What is Inventory Days on Hand & How to Calculate It
August 22, 2019
When it comes to managing inventory, you might find yourself wondering how long your inventory will last before it runs out or how quickly you’ll go through it. In the worlds of both ecommerce and physical retail, your inventory levels can make or break your business.
With accurate stock levels, you can ensure customers are going to be able to purchase what they need without needing to subscribe to “Back in Stock” notifications. Calculating and tracking how quickly you go through inventory is where the metric of inventory days on hand comes into play.
We covered inventory forecasting in depth to demonstrate how you calculate how much inventory you need. Combined with inventory days on hand, you can use these two metrics to determine how quickly your products are being sold on average and accurately predict future inventory levels.
What is inventory days on hand?
Inventory days on hand (or days of inventory on hand) measures how quickly a business uses up its inventory levels on average. Calculating accurate inventory days on hand allows businesses to minimize stockouts. In general, the fewer days of inventory on hand, the better — and we’ll explain why in this article.
Why inventory days on hand matters
Managing inventory levels is vital for most businesses. It’s increasingly more challenging for ecommerce businesses to predict accurate inventory counts as new customers can come in from all over the world, making demand harder to predict than ever before.
In addition to general growth, you must factor in prime online shopping days like Black Friday, Cyber Monday, Labor Day, Independence Day, and other large promotions or flash sales you run to ensure your business has the right amount of products to ship out.
Without getting accurate projections, you may experience many canceled or delayed orders and angry customers — which can then turn into negative reviews and feedback for your business.
While inventory turnover ratio is one of the best indicators of a company’s level of efficiency at turning over its inventory and generating sales from that inventory, inventory days on hand helps with letting you know when it’s time to restock inventory levels. If the inventory days on hand is low, the inventory turnover will be high (and vice versa).
Here are three reasons why inventory days on hand is important for your business:
1. Lower costs
The fewer inventory days on hand you have, the less money you need to spend on warehousing and your upfront inventory investment. Of course, depending on where your inventory is stored can also affect your inventory storage costs (for example, using a 3PL like ShipBob that lets you split your inventory between fulfillment centers to ship orders from the location closest to your customer to reduce shipping costs).
2. Faster profits
If you can reduce your inventory days on hand (meaning, speed up the rate at which you deplete inventory), you’re moving inventory quicker, and thus making your money back quicker.
3. Fewer stockouts
Having an accurate inventory days calculation available lets you set up accurate reorder points and have the right amount of stock available, whenever you need it. With fewer stockouts, you can ensure a consistent customer experience and prevent out-of-stock notices to your customers.
How to calculate inventory days on hand
The inventory days on hand calculation is done with a simple formula.
Days on hand = (Average inventory for the year / Cost of goods sold) x 365
Real world example
A company has inventory that’s worth $43,780 and its cost of goods sold is worth $373,400 for the year 2018.
Inventory days on hand: 43,780 / (373,400) x 365 = 42.795 days
This means that on average the company had 42.795 days of inventory on hand during 2018.
Streamline your inventory with ShipBob
ShipBob ecommerce fulfillment services for online brands of all sizes, taking the hassle out of storing, picking, packing, and shipping your products. ShipBob lets you focus on creating and selling great products — we’ll handle the rest.
Here are a few key ways that ShipBob helps improve your inventory days on hand:
With ShipBob’s network of nationwide fulfillment centers, you have access to a powerful geographic footprint. Our fulfillment centers are powered by our proprietary technology, which makes it easy to strategically split and manage your inventory to reduce shipping costs and time in transit.
ShipBob makes it easy to take a data-driven approach to inventory distribution. By aggregating historical order data, you get an analysis of which fulfillment centers you should stock to best leverage ShipBob’s network of fulfillment centers for the most cost-effective and fast deliveries.
ShipBob’s technology powers our network of fulfillment centers across the country. As soon as an order is placed on your store, it is automatically sent to the ShipBob fulfillment center closest to the customer to be picked, packed, and sent to the customer. You can view real-time inventory counts at the SKU level by location.
For each order, ShipBob finds the fastest and most cost-effective option to get it delivered to its shipping destination. ShipBob’s algorithm selects the fulfillment center you have inventory in that’s closest to the customer. As soon as the order ships, ecommerce order tracking info is pushed back to your online store and sent to your customers so they stay in the loop every step of the way.
Calculating reorder points for each product can take a lot of time. ShipBob’s proprietary technology lets you set automatic reorder points for each product, so that you are notified when stock is running low, taking into account your inventory days on hand, safety stock, and how your product has historically moved — all of which can be tracked in the ShipBob dashboard.
Lowering your inventory days on hand should be a priority for your business. With proper inventory control and management, you can account for and prevent stockouts, no matter how small or large your business is.
As your ecommerce business grows and managing inventory levels becomes too expensive or challenging to manage in-house, consider using an expert order fulfillment company to help you. They can help you manage your inventory turnover rate and reduce your inventory carrying costs to save your business money.