Inventory analysis and management are critical parts of managing a successful ecommerce brand. There is no shortage of supply chain KPIs that can help brands determine how efficient their process is. Are products selling out before a brand can restock them? Or are products sitting on shelves too long and unnecessarily increasing storage costs?
The days sales in inventory metric can give brands critical insight into how long it takes to sell through their inventory and discover ways to optimize their inventory management process. It is important to stay on top of your order management and current inventory to ensure costs are being optimized.
What Is Days Sales in Inventory?
Days sales in inventory (DSI) measures the average number of days a brand takes to sell through its inventory. It’s also sometimes referred to as inventory days on hand, days inventory outstanding, or days sales of inventory.
DSI can also measure the demand for inventory, the speed of the cash conversion cycle, how effectively a business manages its inventory, and a brand’s cash flow.
Days Sales in Inventory vs Inventory Turnover
The inventory turnover ratio measures how efficiently inventory is managed. It’s the rate at which a company replenishes inventory in any given period due to sales. The figure is calculated by dividing the cost of goods by the average inventory.
For example, in 2019, Walmart reported $385.3 billion in annual costs of goods sold and an average inventory of $44.05 billion. When calculated, its inventory turnover ratio equals 8.75.
The formula for days sales in inventory is:
Days Sales in Inventory = Number of days in the time period / Inventory turnover
In order to calculate the days sales in inventory, brands need to first calculate their inventory turnover ratio. The two metrics are also inversely proportional; when days sales in inventory is low, inventory turnover is high. Alternatively, if days sales in inventory is high, inventory turnover will be low.
Why Is Days Sales in Inventory Important?
Days sales in inventory measures how long it takes a brand to sell through its inventory and is an indicator of how long a brand’s cash is tied up in inventory. A smaller number means a brand is more efficient in selling through its inventory, while a higher number might indicate a brand might have too much inventory on hand.
Days sales in inventory is also important to track because it’s another metric that can help brands tell how efficient their inventory management is. Inventory costs are a huge part of a brand’s overall costs, which is why it’s critical for brands to ensure an efficient inventory management process. While there are many metrics that help brands track inventory management efficiency, days sales in inventory contextualizes this efficiency by putting it into a discrete number of days.
How to Calculate Days Sales in Inventory
Calculating days sales in inventory actually requires calculating a few other figures first, so we’ll break down the formula needed.
Days Sales in Inventory Formula
In order to calculate the days sales in inventory, brands first need to calculate their inventory turnover ratio, which we talked about above. As a reminder, the formula for the efficiency ratio is:
Days Sales in Inventory = Number of days in the time period / Inventory turnover
Let’s stick with the Walmart example we used above and plug the inventory turnover ratio of 8.75 into the days sales in inventory formula to calculate Walmart’s days sales in inventory in 2019.
Days Sales in Inventory = 365 / 8.75
For this example, Walmart’s DSI value in 2019 was 41.71. That means it took Walmart an average of 41.71 days to sell through its inventory items.
What Is a Good Days Sales in Inventory Level?
Like with many KPIs, there’s no universal goal for days sales in inventory because the current inventory depends so much on the type of business and what they sell. For example, Walmart’s DSI is lower than Amazon’s DSI because they sell a large number of perishable finished goods that need to get off the shelves quicker, therefore having a higher inventory turnover rate.
Brands can benchmark their days sale against their competitors as well as their own historical DSI to determine the right financial ratio for them and their business. Ideally, the lowest DSI a brand can pull off without running into inventory issues is the best DSI for them.
Optimize Days Sales in Inventory with Flowspace
Flowspace pairs powerful fulfillment software with a flexible nationwide fulfillment network to support growing ecommerce brands and help them lower their days sales in inventory to reduce costs and increase retained earnings.
Store products closer to customers
The Flowspace Network Optimization algorithm identifies the optimal warehouse fulfillment centers within the nationwide Flowspace network so brands can provide the fastest, most cost-efficient shipping to their customers. The distributed network also allows brands to allocate different inventory levels at different warehouses. For example, does one product sell more and more quickly on the West Coast? A brand can ensure those West Coast warehouses have enough inventory to avoid stock outs. But does the same product sell slower in the Midwest? A brand can dictate lower inventory levels in their Midwestern warehouses so it isn’t paying for storage space it doesn’t need.
Days in sales inventory can help brands determine inventory level across the fulfillment network, but the Flowspace algorithm can also help brands optimize that order fulfillment network to maintain a low days in sales inventory.
Track inventory in real-time
Flowspace improves product inventory management by providing complete inventory visibility of inbound, outbound, and in-progress stock. Brands can ensure optimal inventory levels with real-time tracking, low inventory level alerts, and a predictive view of remaining products. While a low days sales in inventory is better for most brands, brands need to ensure they have enough stock to meet customer demand. With more accurate customer analytics like demand forecasting, with Flowspace’s tools, brands can better manage inventory by having safety stock to avoid low inventory count situations while also avoiding excess inventory cost.
Manage inventory based on demand forecasting
Demand forecasting can help brands stay ahead of trends—such as seasonal demand for certain products—and allow them to plan ahead to have extra stock on hand. To effectively increase profits and mitigate unnecessary costs, brands need to improve demand forecasting and optimize their supply chains. Flowspace’s demand forecasting software uses advanced analytics and distribution metrics to inform business decisions, improve inventory flow and give brands the resources needed to bring their ecommerce stores to the next level.
Set inventory reorder points
A quality inventory management system helps brands accurately forecast inventory needs and reorder products at just the right time—not too soon and not too late. Ordering too soon means a brand is paying to store products that are just sitting on the shelves. Ordering too late means sold out products and unsatisfied customers. The Flowspace platform provides real-time, actionable insights to help brands make smarter inventory management and allocation decisions. Inventory account accuracy is important to ensure the optimal stock level to fulfill customer demand
Focusing on improving the days sales in inventory KPI allows brands to more efficiently manage their inventory. Get in touch today to find out how Flowspace can help you do that today!
Sources:
“Walmart – 2019 Annual Report.” Www.corporatereport.com, 2019, www.corporatereport.com/walmart/2019/ar/index.php. Accessed 27 Jan. 2023.
Written By:
Allison Champion
Allison Champion leads marketing communication at Flowspace, where she works to develop content that addresses the unique challenges facing modern brands in omnichannel eCommerce. She has more than a decade of experience in content development and marketing.
