What is Inventory Days on Hand? Definition, Inventory Days on Hand Formula, Importance & 5 Strategies for Improvement
When you buy or replenish inventory in your warehouse, it doesn’t leave immediately. It lies there for a period of time before being shipped or transferred. It is important for a business to refine its inventory management processes so that the duration of inventory lying idle is limited as this can lead to obsolescence or expiry.
However, it is also suitable for a business to have inventory on hand in case there is an emergency or urgent requirement. Businesses need to find the sweet spot of having just the right amount of inventory in storage. In this article, we take a look at the meaning of inventory days on hand, how to calculate it using the inventory days on hand formula, its importance, and ways to improve it.
- What is Inventory Days on Hand (DOH)?
- What is the Inventory Days on Hand Formula and How to Calculate it?
- Importance of Inventory on Hand (IDOH)
- Top 5 Strategies to Improve Inventory Days on Hand in 2023
- How Can a Fulfillment Company like WareIQ Help Improve Inventory Days on Hand?
- Inventory Days on Hand: FAQs
What is Inventory Days on Hand (DOH)?
Inventory Days on Hand (DOH) is the number of days that inventory stays in your warehouse or storage space before being sold. It reveals how many days it takes you to sell your average inventory on hand. It is an accounting ratio that indicates the average number of days that different kinds of inventory, including raw materials, work-in-progress goods, and finished goods, spend in your warehouse before turning into sales. It is also called Days Inventory Outstanding (DIO), Days in Inventory, Inventory Period, or the Inventory Days of Supply.
Further, it depicts how soon a company can turn its current assets into cash. This metric is extensively used by analysts and business intelligence to gauge the company’s liquidity and financial and operational health.
WareIQ, an eCommerce fulfillment company, empowers online brands with a superior-tech platform to compete with Amazon like service levels by bringing their average delivery timelines from 5-10 days to 1-2 days.
What is the Inventory Days on Hand Formula and How to Calculate it?
The inventory Days on Hand formula considers the average inventory value in your warehouse compared to the Cost of Goods Sold (COGS) and the number of days in an accounting period such as a week, month, or year.
The below equation comes in handy for calculating the inventory in hand:
Inventory Days on Hand = [Average Inventory Value / Cost of Goods Sold] x Number of Days in Accounting Period
And if you know the inventory turnover ratio for your business, you can use the below inventory on hand Formula:
(Number of Days in Accounting Period) / (Inventory Turnover Ratio) = Inventory Days on Hand
Example for Explanation
Let us take an example of how to calculate inventory days on hand.
Mr. Sanjay Dutt owns a business that manages a huge amount of inventories. Let us assume that Mr. Dutt’s company owns an inventory worth Rs. 10,00,000 during the year 2022. The Cost of Goods Sold (COGS) for Sanjay’s company is Rs. 1,00,000 for the same year.
Therefore, now if we calculate Inventory Days on Hand, it will be,
IDOH= (10,00,000 / 1,00,000) X 365 = 3,650 Days
This means that Mr. Sanjay Dutt’s company had an average of 3,650 days of inventory in 2022.
Importance of Inventory on Hand (IDOH)
The inventory days on hand figure reveals much-desired information about your business. Here’s why you need to monitor it regularly:
Analysis of Operational Performance
Inventory days on hand show how long working capital gets frozen in stock. Once you have that data, you can devise ways to shorten the duration by optimizing procurement and sales processes.
A lower DOH value indicates that your business is productively utilizing its inventory. On the other hand, a higher number shows the company’s poor investment decisions and inefficient stock utilization. However, a high inventory quantity doesn’t always showcase unproductive business practices. For example, you may have a higher DOH value if you store stock for around-the-corner peak season sales or a lockdown-like contingency.
Either way, this analysis helps calculate and enhance your business’s operational performance.
Prevents Stockouts and Overstocking
While companies keep adequate stock to shield them from demand fluctuations and variable market dynamics, inadequate inventory management can hurt business operations and revenue. Stockouts or overstocking occurs due to poor demand forecasting or incorrect analysis and reporting. That is when inventory days on hand come to your rescue.
DOH clearly tells you how far you are from a stockout or when you need to stop further ordering of inventory. Keeping a tab on it warns you before a crisis unfolds in your warehouse and can help prevent the crisis from occurring.
Inventory on hand is an indicator of business efficiency. A lower DOH indicates better cash flow and higher productivity. A smoother cash flow also gives you the leverage to pump more capital into the business for expansion, promotion, research and development, and other activities.
Attracts Potential Investors
DOH helps you gauge the inventory conversion rate of your business. A higher stock conversion or liquidity means that you can frequently replace or refill your merchandise, thus keeping your product offerings refreshed for your customers. It is an indication of an agile and flexible business. This practice tends to lure more customers to your stores and attract larger amounts of attention from potential investors.
