Inventory days on hand (DOH) is a business performance indicator that measures how long it takes a company to sell its inventory. Knowing this metric gives retailers a better understanding of operational performance. This data can also help retailers detect supply chain issues, improve efficiency, predict storage costs, and attract investors.
The more informed you are about your shop’s operational health, the faster you can reach the right business decisions. In this retailer’s guide to inventory days on hand, you’ll learn how to calculate, understand, and improve your DOH.
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What is inventory days on hand?
Inventory days is a measure of inventory liquidity that “indicates how rapidly a company sells its inventory,” says Yasin Alan, Associate Professor of Operations Management at Vanderbilt University’s Owen Graduate School of Management.
This metric is also known as days inventory outstanding (DIO) and days of sales inventory (DSI). It measures, in days, how long inventory stays in stock and how long a business’ funds are tied up in its inventory. If, for example, your business’s DOH is 14 days, that means it takes two weeks to sell all of your products.
A low DOH is ideal, as it indicates efficiency, high profitability, good inventory management, and effective forecasting of inventory needs. A high figure is bad because it means that stock sits on the shelves or in storage for a long time. It’s a hallmark of inefficiency, low profits, and poor demand forecasting.
So, what benchmark DOH should retailers aim for?
“This depends on many factors, including the retailer’s gross margin and industry segment,” Alan says. “Some retail segments naturally have shorter DOH than others because they sell more perishable goods. Product margins also play a role [in inventory days on hand].”
Retailers that sell low-margin products (e.g., grocery stores) need to turn their inventories faster to minimize inventory holding costs, while retailers that sell high-margin products (e.g., jewelry) can afford to hold inventories longer. This is known as the earns vs. turns tradeoff in retailing.
“Given these considerations, a good benchmark for a retailer is to pick the highest-performing retailers in its retail segment. For example, a grocery retailer should benchmark itself against a direct competitor (another grocery retailer with a low DOH), rather than a consumer electronics retailer,” says Alan.
Importance of inventory days on hand
Calculating inventory days on hand is an important exercise for retailers because it’s an indicator of performance. It can also help businesses prevent stockouts and overstocking, boost efficiency, attract investors, and predict storage costs.
Understand operational performance
“DOH gives a 10,000-feet level overview of a retailer’s operational performance,” says Alan.
If DOH shows wild fluctuations and/or significant deviations from historical averages, it might be a red flag. This is because such fluctuations and deviations might indicate supply problems (e.g., inventory is not being replenished due to supply chain disruptions) or demand shocks (e.g., demand spikes due to COVID).
Prevent stockouts and overstocking
When you know your DOH and can foresee supply chain problems, you can prevent stockouts and overstocking.
Stockouts are problematic because they frustrate customers and lead to lost opportunities to make profits. By understanding how long it takes your store to run through its inventory, you can restock in time to meet demand.
Overstocking is also problematic because it means your cash is tied up in inventory you can’t sell. You have to discount and sell it with reduced profit margins, or donate it to avoid overspending on storage.
Fluctuations in DOH, or a DOH that’s higher than your benchmark, can indicate inefficiencies in how you manage inventory. By tracking inventory days on hand, you can also improve your inventory management systems and more accurately forecast when you’ll need to reorder stock.
Ultimately, with fewer inventory days on hand, you’ll have higher profits because you’re getting the money back you invested in stock and then some.
If you’re looking for investors for your retail business, they’ll want to know your DOH and inventory turnover ratio. These metrics prove how efficient you are at selling and managing inventory.
By calculating DOH, you can proactively take steps to improve it, and show progress to potential investors.
Predict storage costs
When you know how long stock will sit unused, you can better predict your inventory holding costs. Doing so can help you optimize storage solutions. You could downsize to a smaller warehouse or storage unit if your DOH is low, or work toward achieving that goal.
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How to calculate inventory days on hand
Calculating inventory days on hand is simpler than you might think. We’re sharing the formula for DOH and showing you how to use it with a sample calculation.
Inventory days on hand formula
The formula for inventory days on hand is:
Inventory Days on Hand = (Value of Inventory/Cost of Goods Sold)*Number of Days
This formula includes the following metrics:
- Value of inventory
- Cost of goods sold
- Number of days
Let's take a closer look at each metric to better understand the full formula.
Value of Inventory
Value of Inventory = (Value of Inventory at Start of Time Period - Value of Inventory at End of Time Period)/2
While this is the typical way to calculate inventory value, some “firm managers have real-time access to their inventory and [cost of goods sold] (COGS), so they might use different averaging techniques (e.g., the daily average inventory value over a 90-day period) for internal purposes,” Alan says.
