Days sales of inventory: time is money in the warehouse

How much time do products need to be stored before they are dispatched, whether distributed to customers or sent to the production lines?

Days sales of inventory (DSI) is the amount of time a company’s or warehouse’s goods remain stored. With this information, organizations can better plan replenishments, identify products entailing excessive storage costs, and compare the profitability of their business with other similar ones.

In this post, we delve into this concept, highlighting its significance and providing the formula for calculating this datum.

Days sales of inventory: definition and importance

Days sales of inventory is both an accounting and a supply chain KPI. This indicator reveals the days necessary for completely renewing the inventory in the warehouse, comparing the economic value of the stock stored and that sold. This concept is also known as inventory days of supply, days inventory outstanding, days in inventory, and inventory period.

Days sales of inventory has a direct impact on a company’s liquidity, since proper goods management increases profitability. This calculation, which serves to analyze storage costs, makes it clear that the less time a product spends in the warehouse, the lower its costs. On the other hand, a high DSI ratio usually indicates that the firm isn’t managing its inventory well or is having trouble selling. To be meaningful, these indicators must be compared with facilities or companies with similar characteristics.

Days sales of inventory formula

The following is the formula for calculating days sales of inventory:

Days sales of inventory = Cost of average daily inventory / (Cost of goods sold annually / 365)

For starters, average daily inventory refers to the cost of the inventory stored in the warehouse on an average day. It can be obtained from the average between the value reported at the beginning and end of the accounting period (e.g., at the end of the fiscal year). In that case, it would be calculated like this:

Cost of average daily inventory = (Beginning inventory + Ending inventory) / 2

The first value in the denominator of the DSI formula — the cost of goods sold — relates to the value of the products dispatched annually. To obtain the average daily stock sold, we divide this figure by 365 (we’ll use a year as a simple period for analyzing the company’s throughput).

The result of the formula will be the number of days it takes to completely renew the stock in the warehouse (or the set of assets being analyzed).

Calculating days sales of inventory: an example

Over a one-year period, a company records a beginning inventory of $220,000 and an ending inventory of $260,000. The value of the goods sold that year stands at $5,800,000. Using these data, the days sales of inventory can be calculated as follows:

We begin with the average inventory:

Cost of average daily inventory = ($220,000 + $260,000) / 2 = $240,000

With this result, we can complete the days sales of inventory:

Days sales of inventory = $240,000 / ($5,800,000 / 365 days) = 15.1 days

The products remain in the warehouse for an average of 15.1 days. Assessing whether this accounts for too much or too little time will depend on the type of business in question. For example, when dealing with perishable goods, this value should consist of very few days. In contrast, with high-value, low-turnover products (such as those of a dealership), the periods can be quite long, even comprising weeks. Either way, the objective of any organization is to reduce its days sales of inventory to the minimum possible in its sector.

Optimal days sales of inventory numbers

What’s the best storage time for a product? There’s no definitive answer to this question, although you should always try to keep it to the minimum time possible. This will depend on each company and on factors such as available capital, customer demand, and supplier lead time.

What’s most important is to move the stock as quickly as you can to replenish it and sell more. This will generate higher profits, which you can reinvest in storage systems, for instance. In fact, an automated storage and retrieval system (AS/RS) will enable you to expand your useful warehousing capacity and dispatch products faster to, likewise, boost your facility’s profitability. Throughout this process, it’s crucial to determine your optimal stock levels, which will allow you to safely cover demand but at the lowest storage cost (thereby avoiding both stockouts and overstock).

Ultimately, any business should analyze the time it needs to distribute all its stock, considering that certain products might have expiration dates and, thus, can’t be sold past that date. With a warehouse management system (WMS), you can prioritize the dispatch of products that run the risk of spoiling.

How to reduce days sales of inventory

To store products for the shortest period of time, it’s necessary to carry out demand planning, which will help you to determine the amount of product required to cover sales. With this information, you can coordinate goods procurement and organize order preparation and dispatch.

Additionally, proper management of stock in the facility leads to lower days sales of inventory figures. One way to improve this indicator is to implement just-in-time criteria, which are employed to manage only the essential products in just the right space and just the right time, as orders arrive.

In any event, it’s best to rely on a warehouse management system such as Easy WMS from Mecalux. This system not only incorporates rules and algorithms to assign each product a location (slotting), but also organizes operators’ tasks to make them more efficient. Hence, products can be dispatched more promptly, reducing days sales of inventory.

Better management to shorten days sales of inventory

The priority of any company is to effectively manage its merchandise. The fewer days the goods are stored, the better the management and the higher profitability of the organization. Conversely, if a product is stored for too long, not only does it drive up costs — it could also become obsolete.

The first step towards making the most of your warehouse is to invest in a warehouse management system, such as Easy WMS from Mecalux. The program will digitize the goods entry and exit processes, slotting products ideally according to preset criteria and rules. And this will speed up flows and improve warehouse metrics. Feel free to get in touch. A Mecalux expert will help you boost your logistics processes.