Sometimes, it might seem like inventory is flying off your shelves; other times, it might feel like it takes weeks for the last piece of inventory to finally get sold.
But how accurate are these feelings? While you may trust your gut as a business owner, it’s always best to use data to determine how fast your inventory is moving.
To get the most accurate sense, you’ll need to calculate your Days of Sales Inventory, or DSI.
Though simple, this metric is very versatile, and can help provide critical insights into customer demand for your products, when you should restock your inventory, and how your company’s sales compare to those of your competitors.
In this article, we’ll cover what DSI is, how to calculate it, and how ShipBob can help you optimize your DSI.
What is days sales in inventory (DSI)?
Days sales in inventory (also known as inventory days on hand, days inventory outstanding, or days sales of inventory) refers to the average number of days it takes a retailer to convert a company’s inventory into sold goods.
In other words, DSI measures how many days on average it takes a business to sell their entire inventory. DSI can also be used to analyze many aspects of a business, including:
- Customer demand for your inventory
- Speed of cash conversion cycle
- How effectively a business manages its inventory
- How demand for your inventory compares to that for your competitors’
- A company’s cash flow (specifically, how much of a company’s cash is tied up in inventory)
To calculate the DSI, you will need to know the cost of goods sold, the cost of average inventory, and the duration of the time period for which you are calculating the DSI.
Days sales in inventory formula
Here is the formula used by retailers to compute the average time it takes to sell through their whole inventory:
DSI = Number of days in the time period / Inventory turnover
To compute DSI, you will first need to calculate your inventory turnover ratio using a different formula:
Inventory turnover = Cost of Goods Sold / Average inventory value
To calculate average inventory value, simply add your beginning inventory valuation to your ending inventory valuation, and divide the sum by 2.
Let’s walk through an example. A fictitious company reports that
- Beginning inventory = $1,000
- Ending inventory = $3,000
- Cost of Goods Sold (or “COGS”) = $50,000.
Therefore, this company would calculate inventory turnover like so:
Inventory turnover = (50,000) / ((3,000+1,000) / 2)
Inventory turnover = 50,000 / 2,000
Inventory turnover = 25
Having calculated inventory turnover, let’s say this company wanted to calculate their DSI for the past year (365 days):
DSI = 365/25
DSI = 14.6
This means that it takes an average of 14.6 days for this retailer to sell through its stock.
Note: You can source inventory value from your company’s balance sheet and COGS value from your annual financial statements. Average inventory value should include raw materials, work-in-process (WIP) inventory, and finished goods.
What is the average number of days to sell inventory?
The average number of days to sell inventory varies from industry to industry.
Within a particular industry or vertical, businesses and retail companies will sometimes compare their own DSIs to their competitors’ (for example, Walmart may compare its DSI to Costo’s).
But if the DSIs are different, it doesn’t necessarily mean one company’s inventory management is any less efficient than the other. The variation could be because of differences in supply chain operations, products sold, or customer buying behavior.
For example, in 2018, Walmart’s DSI is lower than Amazon’s. This is because Walmart’s sales mix has a higher share of perishable goods which cannot be kept for too long in its warehouses.
Walmart’s merchandise is also bought in bulk by customers who visit its brick and mortar retail stores, unlike with Amazon where customers purchase just one or two items at a time and expect door-step delivery. The delivery time adds to Amazon’s DSI.
While there is not necessarily one perfect DSI, companies typically try to keep low days sales in inventory. A lower DSI indicates that inventory is selling more quickly, which is usually more profitable than the alternative.
Days sales in inventory vs. inventory turnover
Inventory turnover and DSI are similar, but they do not measure the same thing. DSI measures the average number of days it takes to convert inventory to sales, whereas the inventory turnover ratio shows the number of times inventory is sold and then replaced in a specific time period.
DSI is also inversely proportional to inventory turnover. This means that when DSI is low, inventory turnover will be high, and high DSI makes for low inventory turnover.
How can ShipBob help with optimizing DSI?
ShipBob helps ecommerce companies manage inventory so that they can meet the increasing consumer demand without slowing down. Here are some of the strategies ShipBob can help you implement to improve your DSI, as well as your overall inventory management.