Cost of Goods Sold
Cost of Goods Sold = The sum of how much the business spent on inventory. You can read our blog post on cost of goods sold (COGS) to learn more about this metric.
Number of Days
Number of Days = The number of days in the time period you want to calculate DOH for.
Alan says this is, “typically 365 although some firms might use different numbers: a firm that operates only five days a week might use 250 and thereby calculate the DOH in terms of work days or weeks, rather than calendar days.
Investors typically calculate DOH at quarterly or annual intervals (because they observe inventory in quarterly and annual financial statements). A retailer can use shorter intervals (monthly or weekly) because they have access to inventory and COGS data in real time.
Alan recommends that retailers “continuously monitor DOH in a moving time window fashion (e.g., DOH in the past 30 or 90 days) to detect anomalies (e.g., supply shortages, demand spikes) in real time.”
Example DOH calculation
Let’s say you run a sneaker boutique and want to know how long it typically takes your business to sell its inventory each quarter.
You’re interested in first-quarter sales, so you refer to your POS reports to find the value of the inventory you sold from January through March. The beginning value of your inventory was $50,000 and the value of the inventory you had left over at the end of the quarter was $5,000. So, your Value of Inventory is $5,000.
According to your POS reports, the COGS for the sneakers you sold during that time was $30,000.
And, since your boutique is open 7 days a week and you’re analyzing DOH over a quarter, the Number of Days in question is 90.
Now we plug those numbers in to the DOH formula:
Inventory Days on Hand = (Value of Inventory/Cost of Goods Sold)*Number of Days
Inventory Days on Hand = ($5,000/$30,000)*90=.167*90=15
Your DOH is 15, which means it takes 15 days for you to sell your inventory.
Strategies for improving inventory days on hand
If your DOH is higher than you want it to be, there are several things you can do to reduce it, including:
- Leveraging inventory management software
- Strengthening relationships with suppliers
- Offering markdowns and bundles
- And donating unsold inventory.
Improving DOH should be a top priority if you notice you're holding inventory too long.
Leverage inventory management software
If you’re not doing so already, use inventory management software to improve efficiency. This software uses historical data to forecast inventory needs, so you can order just what you need and work through the stock quickly.
It’s also tremendously helpful for managing omnichannel inventory. If you sell at a brick-and-mortar outlet and online, you can prevent stockouts by ensuring you have up-to-date inventory levels at all times.
Manage inventory from one back office
Shopify POS comes with tools to help you manage warehouse and store inventory in one place. Forecast demand, set low stock alerts, create purchase orders, know which items are selling or sitting on shelves, count inventory, and more.
Strengthen relationships with suppliers
“Supply chain speed and collaboration are important to improve DOH,” Alan says.
When a retailer works with responsive suppliers, it can hold a small amount of inventory and rely on supply chain speed to replenish its stores in case of an unexpected demand spike. By contrast, if the supply chain is slow, the retailer will be forced to hold extra inventory (also referred to as safety stock) to hedge against demand fluctuations.
Alan continues, “Having safety stock increases DOH. Supply chain collaboration also helps because it reduces supply and demand uncertainty. Consequently, the need for excess inventory in the supply chain declines.”
Offer markdowns and bundles
Retail markdowns help you move stock, thus improving your DOH and lowering holding costs. Check your POS reports to see which items have been in stock the longest or whose sales have stagnated to determine what to put on sale.
If customers need a further incentive, give a discount on bundled items. Bundling is an effective cross-selling technique that gets stock moving.
Donate unsold inventory
If you still can’t sell your inventory after discounting it, you may still be paying to store it. It may be wise to donate unsold inventory to stop bleeding money. And, in most cases, you’ll be able to use the donation as a tax write-off.
If those aren’t good enough reasons to donate unused inventory, doing so can also help create good PR for your company.
According to the National Retail Federation, “People are looking for a meaningful connection to the brands they support.”
Donations, therefore, can help you connect with customers who value the causes you donate to. Tell consumers via social media why you’re donating to your charity of choice.
Optimize your inventory days on hand
Along with profitability, sell-through rate, inventory turnover ratio, and other key performance indicators, inventory days on hand is a critical metric that indicates how well your business is doing.
Make a habit of calculating it regularly to prevent stockouts and inefficiencies. When your numbers are off, try building stronger relationships with suppliers, using inventory management software, offering discounts, and donating stock to bring your DOH down.
Unify your inventory management with Shopify
Only Shopify POS helps you manage warehouse and retail store inventory from the same back office. Shopify automatically syncs stock quantities as you receive, sell, return, or exchange products online or in store—no manual reconciling necessary.