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This way, you can track your inventory accurately, avoid mistakes, and prevent lost sales. Inventory distribution means strategically distributing your products across different locations or channels for efficient delivery. Think about future uncertainties and choose a demand-forecasting strategy that best fits your business. To start, evaluate your recent data and consider what underlying forces may impact your current numbers. Nail this step, and you can purchase enough supply to satisfy your customers without tying up too much money in excess inventory. Obvious as it is, accurately forecasting demand helps you make better decisions about how much product to purchase. Accurately forecast demandĬustomer demand directly impacts the amount of working capital you need on hand.
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Here are some plug-and-play tips that can help. I’m glad you asked, and thanks for keeping us on track - that’s what we want to cover next. Lowering my inventory days on demand is a good idea. How can shortening inventory days on hand help your business? However, it may help to think about how to shorten your inventory days on hand. Most companies have between one and two months of inventory on hand, so this result is pretty average. Round that up, and your number of inventory DOH is 55. Inventory days on hand = (Average inventory for the period /COGS ) x 365 Let’s plug these numbers into our formula and see what we get. Your average inventory is 1,500 bottles, and your average cost of goods sold is $10,000 per month to produce 1,000 units (or $10 per bottle). Imagine you sell insulated water bottles. Let’s imagine a real-world scenario where you would use this formula. Keep that in mind when looking at the example below. Remember the order of operations? It’s that principle you covered back in sixth-grade math that probably had some sort of acronym to go with it.Īnyway, it’s important here because it reminds us that we have to do the problem in parentheses first. Hopefully, you’re not reading during a leap year, or I’ve just lost my credibility. It includes raw material costs, labor costs, and any other direct costs. This is the direct cost of producing the items you sell. Beginning inventory also works, if that’s how you roll. One way to figure it out is to add your ending inventory from each month in a year and divide by 12. This is your average inventory calculated over at least two accounting periods. A quick reminder (in case your memory is worse than Ten-Second Tom from “50 First Dates”), your inventory DOH is the number of days you expect your inventory to last. Inventory days on hand = (Average inventory for the period/Cost of goods sold per day) x 365īefore we get too far into this, let’s break down the terms in the formula: We’ll give you the formula and do an example calculation to show you how this works. We get it - maybe math was your least favorite class in school, or it was right after lunch and you were often tempted to doze off.īut we won’t make you stand up in front of the class or show your work. We know that bringing up math problems probably causes a trauma response for some of you. Meanwhile, DOH reflects your current value of inventory based on how many days you could continue to meet consumer demand before experiencing a stockout.
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Your inventory turnover ratio has more to do with how many times your inventory turns over during a given time period. Keep in mind that your inventory DOH and your inventory turnover rate are related but not identical. Spoiler: If your DOH is too high, you may have too much safety stock on hand (we wrote a whole article about safety stock, if you’re interested). They can tell you you’re doing awesome if your numbers are low, or they can give you a kick in the pants and tell you how much money you’re wasting if your metrics are too high. Note: Don’t confuse inventory “days on hand” with “days of inventory” (the average number of days it takes to sell your entire inventory).įinancial analysts and investors can look at these metrics on your balance sheet and tell you how effectively your business manages inventory. Reducing inventory days on hand means you’ll have less money tied up in supplies and more money in your pocket.
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Most companies have one to two months of inventory days on hand, but this can vary - especially for perishable products. Your number of inventory days on hand is how many days your inventory is expected to last (often referred to as DSI or “days sales of inventory”).