouts while still maintaining a low DOH.
Increased Order Frequency
Maintaining a low DOH might require more frequent reordering, which can increase administrative and shipping costs. Efficiently managing reorder points and supplier relationships is essential to mitigate these costs.
How SMBs Can Benefit from Optimizing Inventory Days on Hand
Small and medium-sized businesses (SMBs) can derive significant advantages from optimizing their DOH:
Cost Efficiency
SMBs often operate with limited resources and tighter budgets. Optimizing DOH can help reduce carrying costs and free up capital that can be reinvested into other areas of the business, such as marketing, product development, or expansion.
Enhanced Flexibility
With optimized DOH, SMBs can be more agile in responding to market changes and consumer demands. This flexibility can be a competitive advantage, allowing them to adapt quickly to new trends or shifts in customer preferences.
Improved Cash Flow
For SMBs, cash flow management is critical. A lower DOH means faster inventory turnover, leading to quicker revenue generation and improved cash flow. This financial stability can support growth initiatives and provide a buffer against economic uncertainties.
Customer Satisfaction
By optimizing DOH, SMBs can ensure they have the right products available at the right time, reducing the risk of stockouts and enhancing customer satisfaction. Happy customers are more likely to become repeat buyers and advocates for the business.
Strategies for Shortening Inventory Days on Hand
Less is more when it comes to Inventory Days on Hand, so how do you shorten this period to improve inventory turnover time? There are several strategies you can implement to shorten DOH. Here’s a closer look at what you can do to incorporate such strategies into your business to align with your short and long-term goals.
Improving Demand Forecasting
Better forecasting can lead to shorter Inventory Days on Hand. It’s the best way to reduce your DOH metric and get rid of any slow-moving inventory. Good demand forecasting can help you identify the products that have been popular and which ones are most likely to sell in the future. This helps provide actionable insight into where your business should invest in inventory going forward.
Enhancing Inventory Management Processes
Optimizing the inventory management process is another way to reduce Inventory Days on Hand. Look into incorporating optimization techniques such as JIT and ABC analysis into your operations. JIT, or just-in-time, analysis aims to reduce inventory holding costs and improve turnover by managing goods received from suppliers only as they are needed. ABC analysis is a method that can help tell businesses which goods are high priority and which ones are not. When incorporated, they can each represent effective management processes for improving DOH.
Implementing Efficient Reordering Practices
A reorder point, or ROP, represents a specific level at which your stock needs to be replenished. Simply put, it’s a metric that tells you when it’s time to place an order for new stock so that you don’t run out of goods. Reorder points are calculated by multiplying daily sales velocity by lead times in days and then adding in the safety stock. The ensuing metric can be used to make a data-driven decision for when it’s time to replenish inventory.
The Role of Inventory Management Software in DOH Optimization
Inventory Days on Hand is one of the most important metrics that businesses that sell products need to be aware of – and the faster you can turn over inventory, the better. One way to help optimize your Inventory DOH is to use robust inventory management software. Such software can help your business get an accurate picture of its inventory at any point in time. It can help record any historical data and also help with planning, forecasting and management of cash flow. A good inventory management software can also help to automate inventory calculations to provide real-time indication of stock that’s taking longer to turn over, so strategies can be implemented to successfully move it. Finally, inventory management software helps reduce errors and provide warnings on low inventory levels, thereby eliminating the need for manual inventory counts. In the end, utilizing a good program to optimize inventory can help build trust with customers and improve the overall efficiency of your operations.
FAQs on Inventory Days on Hand
What are Inventory Days on Hand and why are they important?
Inventory Days on Hand is a measurement of how quickly a business turns over its inventory stock. Knowing this number allows businesses to forecast better and avoid going out of stock on certain items.
How do you calculate Inventory Days on Hand?
There are two formulas for calculating Inventory Days on Hand. One involves dividing the annual average inventory by the cost of goods sold and multiplying that number by 365. The other involves dividing the number of days in your accounting period by your inventory turnover ratio.
What is a good Inventory Days on Hand ratio for a business?
Generally speaking, the smaller the Inventory DOH, the better it is for a business. That’s because a smaller number is indicative of inventory being completely turned over faster, which means you’re making sales and improving cash flow. A higher Inventory DOH number comes with a greater risk of obsolescence.
How can optimizing Inventory Days on Hand improve cash flow?
The faster you turn over inventory, the faster you’re also making a profit. On this note, optimizing your DOH number can improve cash flow for your business and increase the amount of capital you have to spend.
What strategies can businesses use to reduce their Inventory Days on Hand?
Strategies involve improving demand forecasting, enhancing the inventory management process and implementing efficient reordering processes, among others.
Unlock Your Inventory Potential with ShipCalm
Improved inventory efficiency. Cost savings. Enhanced responsiveness to market demands. These are just a few of the key benefits involved when your business partners with ShipCalm for its inventory management.
Take that next step to optimizing your inventory management by contacting ShipCalm today. We’re standing by and ready to demonstrate how we can help take your inventory management to a whole new level. Contact us today for more information.
