Days of inventory on hand (doh) is a metric used to measure the number of days that a company takes to sell its inventory. In other words, doh tells you how long it would take for a company to completely deplete its current inventory levels if sales remained constant.
This metric is important because it can give you insight into a company’s overall efficiency. A high doh indicates that a company is not selling its products as quickly as it could be, which can lead to higher inventory costs and ultimately lower profits. On the other hand, low doh suggests that a company is selling its products quickly and efficiently, which can lead to higher profits.
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What is Days of Inventory on Hand (DoH)?
Definition: Days of inventory on hand are defined as the number of days it would take to sell all of a company’s inventory at the current sales pace. This metric is used to measure a company’s inventory turnover. It is a measure of the number of days that a company takes to sell its entire inventory.
This metric is commonly used to define how long a product has been on the shelf before it should be sold or repurchased. There are several names for this metric, including Days of Supply (DOS), Days in Inventory (DII), days inventory outstanding (DIO), Days to Sell, and Days Sales of Inventory (DSI). Since it’s used to determine the number of days that the inventory remains in stock, the DOH value represents the inventory liquidity.
Goods sold refers to the portion of inventory that is sold during an accounting period. Excess inventory refers to the inventory that remains unsold at the end of an accounting period. The days of inventory on hand (also called Days Inventory Outstanding) is one of the key performance indicators that measures the number of days it takes to sell the inventory.
Importance of Inventory Days on Hand
Days of inventory on hand is a lagging indicator, which means that it cannot be used to predict future trends. However, it is still a valuable metric to track because it can give you insights into a company’s overall efficiency.
Some of the reasons why financial analysts consider DoH important for managing inventory and optimizing inventory performance are-
1. Understanding operational performance
Days of inventory on hand can help you understand how well a company is managing its inventory. If a company has a high DoH, it may be indicative of poor inventory management. Conversely, a low DoH may suggest that a company is efficient in managing its inventory.
2. Preventing stockouts and overstocking
Days of inventory on hand can also help you avoid stockouts and overstocking. When you understand your DOH and can anticipate supply chain difficulties, you can avoid stockouts and overstock.
3. Improving efficiency
DoH can also be used to improve operational efficiency. If you can identify inefficiencies in your inventory management, you can make changes to improve your DoH.
4. Attracting investors
Days of inventory on hand is a key metric that investors use to evaluate companies. A low DoH may attract investors who are looking for companies that are efficient in managing their inventory.
5. Predicting storage costs
Days of inventory on hand can also help you predict future storage costs. If you know that your DOH is high, you can anticipate that your storage costs will increase in the future.
How to Calculate Inventory Days on Hand
Days of inventory on hand are calculated by dividing the average inventory by the daily sales.
Days of inventory on hand = Average inventory/(Daily sales/No. of Days)
The average inventory is calculated by adding the beginning inventory to the ending inventory and dividing it by two.
Average inventory = (Beginning inventory + Ending inventory)/2
The daily sales are calculated by dividing the total sales by the number of days in the period.
Daily sales = Total sales/Number of days
Example of DOH Calculation
For example, let’s say Company A has $1,000 in beginning inventory, $2,000 in ending inventory, and $10,000 in sales.
Average inventory = (1,000 + 2,000)/2 = 1,500
Daily sales = 10,000/30 = 333.33
Days of inventory on hand = 1,500/333.33 = 4.5
This means that it would take Company A 4.5 days to sell all of its inventory at the current sales pace.
Limitations of Days of Inventory on Hand (DOH)
Days of inventory on hand is a useful metric, but it has some limitations.
1. It is a lagging indicator
Days of inventory on hand is a lagging indicator, which means that it cannot be used to predict future trends.
2. It does not take into account the value of the inventory
Days of inventory on hand do not take into account the value of the inventory. For example, if a company has $1,000 in inventory and $2,000 in sales, its DOH would be 2. However, if the company’s inventory is made up of low-value items, the DOH may not be as meaningful.
3. It does not consider customer demand
Days of inventory on hand do not consider customer demand. For example, if a company has a DOH of 4, but its customers only buy goods every 6 days, the DOH may not be as meaningful.
4. It is affected by seasonality
Days of inventory on hand can be affected by seasonality. For example, a company’s DOH may be higher in the winter months due to lower sales.
5. It does not take into account the type of inventory
Days of inventory on hand do not take into account the type of inventory. For example, if a company has $1,000 in inventory and $2,000 in sales, but the inventory consists of slow-moving items, the DOH may not be as meaningful.
Despite these limitations, days of inventory on hand are still a useful metric for evaluating a company’s inventory management.
Strategies for Improving Inventory Days on Hand
There are several strategies that companies can use to improve their inventory days on hand.
Review your inventory regularly: Reviewing your inventory on a regular basis can help you identify inefficiencies and make changes to improve your DOH.
