Calculating Days Sales in Inventory (DSI)

As retail and e-commerce businesses continue to grow and scale, precise inventory planning and management become an increasingly important part of streamlining operations, conserving resources, and maximizing profits. And one of the most critical aspects of inventory health is maintaining optimal levels of stock.

Achieving optimal inventory levels requires knowing exactly how much stock to order and when, so you can avoid the inefficiencies, waste, and other issues that come with understocking or overstocking inventory. For example, understocking can result in stockouts and backorders, leading to lost sales, decreased revenue, and customer dissatisfaction. It’s simple: if you don’t have an item in stock, you can’t make the sale.

On the other hand, having too much inventory on hand can reduce cash flow and increase your overhead due to expensive storage and handling costs associated with high stock levels. Overstocking can also lead to dead stock when excess product becomes outdated and unable to move, especially in industries like fast-fashion where product trends and customer demand can fluctuate rapidly.

Inventory is what moves a business forward, but until it’s sold, it can be an expensive asset to hold onto. In order to find the right inventory balance for your retail, e-commerce, or wholesale business, it’s crucial to know precisely what you’ve got, how much you need, how fast it’s selling, and how long it takes to replenish. By tracking this data and using it to calculate optimal order quantities, you can ensure you have just the right amount of stock for your business.

Maintaining Optimal Stock Levels

Inventory is one of the most expensive assets for retail, e-commerce, and wholesale businesses, so it’s crucial to properly calculate average optimal levels and adjust your ordering practices accordingly. Efficient inventory planning means having the right amount of inventory to meet demand without tying up cash flow.

You want to balance how much you need to order so you have enough stock on hand to fulfill orders, but not so much that you are overpaying for inventory storage, warehousing costs, and potential dead stock that you aren’t able to move and end up having to sell for a discount. 

One key metric that assists merchants in achieving this balance is the inventory turnover ratio. Inventory turnover refers to how long it takes to get rid of all your inventory. By using formulas to determine how fast you sell certain products and how long it takes you to get more stock, you can better predict when and how much inventory to order to keep your stock levels optimal. That’s where calculating Days Sales in Inventory (DSI) can help.

What does Days Sales in Inventory (DSI) mean? 

Simply put, Days Sales in Inventory (DSI), Days Inventory, or Inventory Days, is a metric that measures the number of days it takes for a business to turn its inventory into revenue. This calculation is important because it provides insight into the efficiency of a business’s inventory purchasing and sales and marketing strategies, and shows the health of its cash flow. 

How do you calculate Days Sales in Inventory (DSI)?

The formula for Days Sales in Inventory is calculated by first dividing the Inventory Balance by the Cost of Goods Sold (COGS). That number is then multiplied by the number of days in a year, quarter, month, or whatever time period you choose. 

Days Sales in Inventory (DSI) = Average Inventory/Cost of Goods Sold x 365

•     Average Inventory refers to the average amount of inventory in stock over a given period of time. This ratio can be calculated by adding together the beginning and ending inventory amounts and dividing by two to determine the average.
•     Cost of Goods Sold (COGS) refers to costs related to the production or purchase of your stock, including materials, labor, and warehousing costs.

For example, if a retail business has an average inventory of $10 million, the COGS on their annual financial statement was $250 million, and the year was 365 days total, the DSI calculation would look like this:

 DSI = 10/250 x 365 = 14.6 days

This means it takes this retail business 14.6 days to turn all its inventory into sales.

How to Interpret Your Business’s DSI Ratio

In general, a low Days Sales in Inventory is preferred, as it indicates that a business is moving stock quickly and efficiently, both in terms of average daily sales and inventory management, representing good financial health. This helps to minimize handling and storage costs, increases cash flow, and allows the company to remain agile when adjusting to seasonality or fluctuating customer demand. However, it can also mean that the business is not stocking enough inventory to meet demand or might have replenishment issues if lead times are extended.

On the other hand, a high DSI value typically indicates either poor sales performance or an excess of inventory purchased. This can be an issue, as it will increase storage and handling costs, and certain products may become obsolete, turning into dead stock. However, depending on the industry, it can also mean that a company with a high DSI is purposely keeping high inventory levels because of fluctuating lead times, minimum supply quantities, or high replenishment logistics costs.

Using Inventory Planner to Improve Your DSI Ratio

Dedicated inventory planning software like Inventory Planner can help improve your Days Sales in Inventory by optimizing your inventory purchasing based on demand forecasts and historical inventory performance. Here’s how:

•     Accurate demand forecasting. Knowing which items and the quantity your customers are likely to buy is fundamental to purchasing the correct inventory that will result in optimal DSI. Inventory Planner takes into account historical sales data, seasonality patterns, marketing campaigns, and other factors to generate accurate demand forecasts.
•     Ordering optimization. Inventory Planner provides reliable replenishment suggestions based on forecasted demand, lead times, and preferred services, telling you what to order and when to order it to minimize the risk of stockouts while avoiding excess inventory.
•     Purchase order automation. Inventory Planner allows you to generate purchase orders from automatic inventory purchasing recommendations in just a few clicks. You can also pre-set each supplier’s ordering specifications, such as minimum order quantity, currency, and preferred shipping method, all of which will be automatically applied to a new purchase order. This reduces manual errors, eliminates delays in replenishment, and maintains order accuracy.
•     SKU-level insights. Inventory Planner provides demand forecasts, inventory purchasing recommendations, and sales performance at the SKU level, so you can avoid overstocking certain SKUs while understocking others.  
•     Identify overstocked items. With Inventory Planner’s best-in-class Overstock report, you’ll have an intuitive, always up-to-date view of all your items. You will be able to see which products are not selling fast enough in relation to customer demand, as well as crucial metrics like overstock costs and last sold dates. That way, you can liquidate your biggest cash-drainers first and avoid purchasing already overstocked items, improving cash flow and lowering DSI. 
•     Optimize merchandising to improve DSI. Coupling inventory insights and marketing metrics pulled from Google Analytics, Inventory Planner allows you to optimize your online merchandising. For instance, you can highlight products with high revenue and low page views on your webstore to drive more attention, leading to more sales, better DSI, and increased cash flow.
•     Align marketing with inventory performance. Inventory Planner turns your inventory and sales data into 200+ meaningful metrics, so you can easily identify your slow-movers, top sellers, high-profit or revenue products, and align your marketing efforts with the products’ performances. For example, if a product is moving slowly, you can discount it to encourage sales, lowering your DSI. By analyzing the 200+ inventory metrics, KPIs, and suggestions provided, you can make informed choices regarding how to optimize your inventory strategies, improve turnover, streamline sales, and increase revenue.

By leveraging the features and capabilities of Inventory Planner, businesses can improve their inventory planning processes, align stock levels with customer demand, reduce excess inventory, and improve inventory turnover, resulting in more optimal DSI.