Distribute inventory across fulfillment centers:
ShipBob has a wide network of fulfillment centers, with dozens of locations all powered by proprietary WMS technology across the US and internationally.
This means that you can strategically allocate your inventory to ensure that each geographical location has optimally high inventory levels. This helps prevent stock from accumulating or going obsolete, which in turn lowers DSI.
Distributing inventory strategically also has other added benefits, the most significant being reduced shipping costs, storage costs, and transit times.
“ShipBob has multiple fulfillment centers in the US, one in Canada, one in the EU, and one in the UK. All locations filter back into one centralized warehouse management system, so everything is under the ShipBob umbrella. By distributing our inventory across these countries and regions, all of our customers are able to get their orders much faster while paying reasonable domestic shipping rates.”
Wes Brown, Head of Operations at Black Claw LLC
Track inventory metrics in real-time
ShipBob’s inventory management software (or IMS) provides updated data so that you can make more informed decisions when managing your inventory.
From real-time inventory counts to daily inventory histories, ShipBob’s analytics dashboard offers you critical metrics at a glance, as well as detailed inventory reports for downloading.
This gives you the information you need to calculate and monitor DSI, as well as other critical metrics such as inventory turnover, COGS, and average inventory valuation.
“ShipBob’s dashboard is super intuitive and easy to navigate. love that you can view orders based on when they are processing, completed, on hold, and in other stages. It is super helpful for us to have that and track the order every step of the way.
We have a Shopify store but do not use Shopify to track inventory. In terms of tracking inventory, we use ShipBob for everything — to be able to track each bottle of perfume, what we have left, and what we’ve shipped, while getting a lot more information on each order.”
Ines Guien, Vice President of Operations at Dossier
Manage SKUs based on future forecasts
Will you need more units of a product next month? Or will you need less? How do you plan your inventory in such a way that deadstock and backorders can be avoided?
Inventory forecasting is the best way to ensure that your stock levels are optimal at every location you operate in, and that inventory keeps moving through your supply chain.
ShipBob’s demand forecasting tools help you accurately predict future customer demand, taking into account historical sales data, planned promotions, and external factors such as trends, seasonal spikes or dips, and geographic variants.
Set inventory replenishment points
Especially for ecommerce businesses, you want to reorder SKUs at just the right time. Too early, and you may wind up with too much working capital tied up in inventory, or a surplus of stock that goes obsolete, and your DSI grows; too late, and you risk stocking out of items and disappointing customers with backorders.
To time inventory replenishment correctly, you need to calculate reorder points and safety stock carefully every time.
ShipBob not only helps merchants calculate reorder points for each product based on inventory days on hand, historical sales, safety stock, etc., but also allows merchants to set automatic reorder notifications for each SKU so that you never miss your perfect reorder time window.
“ShipBob’s analytics tool is really cool. It helps us a lot with planning inventory reorders, seeing when SKUs are going to run out, and we can even set up email notifications so that we’re alerted when a SKU has less than a certain quantity left. There is a lot of value in their technology.”
Oded Harth, CEO & Co-Founder of MDacne
Days in sales inventory FAQs
Here are answers to the most common questions about days in sales inventory.
Why is days sales in inventory (DSI) useful?
DSI is a useful metric to help with forecasting customer demand, timing inventory replenishment, and assessing how long an inventory lot will last.
Calculating DSI gives you a benchmark for how long it takes on average to sell your whole inventory; with this information, you can make adjustments to increase cash flows, lower costs, deliver quick profits, avoid stockouts, and reduce instances of obsolete inventory.
What’s considered a good average number of days to sell inventory?
The average number of days to sell inventory really varies from business to business depending on the operating model, items being sold, the transit time, etc.
How do you calculate days sales in inventory?
The inventory calculation for days sales in inventory (DSI) divides the number of days in the time period by the inventory turnover in that period.
What are some factors that may affect the number of days it takes to sell inventory?
Product type, business model, and replenishment time are just some of the factors that affect the number of days it takes to sell inventory.
Can ShipBob help optimize days sales in inventory?
ShipBob can help lower your inventory days by offering better inventory management and inventory tracking capabilities, lowering fulfillment costs, and efficiently setting reorder points.
Ultimately, with ShipBob’s fully integrated 3PL services you can start viewing inventory as a way to grow the company’s cash flows and valuation.