Inventory days on hand (DOH) is a key metric that measures how long your inventory lasts before it is sold or used. It reflects how efficiently you manage your stock levels and cash flow. But how do you calculate and interpret DOH, and what are some best practices to improve it? In this article, we will answer these questions and help you optimize your inventory management.
DOH is the ratio of your average inventory to your cost of goods sold (COGS) over a specific period, usually a year. It tells you how many days it takes to sell or consume your entire inventory. To calculate DOH, you need to divide your average inventory by your COGS and multiply by 365. For example, if your average inventory is $50,000 and your COGS is $100,000, your DOH is 182.5 days.
While DOH is an important KPI in the world of inventory management it is crucial to consider Minimum Order Quantities into it. Assuming you're having a product with a Minimum Order Quantity (MOQ) of 20,000pcs, but you're only selling 10,000pcs, the DOH might look disappointing, but if the product is profitable even including the warehousing costs, it's nothing to start worrying over. KPIs are important metrics, but as always: Treat with care, and make decisions based on reality & data, not only data.
DOH is important because it indicates how well you balance your inventory levels and demand. A high DOH means you have too much inventory, which can lead to higher storage costs, lower turnover, and increased risk of obsolescence and spoilage. A low DOH means you have too little inventory, which can lead to stockouts, lost sales, and customer dissatisfaction. Ideally, you want to have a DOH that matches your industry standards and customer expectations.
To benchmark your DOH, you need to compare it with your competitors, industry averages, and historical trends. You can use various sources of data, such as financial statements, industry reports, and market research, to find out how other businesses in your sector perform. You can also track your own DOH over time and see how it changes with seasonality, demand fluctuations, and operational improvements. By benchmarking your DOH, you can identify gaps and opportunities for improvement.
To reduce your Days of Holding (DOH), you need to implement strategies that increase inventory turnover and reduce excess stock. Accurately forecasting demand and adjusting inventory levels accordingly is one way to do this. Additionally, implementing an inventory management system that automates ordering, tracking, and replenishing processes can help. Adopting a lean inventory method such as just-in-time (JIT) can also minimize inventory waste and maximize efficiency. Negotiating better terms with suppliers, such as lower prices, shorter lead times, and flexible delivery options, is another option. Offering discounts, promotions, or incentives to clear out slow-moving or obsolete items can also be effective.
There are other factors to include when determining an appropriate DOH. Pure metrics should not be the sole reason to change inventory on hand or any other financial statement measure. For example, if your suppliers need a long lead time or there are logistical issues such as a delayed transportation, it will be important to have a larger safety stock which will increase inventory costs on the balance sheet and DOH, but reduces the chance of a stock out occurring. In many cases it is better to carry extra inventory in the short term than to not have inventory required to meet demand in the long term.
To increase your DOH, you should implement strategies that guarantee enough inventory to meet customer needs and avoid stockouts. This can be done by analyzing sales patterns and stocking up on profitable items, implementing a safety stock system, diversifying your product portfolio, expanding your market reach and distribution channels, and improving product quality and customer service. This will help you build loyalty and retention while also tapping into new customer segments or regions.
To monitor your DOH, you need to measure it regularly and review it against your goals and benchmarks. You can use various tools and techniques, such as dashboards, reports, or key performance indicators (KPIs), to track your DOH and its impact on your profitability and cash flow. You can also use feedback and data from your customers, suppliers, and employees to evaluate your inventory performance and identify areas for improvement. By monitoring your DOH, you can make informed and timely decisions to optimize your inventory management.
Ensure consistency in the time frame you use for calculating DOH. If you measure it monthly, use the same number of days for each month. Consider calculating DOH for different product categories or product lines to gain more specific insights into your inventory management. Use accurate and up-to-date inventory and COGS figures for your calculation. Regularly monitor and update your DOH calculation to reflect changes in your inventory and sales patterns. Divide the Average Inventory Value by the COGS and then multiply by the number of days in the period to calculate your Inventory Days on Hand.