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Warehousing & Fulfillment

The Importance of Inventory Days on Hand: What to Know

Do you know how to calculate your inventory days on hand? Check this blog out to find out.
The Importance of Inventory Days on Hand: What to Know
Alexandra Ortolani

By Alexandra Ortolani

 

March 1, 2022

Key Points:

  • Inventory days on hand, otherwise known as days of inventory on hand, is the measurement of how fast a business can turn inventory
  • The inventory days on hand formula prevents fewer stockouts and allows eCommerce merchants like yourself to have the correct inventory in stock
  • You can significantly reduce the amount of money you spend on warehousing by maintaining a low average of inventory days on hand

Accurate stock levels ensure your customers can purchase items they desire without needing the “Back in Stock” notifications and save your customers from disappointment. So if your eCommerce business is performing well, your inventory would report a low DOH, which means it takes a short period to sell stock.

We’ll go over how to calculate inventory days on hand so that you can turn your inventory in no time.

Table of Contents

What Are Inventory Days On Hand?

Inventory days on hand, otherwise known as days of inventory on hand, is the measurement of how fast a business can turn inventory. Companies can calculate their inventory days on hand to minimize stock-outs while optimizing their inventory management.

Inventory Days on Hand

Plus, the fewer days of inventory on hand, the better for your eCommerce business. We’ll go over how to calculate your inventory on average and why it's important in the next section.

Why Inventory Days On Hand Is Important

There are many reasons why calculating your inventory days on hand is beneficial for establishing an optimized inventory management system. Whether you’re a small or large eCommerce business, predicting accurate inventory count helps predict customer demand, which is especially vital during peak season or major holidays.

We’ll go over the other reasons why inventory forecasting is essential for your business and the best practices in this section.

1. Helps plan for the future

Calculating your inventory turnover ratio helps businesses forecast demand during peak sales periods like Black Friday through the Christmas season. In addition, understanding the average number of days helps you have a better idea of your company’s inventory 365 days a year.

Days on Hand Calculation Example

2. Helps optimize your inventory management

Calculating your inventory days on hand helps eCommerce companies and merchants make informed decisions about inventory purchases. Purchasing too much inventory can be a significant drain on your resources. It can financially impact your business if the product is no longer in demand, which is where the DOH formula comes in handy.

3. Prevents fewer stockouts

The inventory days on hand formula prevents fewer stockouts and allows eCommerce merchants like yourself to have the correct inventory in stock. Fewer stockouts translate to a better customer experience.

4. Lowers costs & improves cash flows

You can significantly reduce the amount of money you spend on warehousing by maintaining a low average of inventory days on hand. So instead of paying an arm and a leg on warehousing, you can invest the freed-up cash in other areas of your eCommerce business.

5. Reduces risk of spoilage

Depending on the type of eCommerce business you run, calculating your DOH formula helps prevent any spoilage if you hold food or perishable goods in stock. The longer the items stay in inventory, the increased risk of spoilage or deadstock. This factor also applies to seasonal items (i.e., Christmas goods).

Related post: Inventory Turnover - 10 Strategies to Help Your eCommerce Business

How to Calculate Inventory Days On Hand Formula

Merchants can easily calculate inventory days on hand with a single formula and don’t require any complicated calculations.

Days on hand = (Average inventory of the year / Cost of goods sold) x 365

We’ll go over a sample calculation so you can better understand how to calculate this DOH formula.

Days on hand calculation example

Let's say your company has an inventory worth $50,000, and its cost of goods sold is worth $500,000 for the year 2021. Using the DOH formula, we'll calculate the average number of days.

Inventory days on hand: 50,000 / (500,000) x 365  = 36.5 days

Inventory On Hand with Easyship

By now, you should know everything about the importance of inventory days and how you can create an optimized inventory system. The DOH formula can help you accurately predict your inventory stock levels so you can focus on other areas of your business, and so you don't pay a fortune on warehousing

While creating a well-rounded fulfillment system is vital, a shipping platform like Easyship can help you scale your business further with premium shipping tools. With a free Easyship account, you gain instant access to benefits like:

  • Easyship Shipping Dashboard: Manage all your orders and shipping activity from our shipping dashboard. Import orders, upload CSVs, or sync directly from your eCommerce store
  • Fulfillment Built for Growth: Easyship has warehouse partners on four continents so that you can reach your customers all across the world. Plus, Easyship helps scale up fulfillment capabilities without increasing overhead costs
  • Powerful Shipping Automation: Our shipping software allows you to automate your shipping manage orders & tracking while handling all the necessary paperwork so you can focus on scaling your business globally

Overall, understanding your company’s inventory is the right step toward decreasing your inventory turnover ratio.

Ready to ship? Sign up for a FREE Easyship account and get instant access to high-volume discounts for domestic and international shipping

Inventory Days On Hand FAQ

Should inventory days be high or low?

Inventory levels should be low because the fewer days a company holds inventory, the better your eCommerce business.

What do inventory days mean?

Inventory days on hand measure how fast a company is selling its products. Keeping a balance sheet of your sales of inventory can put you one step closer to an optimized inventory system.

Why would days in inventory increase?

Days in inventory will increase if it takes your business longer to turn inventory.


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