Similarly, lower liquidity indicates poor business performance. It shows that you cannot sell the stock you buy and cannot replace it with fresh supply on time.
Forecasts Storage Costs
Inventory days on hand show how much inventory you need to order and when. It indicates the amount of stock turnover which tells you how frequently you need to replace or replenish the stock of a particular commodity, within a specified time period. It also highlights areas in your inventory management process where there is scope for improvement. Thus, you can use the inventory on hand figure to forecast storage costs for your inventory.
Mitigates Operating Costs
Where and how long you store your inventory affects your storage and operating costs. The lesser stock you have on hand, the lesser you need to spend on ecommerce warehousing and other operations. Therefore, knowing the storage period of your stock enables you to plan your finances in advance and mitigate expenses to the largest extent possible.
Of course, having a competent 3PL partner like WareIQ allows you to leverage a nationwide presence of warehouses closer to customer locations. This type of service helps further reduce cost overheads.
Increases Profit Margins
Inventory is a current asset and affects a company’s cash flow and profit margins. The inventory days on hand ratio shows how much time and money must be invested in a stockpile before they turn into sales. Therefore, better and regular monitoring of the inventory on hand can safeguard you against loss-making decisions related to unwanted stockpiling or a lack of adequate volume.
Top 5 Strategies to Improve Inventory Days on Hand in 2023
If you regularly deal with inventory days on hand, you might want to improve it wherever possible. Here’s how you can do that:
Utilizing Inventory Management Software
Your 3PL partner’s superior inventory management software can track and trace inventory and keep inventory records actively updated. This software can be coupled with devices such as hand-held scanners that scan merchandise in the warehouse and sends data directly to the system for accounting and record-keeping purposes. In addition, these systems can trigger alerts when some stock needs replenishing, when you have overstocked or when it needs to be replaced with a fresh supply, especially in the case of perishable items.
Such robust tech can remove the burden of keeping accurate inventory records and renewing them regularly. Furthermore, they essentially guide you on how to improve your inventory management efficiency.
Improving Relationships With Manufacturers
Better inventory management by the business causes less hassle for the manufacturers and sellers of products. In addition, accurately telling them when you need to stock up or replace the old inventory strengthens your relationship with them.
Logistical pace and associations affect the relationship between sellers and manufacturers. For example, if a retailer needs a small quantity of stock urgently, the supplier can utilize existing stock to deliver it to their doorstep on time. In such a scenario, their relationship will grow and become stronger. If, on the other hand, the logistics speed is slow, the supplier will have to keep extra merchandise, thus increasing their inventory days on hand.
Strong alliances with suppliers will push you to keep adequate inventory days on hand, thus improving inventory management and business performance.
Providing Markdowns and Bundles
You can bundle slow-moving stock in pre-determined groups with further discounts. Products experiencing low sales can be combined with a similar category of other products that have a higher rate of demand. For instance, you can combine poorly selling plates with fast-moving coffee mugs. A markdown on their prices can further attract the attention of customers.
Clean-ups, closeouts, or flash sales are common ways to mark down your inventory and push it out to improve the inventory days on hand.
Making Use of Unsold Inventory
If markdowns don’t work for your unsold inventory, there might not be a way out of storing it indefinitely. The stock in your warehouse costs you the storage, maintenance, labour, and other overheads. Hence, it is better to put it to use in whatever way it can. If you cannot sell it, you can always donate it and count it as a CSR initiative, recycle it to make new products, or refurbish it to attract new demand. Even if you cannot sell it, it will be less of a loss if it is involved in another business process rather than just wasting your storage space and the money spent on renting it.
Streamlining Operational Processes
Unclear and poorly strategized operational processes cause trouble in inventory management. Your warehouse and supply chain operations need to be streamlined to avoid an excess burden on the existing inventory. Ensure seamless communication and a smooth flow of information to avoid logistics chain disruptions. Combined with a skilled workforce to operate the systems and man the merchandise on the ground, this can help to improve your inventory days on hand ratio.
How Can a Fulfillment Company like WareIQ Help Improve Inventory Days on Hand?
A strong 3PL partner like WareIQ can change the way you manage inventory. We can provide three things you will need the most to monitor your stock effectively:
- State-of-the-art WMS to assist in inventory management and forecasting inventory days on hand of your current inventory.
- Advanced technology to record and monitor the inventory days on hand and provide solutions for improving it.
- Nationwide network of fulfillment centers so you can store inventory near areas of high demand or near shipping and distribution hubs.
Most importantly, a trustworthy logistics partner can empower you with all the tools, technology, and knowledge to control your inventory on hand in the most intelligent manner.