What is the term for the ideal amount of inventory that an operation should have?

Inventory days formula is equivalent to the average number of days each item or SKU (stock keeping unit) is in the warehouse.Inventory days is an important inventory metric that measures how long a product is in storage before being sold. If the percentage is high, there may not be enough demand for it, the product might be too expensive or it's time to rethink how it's being promoted.

An inventory days estimate is useful for distribution businesses because it allows a proper allocation of storage costs for inventory (storage costs or holding costs are part of the overall inventory costs). The less time each item spends in inventory, the lower the cost of storage. For example, if a product has an annual storage cost of 24%, but if it only remained in inventory for four months, how much was paid in holding costs for it? The answer is 8% (24%/4). We must remember that typically the cost of storing an item is represented as a percentage of its valuation (in the previous example, 24%).

How to calculate inventory days? 

To calculate inventory days, you can use the formula:

Inventory days = 365 / Inventory turnover

Use the number of days in a certain period and divide it by the inventory turnover. This formula allows you to quickly determine the sales performance of a given product.

The number used in the formula denotes the 365 days of a year. However, you must use the same period that you used to calculate inventory turnover.

For example, imagine that you will calculate inventory days with a turnover figure of 4.32 per year. The calculation is as follows: 365/4.32, which will result in an average inventory day of 84.49.

If you did the operation with different data, for example, with a rotation of 2.31 for 180 days, the average inventory days would be 77.92.

How to calculate inventory turnover?

This formula uses a specific value of inventory turnover, which is necessary for the calculation. Therefore, it is useful to understand this figure and how to obtain it.

To do this, use this other formula:

Inventory turnover = Cost of products sold/Inventory.

There are two things to keep in mind: 1) The final price of the product is generally used; 2) The average inventory for the same period is used. The inventory days formula can be redone as the numerator inversely multiplied by the denominator.

Inventory days = 365 x Average inventory

This second formula is essentially the percentage of the products that sold in terms of cost of products sold. You can use this average to estimate the time that said product was predicted to sell. The figure resulting from this formula can be easily converted to days by multiplying this data by 365 or by a period.

What's an ideal inventory time?

The answer is: it depends The inventory days and the ideal amount of inventory time depends on the following:

1. Does your company have enough cashflow to obtain the necessary inventory?
2. Does your company have a certain method of calculating inventory?
3. How long does it take your company to restock?

But one thing is key: getting the restocking timing accurate. Understanding your suppliers’ wait times and how long it takes to replenish your inventory will allow you to determine your ideal inventory time.

For example, if you have ten days of inventory and it takes 21 to resupply, then there is a negative time gap. If you order more products today, it will take 21 days for your supplier to deliver, while in ten days, you will be without products. As a result, you will have eleven days in which you will not meet your customers’ demands, putting you in an awkward position.

How does inventory management software help?

Inventory management software helps a business to obtain an overall picture of inventory at any given time. It records all data about what inventory or stock is sourced, stored, ordered, sold and shipped. By having accurate measures of stock enables people to plan, manage cash flow, supervise the flow of products/materials and improve the quality of customer service. Inventory management software collates many layers of data and integrates with ERP systems.

Effective inventory management can often be the difference between staying competitive or not. Good inventory management software enables a business to automate inventory control reducing errors and costs. By keeping track of which products are on-hand or ordered, there is no need for ad hoc inventory counts because the software allows you to know what products are available in real-time, saving lots of time. Inventory management software identifies slow-moving products, measures key inventory calculations and metrics and helps to retain customers because a business can give them certainty that products can be delivered on time and in full.

To find out more about the inventory days formula, watch this video discussion: Master inventory calculations and predict future demand

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