Ecommerce success doesn’t just hinge on product purchases. Scaling brands also need to ensure they’re keeping a tight rein on their inventory levels.
Excess inventory ties up cash and racks up storage costs, whereas stockouts risk losing sales and damaging customer trust. Striking a balance is difficult, which is where the inventory days on hand (DOH) metric comes in.
By calculating, tracking, and optimizing inventory DOH, businesses can respond quickly to consumer demand, improving their cash flow, operational efficiency, and overall inventory management.
In this guide, we’ll break down what inventory days on hand means, how to calculate it, and how to use it to boost efficiency, improve cash flow, and drive smarter inventory decisions.
What Is Inventory Days on Hand?
Inventory days on hand, also known as DOH, represents the average number of days a company holds inventory before selling it. It is a crucial metric in inventory management, helping businesses ensure they have enough products to fulfill customer demand without overstocking or risking stockouts. DOH directly impacts cash flow, liquidity, and operational efficiency.
Why Is DOH Important for Inventory Management?
DOH plays a significant role as it reflects the health and efficiency of your current inventory strategy. Broadly, it helps optimize inventory accuracy levels, reduce carrying costs, and enhance order fulfillment.
Efficient management of DOH also leads to streamlined operations, satisfied customers, and a healthy bottom line. For example, a low DOH might signal fast-moving stock, or you’re on the brink of inventory hold-ups and customer dissatisfaction.
On the other hand, a high inventory on hand number could signal you’re overstocking or have excess storage costs, or poor demand forecasting
Is Inventory Days on Hand the Same as Days Sales in Inventory?
While inventory days on hand and days sales in inventory (DSI) both provide insights into inventory management, they focus on slightly different aspects.
DOH measures inventory sufficiency in days, while DSI calculates the number of days it takes to sell existing inventory. Both metrics are valuable and complement each other to provide a comprehensive view of performance, often being used interchangeably to reflect inventory turnover and efficiency.
How to Calculate Inventory Days on Hand
To calculate DOH, brands need two key pieces of information: the average inventory value and the cost of goods sold (COGS).
Breaking Down the DOH Formula
The formula for inventory days on hand is as follows:
DOH = (Average Inventory Value / COGS) * 365
- Average Inventory Value: The total value of inventory (beginning inventory + ending inventory) divided by 2.
- COGS: The cost of goods sold during the same period.
By dividing the average inventory value by COGS and multiplying the result by 365 (number of days in a year), you can determine the number of days your inventory can sustain your operations.
Practical Example of DOH Calculation
Let’s say a retail business has an average inventory value of $100,000 and a COGS of $1,000,000 over a year. Using the DOH formula:
DOH = ($100,000 / $1,000,000) * 365 = 36.5 days
In this scenario, the business has approximately 36.5 days’ worth of inventory available.
The Impact of DOH on Business Operations
Inventory days on hand has far-reaching effects on various aspects of a business’s operations and financial health, which we break down in detail below.
Supply Chain Streamlining
DOH directly affects the efficiency of a company’s supply chain.
For instance, as we mentioned, a high DOH indicates that inventory turnover is slow, potentially leading to dead stock, understock, or overstock and tying up valuable capital.
On the other hand, a low DOH suggests that the company may struggle to meet customer demand due to insufficient inventory. Striking the right balance is crucial for ensuring a streamlined supply chain that can respond promptly to fluctuations in demand.
Cash Flow and Liquidity
Inventory carries costs, and a high DOH often means capital is locked in unsold stock. This limits available cash and can affect your ability to invest in growth or cover operating expenses.
Too low, and you risk stockouts that result in lost sales. Managing DOH well frees up working capital while meeting customer demand and enhancing cash flow and liquidity.
DOH and Inventory Turnover
DOH and inventory turnover rate are closely related. Inventory turnover measures the number of times inventory is sold and replenished within a specific period. It is calculated by dividing COGS by the average inventory value.
COGS / Average Inventory = Inventory Turnover Ratio
As DOH increases, inventory turnover decreases, indicating that stock is held for a more extended period. Monitoring and adjusting DOH can improve inventory turnover rates and other inventory management KPIs, indicating a more efficient use of inventory.
Operational Efficiency
When inventory levels align with actual demand, operations run more smoothly. A well-optimized DOH helps reduce storage costs, improve warehouse flow, shorten lead times, and boost order fulfillment.
Ultimately, this leads to stronger productivity, lower costs, and increased customer satisfaction.
Strategies to Optimize Inventory Days on Hand
To optimize DOH and improve overall inventory performance, businesses can adopt the following strategies.
Leverage Inventory Management Software
Implementing inventory management software provides real-time visibility into inventory levels and automated replenishment.
This technology-enabled solution helps businesses continuously monitor and adjust operational needs, ensuring optimal DOH and stock management. Using inventory management software also helps eliminate human error from the equation by automating calculations, reducing manual data entry, and providing accurate, up-to-date insight.
Strengthen Supplier Relationships
Strong relationships with suppliers enhance inventory management. Collaborative partnerships enable better communication, faster order fulfillment, and improved lead times.
When working with a supplier they trust and with a proven track record, brands can reduce lead times, minimize stockouts, and lower DOH.
Implementing Effective Sales Strategies
Effective sales strategies, such as promotion planning, demand forecasting, and sales channel optimization, can impact DOH.
By aligning sales efforts with inventory management, businesses ensure a steady flow of sales, reduce excess stock, and maintain an optimal DOH.
For example, a brand might offer a sale on a particular product that is nearing its sell-by date. This would help to reduce the amount of excess stock that the business has on hand and improve its DOH.
The Role of Days on Hand in Attracting Investors
Days on hand (DOH) is a key metric investors use to assess a retailer’s operational efficiency and financial health. A well-optimized DOH signals that a business is capable of managing inventory effectively, minimizing excess stock, avoiding stockouts, and maintaining consistent cash flow.
In the competitive retail industry, this balance is essential.
A low DOH suggests strong demand forecasting and efficient turnover, both of which indicate that the company is agile, customer-focused, and financially disciplined. These are attractive qualities for investors seeking sustainable, profitable growth.
How Flowspace Can Help Optimize Your DOH
Partnering with an integrated inventory management solution like Flowspace makes a significant difference when it comes to optimizing inventory days on hand and your order fulfillment process as a whole.
With real-time visibility, advanced analytics, and smart routing capabilities for shipping, Flowspace empowers businesses to reduce excess stock, prevent stockouts, and streamline operations.
Our platform integrates seamlessly with major sales channels, making it easy to track inventory, manage SKUs, and generate actionable insights.
Take advantage of a comprehensive product inventory management and gain complete oversight of your inventory, from inbound and outbound to in-progress stock. Make smarter, data-driven decisions that support growth and efficiency. Position inventory closer to your customers and expedite shipping, depending on customer satisfaction.
Get in touch today to learn how we can improve your DOG and optimize your inventory management. Schedule a demo.
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