Getting customers to purchase products from an ecommerce brand is critical to success, but so is having enough products so that when customers purchase them, they aren’t out of stock.
But there’s a flip side to that inventory coin. Brands also want to make sure they aren’t holding on to too much product and wasting money paying to store products that aren’t moving.
One metric to measure that inventory balance is Inventory Days on Hand (DOH). By mastering the calculation and optimization of inventory DOH, businesses can improve their cash flow, operational efficiency, and overall profitability.
In this comprehensive guide, we’ll delve into the definition, importance, calculation, and examples of Inventory Days on Hand, and explore strategies to optimize it for enhanced business performance.
Definition and Importance of Inventory Days on Hand (DOH)
Inventory Days on Hand, also known as DOH, represents the number of days a company’s current inventory can sustain its operations. It is a crucial metric in inventory management as it helps businesses ensure they have enough inventory to fulfill customer demand without overstocking or risking stockouts. DOH directly impacts cash flow, liquidity, and operational efficiency.
The Role of DOH in Inventory Management
Inventory Days on Hand plays a significant role in guiding inventory management decisions. By understanding DOH, businesses can strike a balance between holding excessive stock and risking stockouts. It helps optimize inventory accuracy levels, reduce carrying costs, and enhance order fulfillment. Efficient management of DOH leads to streamlined operations, satisfied customers, and a healthy bottom line.
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 different aspects. DOH measures inventory sufficiency in days, while DSI calculates the number of days it takes to sell existing inventory. DOH focuses on the internal operations of a business, while DSI focuses on the external market demand. Both metrics are valuable and complement each other to provide a comprehensive view of inventory performance.
Understanding the Inventory Days on Hand Calculation
To calculate Inventory Days on Hand, 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: Total value of inventory (beginning and ending inventory) over a specific period divided by the number of periods (e.g., an average of monthly inventory values).
- 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 to support its operations.
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. DOH impacts cash flow, liquidity, and operational efficiency.
DOH and the Supply Chain
DOH directly affects the efficiency of a company’s supply chain. 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.
How Inventory Days On Hand Affects Cash Flow and Liquidity
Maintaining a high DOH can tie up significant capital in inventory, leading to reduced cash flow and limited liquidity. On the other hand, a low DOH may cause stockouts and missed sales opportunities. Striking the right balance and optimizing DOH ensures efficient use of capital while meeting customer demand and enhancing cash flow and liquidity.
The Relationship Between 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. As DOH increases, inventory turnover decreases, indicating that stock is held for a more extended period. Monitoring and adjusting DOH can lead to improved inventory turnover rates and other inventory management KPIs, indicating a more efficient use of inventory.
DOH and Its Influence on Operational Efficiency
Efficient inventory management directly impacts overall operational efficiency. By optimizing DOH, businesses can reduce carrying costs associated with overstocking, minimize the risk of stockouts, increase order fulfillment rates, improve lead times, and streamline warehouse operations. With a balanced DOH, businesses can achieve higher 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 various strategies, including using inventory management software, improving supplier relationships, and implementing sales strategies.
Leveraging Inventory Management Software
Implementing inventory management software can provide real-time visibility into inventory levels, demand forecasting, and automated replenishment. This technology-enabled solution helps businesses continuously monitor and adjust inventory levels, ensuring optimal DOH and efficient stock management. Using inventory management software also removes human error from the equation.
Strengthening Supplier Relationships
Developing strong relationships with suppliers can 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
Implementing effective sales strategies such as promotion planning, demand forecasting, and sales channel optimization can impact DOH. By aligning sales efforts with inventory management, businesses can 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
Inventory Days on Hand plays a crucial role in attracting investors, particularly in the retail industry. A low DOH shows investors that a business is efficient at selling its inventory and minimizing its costs. This can make a business more attractive to investors.
How Investors View DOH
Investors consider DOH as an essential metric when evaluating a company’s operational efficiency, risk management, and financial health. An optimal DOH demonstrates effective inventory management, which indicates a well-run business capable of meeting customer demand while minimizing costs and maximizing profitability.
The Importance of DOH in the Retail Industry
In the competitive retail industry, DOH holds significant importance. Retailers need to strike a delicate balance between customer demands and inventory availability. An efficient DOH enables retailers to avoid stockouts, minimize excess inventory, improve customer satisfaction, and ultimately drive growth and profitability.
How Flowspace Can Help Optimize Your DOH
Partnering with a reliable inventory management solution like Flowspace can make a significant difference when it comes to optimizing Inventory Days on Hand.
Flowspace’s Role in Efficient Inventory Management
Flowspace provides businesses with a comprehensive suite of inventory management tools, empowering them to optimize their DOH. From real-time inventory visibility and demand forecasting to efficient order fulfillment and advanced analytics, Flowspace enables businesses to streamline their operations, reduce DOH, and enhance their overall inventory performance.
Flowspace’s order fulfillment platform provides seamless integration with online stores and every other sales channel, so brands can see inventory levels, manage items, and create sales order reports with just a few clicks.
Flowspace also provides a comprehensive product inventory management solution that gives brands complete visibility of their inventory, from inbound to outbound to in-progress stock. Real-time inventory tracking, low inventory level alerts, and a predictive view of remaining product help brands ensure that they have an optimal stock level at all times. By having accurate customer demand insight, brands can better manage their inventory by having safety stock to avoid low inventory count situations while also avoiding excess inventory costs.
Get in touch today to learn how a fulfillment company like Flowspace can improve your Days on Hand and optimize your inventory management!