In inventory management, metrics are everything. Carrying costs tell you how much money holding inventory will set you back. Lead times measure the time it takes to receive inventory from a supplier. And reorder points replenish stock at the right time to prevent stockouts.
Another valuable metric is days inventory outstanding (DIO), also known as inventory days. It measures your company’s efficiency at managing inventory, offering a clearer view of turnover ratios and supply chain performance. Here’s how to use it.
Understanding days inventory outstanding
DIO represents the average number of days you hold onto inventory before selling it — for every product you carry, across every single location.
A low DIO, like 20, means inventory moves quickly, which is often a sign of strong demand and effective inventory management. A higher DIO, like 100, indicates that inventory takes up space in the stockroom or warehouse for longer. Overstocking, slow sales, or supply chain inefficiencies usually lead to a higher DIO, but it can have a number of causes.
DIO is important to track because it has a direct effect on carrying costs. Holding onto inventory for longer ties up capital you could be using somewhere else. A low DIO usually correlates with reduced shrinkage and lower carrying costs since selling inventory faster reduces the time you spend holding and storing goods.
How do you calculate DIO?
Before exploring the DIO formula, let’s define the different parts of the equation:
- Average inventory: This is your inventory’s average total value over a specific period. Add the period’s beginning and ending inventory values and divide by two.
- Cost of goods sold (COGS): This is the total cost of producing or procuring the goods you sold throughout the period, including direct costs like labor and raw materials and landed costs like shipping and duties.
To run the DIO calculation, you just need to divide your average inventory by how much you spent to produce or procure it. Then, multiply that figure by 365. Here’s the formula:
DIO = (Average inventory / Cost of goods sold) x 365 days
Whether you refer to the equation’s solution as days sales, days of inventory, or DIO, the meaning of the result is the same — it’s the number of days it typically takes for you to sell your inventory.
Here’s an example. Imagine your company has an average inventory of $500,000 and a COGS of $2,000,000 for the year. The formula would be:
DIO = ($500,000 / $2,000,000) x 365 = 0.25 x 365 = 91.25 days
In this scenario, you’re holding inventory for roughly 91 days before it sells — information you can use to make informed decisions about stock movement.
How to interpret days inventory outstanding
To make the most of this metric, interpret the results of your DIO calculations within the larger context of your business operations.
What does a high DIO mean?
A high DIO is often a red flag. You might be overstocking items, struggling to match inventory levels with customer demand, or poorly managing sales or marketing strategies.
But higher DIOs aren’t always bad. In industries where products have a long shelf life or require heavy customization, like high-end furniture, an elevated DIO might be common and perfectly acceptable. The key is to compare your DIO against both industry benchmarks and your company’s historical performance to determine if it’s within a reasonable range.
What does a low DIO mean?
Believe it or not, low DIOs also have pros and cons. They’re likely a sign your products are in high demand and that you manage inventory well. And you spend less on carrying costs like storage and insurance.
But an extremely low DIO might signal that there isn’t enough inventory on hand to meet demand, which could lead to stockouts and lost sales opportunities. It’s also more work for your team to repeatedly unload shipments. And placing larger orders might lead to bulk discounts. Calculate your economic order quantity to find the optimal amount of stock to order.
As with a high DIO, context is everything — the ideal DIO varies by industry, product type, and business model.
What’s a good DIO?
There’s no one-size-fits-all “good” DIO. The key is to aim for a number that aligns with your operational and financial objectives while staying competitive within your industry.
You’ve probably noticed that inventory management plays an important role in DIO, and that means tracking inventory metrics offers more context and actionable data to improve your practices. Try tracking your inventory turnover ratio, which measures how many times you sell and replace inventory over a certain time period. Combining turnover and DIO offers deeper insights into how well your business balances inventory levels with sales.
How to improve days inventory outstanding
If your DIO is higher than you’d like, don’t worry — several strategies can improve it. Here are six effective approaches to reduce DIO, streamline inventory management, and enhance overall operational efficiency.
1. Implement just-in-time inventory
Practicing just-in-time (JIT) inventory means you order goods only when you need them for production or sales, reducing the amount of inventory held at a given time. By strategically aligning inventory purchases with demand, you lower carrying costs, DIO, and the risk of overstocking.
2. Enhance forecasting accuracy
A strategy like JIT inventory only works with accurate demand forecasts. Analyzing historical sales data, market trends, and customer behavior leads to more data-driven inventory adjustments, improving turnover and lowering DIO.
3. Optimize supplier relationships
The better your relationships with suppliers, the better the procurement terms. Work and communicate closely with all partners to reduce lead times and enjoy more ordering flexibility — all factors that contribute to a lower DIO. Also, consider negotiating for smaller, more frequent shipments to keep inventory levels lean without sacrificing your ability to meet customer demand.
4. Adopt an automated inventory management system
Automation is a game-changer for inventory management. With a software solution like Fishbowl, you gain efficiency and real-time visibility into stock levels, sales trends, and reorder points while protecting key processes like order generation and stock replenishment from the risk of human error.
5. Regularly review and adjust inventory levels
Seasonality and shifts in customer demand or market conditions sometimes lead inventory needs to change almost overnight. To avoid facing shortages and obsolescence or holding onto excess stock, conduct regular reviews and inventory audits and make the changes necessary to maintain a low DIO.
6. Improve sales and operations planning
The sales and operations planning (S&OP) process can help you match supply with demand and align sales goals with operational capabilities. Improving the S&OP process makes it easier to coordinate between departments to match inventory levels up with sales forecasts and production plans, reducing excess inventory — and DIO.
Experience the power of smart inventory management with Fishbowl
At the end of the day, one of the most effective ways to improve DIO is with streamlined inventory management. And Fishbowl is here to help.
Fishbowl is an all-in-one inventory management solution that offers real-time inventory tracking and efficient order management. The platform also integrates with QuickBooks to promote financial visibility.
Are you ready to reduce DIO and carrying costs and gain end-to-end visibility over your operations? Schedule a demo.