Days in Inventory: How To Measure and Why It Matters
Efficient inventory management is vital for manufacturers to maintain optimal production levels, minimize costs, and meet customer demands. Among the many metrics used to evaluate inventory performance, “days in inventory” stands out as a crucial indicator.
This benchmark provides valuable insights into the time required to deplete inventory based on the average daily usage. By understanding and measuring days in inventory, manufacturers can make informed decisions about production planning, working capital, and more.
Defining days in inventory
On the surface, days in inventory sounds like a metric for measuring how much raw material is in a warehouse at a given time. While this is the fundamental function of the measure, at its heart, it’s a financial metric for determining how many days are required for a manufacturer to work through their inventory.
Manufacturing managers use days in inventory to make informed decisions about purchasing and production. The concept considers the inventory in its raw materials, work in process, finished goods, and total inventory stages. By tracking this information, companies can optimize their inventory levels and production to create healthy operations and cash flow.
Calculating days in inventory
There’s more to inventory measuring than simply quantifying the number of materials you have in the warehouse at a given time on a given day. Here’s a breakdown of how to calculate days in inventory:
- Determine the average inventory on hand. Average inventory is the average value of inventory over a certain period. To calculate the average inventory, add the inventory at the beginning of the period to the inventory at the end of the period and divide it by two.
- Calculate the average daily usage. Once you know your average inventory, calculate the average daily usage. This is the amount of inventory a manufacturer uses daily. To calculate this number, divide the total inventory used during a specific period by the number of days in the period.
- Determine the days in inventory. After establishing the average inventory and average daily usage, divide the former by the latter to get days in inventory. Ensure the time periods used to calculate the average inventory and average daily usage match. Otherwise, the results may not be accurate.
Utilizing days in inventory
By using the average days in inventory, manufacturers can make informed assumptions about how to manage ordering, production, capital allocation, and more. It’s about finding balance. High days in inventory can drain working capital and increase costs, putting a strain on the company’s overall finances. On the other hand, low days in inventory could cause delays in production and delivery, negatively affecting customer satisfaction.
Inventory management comes with many challenges, from unexpected demand fluctuations to supply chain disruptions. It’s all producers can do to understand how they’re managing their inventory and production against these headwinds. Days in inventory offers essential insights for controlling the value stream and its production implications.
