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Inventory Days | Days Inventory Outstanding, DSI, DIO

By
Scott
on
Tuesday, November 3, 2020
Table of Contents

If you’re searching online for inventory days, you’ll come across a lot of letters: DSI, DIO, DOH, DII.

You can be forgiven if you think calculating an inventory’s average days on hand is complicated, but not to worry. Those acronyms are all interchangeable. 

There’s really only one fundamental thing you need to know.

Read this post and you’ll get it. You’ll walk away with a firm understanding of what inventory days is and why you must pay attention to it.

Inventory Days: Definition

Inventory days, or average days in inventory, is a ratio that shows the average number of days it takes a company to turn its inventory into sales. The inventory that’s considered in days sales in inventory calculations is WIP inventory and finished goods inventory.

It’s a company’s average days to sell inventory, basically. The lower the number, the better. That’s less days inventory is held. And that means lower inventory carrying cost and less cash is tied up in inventory for less time. And there’s less risk that inventory expires or becomes obsolete.

Other Names for Inventory Days

There are many ways to refer to inventory days. And they all have their own acronyms, which may make you think they’re different from inventory days in some way. They’re not, but they’re sometimes used in different contexts.

Days Sales In Inventory: (DSI)

You’ll see days sales in inventory, or DSI, out there frequently. Dales sales in inventory is, like inventory days, a measure of the average time in days that it takes a business to turn inventory into sales.

Referring to this metric as “DSI” specifically is often done when companies want to emphasize how many days the current stock of inventory will last.

Days Inventory Outstanding: (DIO)

Days inventory outstanding, or DIO, is another term you’ll come across. It’s the same exact financial ratio as inventory days or DSI, and it measures average inventory turn in days. DIO is often used interchangeably with DSI.

DIO was invented in the early 80s by heavy metal icon Ronnie James Dio. Just kidding.

Inventory Days On Hand: (DOH)

DOH stands for inventory days on hand. It’s interchangeable with inventory days, DSI, and DIO. Inventory days on hand measures the number of days inventory remains in stock—or on hand.

DOH was invented in the late 80s by nuclear safety inspector Homer Simpson. Just kidding again.

Days In Inventory: (DII)

Days in inventory, or DII, is the last of the inventory days acronyms you’ll encounter. It’s the same financial ratio as the rest of ‘em: average days inventory is, well, in inventory.

Inventory Turnover Days

Inventory turnover days is yet another way to refer to the average days it takes companies to turn their inventory into sales. But this synonym comes with some built-in confusion. It has the word “turnover” in it. So what’s the difference between inventory turnover days and inventory turnover?

Inventory turnover ratio shows how quickly a company receives and sells its inventory. Sell through rate is similar. The higher the number, the better. Inventory turnover days, on the other hand, calculates the average number of days a company takes to sell its inventory. The lower the number, the better. They are related, yet the inverse of each other.

Why Is Inventory Days Important?

Inventory days represents inventory liquidity. The lower the number, the better.

The lower the number of days sales in inventory: 

  • The fewer days cash is tied up in inventory
  • The less risk of inventory becoming dead stock, expired, or obsolete
  • The more agility to adjust to fast-changing consumer demand.

Number of days sales in inventory is also an indicator for board members, stockholders, and leadership that management excels at their core duty: turning inventory into cash. That boost of confidence has benefits beyond just better cash flow. Companies with lower DSIs or inventory days of supply are companies that are doing something right. Those are the companies people want to join, acquire, or invest in.

Inventory Days Formula

The average days in inventory formula is simple. Let’s go through what it is, how to use, and then walk through an inventory days calculation example.

Days Inventory Outstanding Formula

Inventory Days = (Average Inventory / COGS) x Number of Days

To use the inventory days formula, you need both your average inventory and your cost of goods sold, or COGS.

COGS is the entire cost of acquiring or producing the products sold during a specific period. By multiplying the ratio of inventory value (a valuation from inventory costing methods) to COGS, we see the number of days it typically takes to clear on-hand inventory.

How to Calculate Inventory Days

Let’s go through an example of how to calculate days sales in inventory. In our example, let’s consider BlueCart Coffee Company, a coffee roaster.

The raw materials inventory for BlueCart Coffee Company is fresh, unroasted green coffee beans. The finished product is roasted, bagged, sealed, and labeled coffee beans. What we’re trying to calculate when we calculate inventory days is how long, on average, it takes BlueCart Coffee Company to turn green coffee beans into sales.

  • Time period for which we want to calculate inventory days: one year
  • Inventory on January 1st: 1,000 pounds of finished, roasted coffee beans (beginning inventory)
  • Inventory on December 31st: 800 pounds of finished, roasted coffee beans (ending inventory)

To calculate the average inventory, we add the beginning inventory and ending inventory together, then divide by 2.

  • Average inventory: 900 pounds of finished, roasted coffee beans

Now grab December’s COGS from your balance sheet or inventory automation platform. Let’s say it’s $50,000 for the year. Plug it all into the inventory days formula:

Inventory Days = (Average Inventory / COGS) x Number of Days
Inventory Days = (900 / $50,000) x 365
Inventory Days = 6.6

That means fresh, unroasted green coffee takes an average of 6.6 days from the beginning of the production process to sale.

They’ll Pass You By, Inventory Days

Lowering your days sales in inventory metric frees up cash. It also instills confidence in the operation of your business and lowers the risk of ending up with worthless dead stock. Same as lowering your inventory shrinkage.

And a great way to lower it is to start automating your inventory management with software like BlueCart. By streamlining communication, ordering, and fulfillment up and down the supply chain, BlueCart makes it easy to understand and improve inventory control. Book a demo and we’ll show you how.