Your eCommerce store is only as strong as your inventory-related operations. After all its performance is very revealing and can tell you quite a few things about your products and sales.
Most importantly, your inventory management will decide whether you are prepared to cater to your customers successfully or if you need to change strategy in any way.
At this point, if you are wondering about the metrics you should consider within inventory management, there are quite a few you should know about.
For starters, if you want to get an overview of the days your goods spend in inventory, and how quickly they turn into sales, you should get acquainted with and calculate the Days In Inventory or DII.
Want to know more about this metric and how it contributes to your business? Keep reading!
What is Days In Inventory (DII)?
To begin with, you should know the Days in Inventory definition as it is an important inventory management metric. Days in Inventory (DII) refers to the average number of days it takes for your company to sell all your inventory. In this definition, the term ‘inventory’ refers to the finished goods and work-in-process inventory.
Now that you know the definition, you know that the lesser the DII, the better for your company. If your inventory is held for fewer days, you will incur lower inventory carrying costs and ensure that very minimal cash gets held up in inventory. As a result, you will be able to ensure that your inventory does not expire or become obsolete.
Why Should You Care About DII?
But the question that is popping up in your mind right now is valid. As an eCommerce business, why is it so important to care about DII? We will now attempt to answer that exact question by going through the most crucial points contributing to the importance of DII.
Here are some of the reasons you should care about DII:
1. Indicates the Performance of Inventory Management
For a growing eCommerce business, nothing can contribute or take away from its success as much as its inventory management. You will be able to use the formula for calculating DII as a part of your inventory audits to assess the current inventory levels and sales projections.
Your DII will paint you an accurate picture of your inventory levels and give you a peek into your business performance as well. For instance, if a product spends dangerously less time in your inventory and risks going out of stock, you will know that you should keep restocking it or maintaining quantity more effectively.
2. Contributes to Cash Management
As a company, if you have too much cash tied up in your inventory, Days In Inventory is an important measure for you to consider. Having too much cash tied up in inventory can make you incapable of paying your suppliers or investing in great opportunities for your business.
Additionally, storing too much inventory or storing it for too long can also contribute to your expenses and prove expensive. By monitoring your DII, you can prevent potential cash management issues from taking place, and improve your financial flexibility.
3. Serves As a Measure of Efficiency
If you take a look at your DII right now, it will tell you only a little bit about your current inventory performance. But when you track your DII over a longer period, you may be able to identify patterns and trends that can offer you signals about your inventory management performance.
A lower DII could mean that your sales strategy is working exceptionally well or that your operational strategy is helping you maintain a good inventory turnover rate. Overall, a good DII can help you boost the efficiency of your business performance and inventory.
4. Helps in Managing Risks
Another aspect that you should consider when talking about DII is risk management in your business. By holding goods in your inventory for too long, you can risk spoilage or damage of goods among other things.
By monitoring the risks and optimising your DII, you can ensure that your business can prevent your inventory from losing too much of its value through obsolescence or wastage. So by managing and optimising your DII, you would be able to prevent potential losses to a large extent.
You see, multiple reasons make DII such a critical operational and distribution metric. Moreover, apart from shaping the aforementioned areas, the calculation of DII will also help you gain the following advantages for your business.
-
Reducing DII can boost your financial health by increasing your cash flow and working capital
-
Increasing customer satisfaction by ensuring that items are readily available to be shipped to customers upon receiving orders
-
Building a competitive advantage for your business by allowing businesses to respond quickly to changes in customer preferences and market demands
-
Enabling effective decision-making regarding resource allocation and procurement equipped with valuable insights into inventory performance
-
Showcases the efficiency of your operations by including the metric within inventory management reports or financial statements
How to Calculate Days In Inventory Accounting: Explained
There are a few ways to calculate Days in Inventory accurately, and while there are Days in Inventory calculators and logistics software that you can use to automate the calculation, all you need is the right formula.
Here is the days in inventory or days in inventory turnover ratio formula that is most commonly used.
Days in Inventory = [(average inventory) / (COGS)] x (no. of days)
Let us now look at the important terms involved in the Days in Inventory formula:
-
Average Inventory: It is the average value of the goods that are contained in your inventory within a specific period.
-
Cost of Goods Sold (COGS): This term refers to the cost of the goods sold in that specific period
-
The final part of the formula refers to the number of days within a specific period
The average inventory here is a major determining factor for the results you will generate. As a result, it is a good idea to follow the most common process to calculate your average inventory.
Your average inventory can be calculated by adding the beginning inventory with the ending inventory and then dividing the sum by 2, to come up with the average inventory for a specific period.
Example
Let us now try to understand the Days In Inventory calculation and formula better with an example.
Say, your company is trying to calculate Days in Inventory ratio for the period between January 1 and December 31. You begin your inventory with $70,000 and end it with an inventory worth $65,000. The total COGS calculated for this period is $1,000,000.
The average inventory can be calculated as:
($50000 + $70000)/2
= $120000/2
= $60000
With these numbers in mind, here is how you can calculate the DII for this target period and company, using the days in inventory ratio formula:
DII = ($60000/$1000000) x 365
= 0.06 x 365
= 21.9
So, the Days In Inventory turnover ratio or DII for the company in that particular target period is 21.9 days. Whether it is a good DII or not, will depend on the nature of your business and the products that are stored in your inventory.
Days In Inventory vs. Inventory Turnover
Days in Inventory turnover might be an important inventory management metric to consider for eCommerce companies, but Inventory Turnover is equally important. Inventory turnover, however, has a lot more to do with efficiency than Days In Inventory.
Days in Inventory will be able to indicate the number of days it takes for your inventory to be sold on average. Whereas inventory turnover will tell the average number of times the inventory is sold or replaced by the business within a specific period.
Let us understand inventory turnover and days in inventory ratio meaning better with an example. Say, a company calculates its DII as a month. Now, if you are calculating the inventory turnover for a fiscal period of one year, which is generally how it is done, the result will be 12.
Now that you understand the differences between the two terminologies, let us also look at the similarities between the two. The most prominent one is the fact that both of them deal with averages so the exact number of times your inventory is sold, as well as the number of days it takes to be sold, will remain masked.
Basically, both these measures may not help much in understanding how much time a product takes to be sold or how popular it is. Additionally, both metrics will contribute to preventing common stocking-related issues such as overstocking, stocking out, obsolescence of stock and more.
Concluding Remarks
Inventory management is a key aspect of your overall eCommerce store performance, making its performance a key driver in decision-making processes. DII can tell you a lot about the efficiency and performance of order fulfilment operations. By calculating it regularly, you can identify and prevent stocking-related issues in advance.
It is important to have a good sales strategy and fulfilment partner by your side to keep your DII low. PACK & SEND can help you get there - just get a quote from our website and let us discuss your requirements further.