Implement just-in-time inventory management: Just-in-time inventory management is a strategy whereby businesses only order the amount of inventory they need when they need it. This can help to reduce the amount of inventory on hand and improve DOH.
Use forecasting techniques: Forecasting techniques can help businesses anticipate future trends and demand, which can help them to manage their inventory more effectively and improve DOH.
Leverage inventory management software: Technology can help businesses automate their inventory management and keep track of their DOH. This can help to improve efficiency and reduce the amount of time needed to manage inventory.
Review your pricing strategy: Your pricing strategy can have a big impact on your DOH. Reviewing your prices regularly and making adjustments as needed can help you boost sales and improve your DOH.
Strengthen relationships with suppliers: Strong relationships with suppliers can help businesses obtain the inventory they need in a timely manner. This can help to reduce the amount of time needed to restock inventory and improve DOH.
Offer markdowns and bundles: Offering markdowns and bundles can help businesses clear out inventory and improve their DOH. Check your POS reports to determine which items have been in stock the longest or whose sales have stagnated to figure out what to put on sale. This helps you move inventory, which will boost DOH and lower holding costs. To figure out what should be discounted, view your POS reports to see which products have been in stock the longest or whose sales have stagnated.
Review your storage and handling procedures: Reviewing your storage and handling procedures can help you identify areas where inventory is being wasted or damaged. Making changes to improve these procedures can help you reduce waste and improve your DOH.
Why You Should Shorten Inventory Days on Hand
There are several reasons why you should strive to shorten your DOH
1. It can improve cash flow
Reducing your DOH can improve your cash flow because you will need less money tied up in inventory. It will help you have more capital to invest back into the business.
2. It can reduce holding costs
Reducing your DOH can also help to reduce holding costs, such as storage fees and insurance costs.
3. It can improve customer satisfaction
Keeping your DOH low can help to ensure that customers always have the products they want in stock. This can help to improve customer satisfaction and loyalty. This will optimize your ability to quickly respond to the demand.
4. It can reduce the risk of obsolescence
Keeping your DOH low can help to reduce the risk of inventory obsolescence. When inventory sits on shelves for too long, it runs the risk of becoming outdated or damaged.
5. It can improve profitability
Reducing your DOH can have a positive impact on your bottom line. With less money tied up in inventory, you will have more funds available to invest in other areas of your business.
Inventory Turnover Ratio & DOH
There is an inverse relationship between inventory turnover and the number of days of inventory on hand. This means that as inventory turnover decreases, the number of days inventory on hand increases.
If a business has a high inventory turnover ratio, it means that they are selling through their inventory quickly. This results in a lower number of days of inventory on hand because there is less inventory sitting on shelves.
Conversely, if a business has a low inventory turnover rate, it means that they are not selling through their inventory quickly. This results in a higher number of days of inventory on hand because there is more inventory sitting on shelves.
Businesses should strive to have a high inventory turnover in order to minimize the number of Days of Inventory On Hand. A high inventory turnover indicates that a business is selling through their inventory quickly and efficiently. This results in less money being tied up in inventory and lower holding costs.
To calculate your Days Inventory On Hand, divide your ending inventory by your daily sales.
For example, if your ending inventory is $10,000 and your daily sales are $1,000, your Days Inventory On Hand would be 10 Days.
Balancing Risk & Reward
Days of inventory on hand (doh) can have a big impact on a business’s operations and bottom line. Reducing DOH can improve cash flow, reduce holding costs, and improve profitability. However, businesses need to strike a balance between reducing DOH too much and having too little inventory on hand to meet customer demand.
Reducing DOH too much can lead to stockouts and lost sales while having too much inventory on hand can tie up capital that could be better used elsewhere. Therefore, it is important for businesses to find the sweet spot where they have enough inventory to meet customer demand without tying up too much capital.
One way to strike this balance is to use data from your point of sale (POS) system to track customer demand. This data can help you to predict future demand and adjust your inventory levels accordingly.
Another way to balance the risk and reward of DOH is to use inventory management. It is a system where businesses only order the amount of inventory they need to meet current demand. This helps to minimize the amount of inventory on hand and reduces the risk of obsolescence.
Days of inventory on hand (doh) is a key metric for businesses to track. Reducing DOH can have many benefits, but businesses need to strike a balance between reducing DOH too much and having too little inventory on hand. Using data from your POS system and employing just-in-time inventory management can help you to find the sweet spot for your business.
Conclusion!
On the concluding note, Days of Inventory on Hand is a metric to understand how much inventory is held by the organization in terms of the number of days.
Days of inventory on hand can have a big impact on the cash flow of the business as it directly impacts how much money is tied up in inventory. To calculate Days of Inventory on Hand, divide your ending inventory by your daily sales. A business should strive to have a high inventory turnover to minimize the number of Days of Inventory On Hand.
Do you track Days of Inventory on Hand in your business? What strategies do you use to strike the balance between reducing DOH too much and having too little inventory on hand? Let us know in the comments below.
