Days of inventory on hand: the formula and what a healthy number looks like

Days of inventory on hand is the number of days your current stock will last if you keep selling at the rate you have been selling. It answers one question: how long until this SKU hits zero.

The formula

• Days of inventory on hand = units on hand divided by average units sold per day
• Average units sold per day = units sold in the window divided by the number of days in the window

That is the whole calculation. The judgement is in the window you pick, not the arithmetic.

Worked through

A black crew tee in size M. You have 240 units on the shelf. Over the last 14 days it sold 112 units, so average daily sales are 112 divided by 14, which is 8 a day. Divide 240 by 8 and you get 30 days of inventory on hand.

Thirty days is the honest read of that stock position today. It is not a forecast. It assumes next month sells like last fortnight, which is why the window matters and why a 7 day window on a SKU that just had a promo will lie to you.

The accounting version

Finance teams write the same idea as days inventory outstanding: average inventory value divided by cost of goods sold, multiplied by the number of days in the period. That gives you one number for the whole business over a quarter. It is useful to a lender. It is useless on a Tuesday when you need to know whether to place an order for one SKU, which is why operators use the unit version above.

There is no universal healthy figure, and anyone quoting one has not asked what your supplier does. Days of inventory on hand only means something next to two other numbers: your lead time and the cover you want left over when the delivery lands.

The comparison is blunt. If your supplier takes 21 days from purchase order to shelf, then 30 days on hand leaves 9 days of slack. Thirty days on hand with a 45 day lead time means you are already late and the gap is booked.

Reasoning from that:

• Below your lead time. You will run out before a new order can arrive. Nothing you do now closes the gap, so the decision is about how to shorten it: air freight, a partial order, a substitute.
• Lead time plus a little. The working zone. This is roughly where a reorder point sits, and it is the moment an order should be raised rather than considered.
• Far above your lead time. Cash sitting still on a shelf, plus storage and the risk the season turns. High days on hand is not safety, it is a different kind of cost.

One more caution. Days on hand is a snapshot that moves every day, faster on your best sellers than anywhere else. A hero SKU can go from 30 days to 9 in a fortnight if a post lands well, and the number in your spreadsheet from last Sunday will not tell you.

Days of inventory on hand sits between three inputs and one output, and each has its own page in this glossary.

• Sales velocity is the units per day figure on the bottom of the division, and the choice of a 7, 14 or 30 day window changes the answer more than most merchants expect.
• Lead time is the number only you can supply, because it comes from your supplier's history rather than your store data. Days on hand cannot be judged without it.
• Safety stock is the buffer you hold for the weeks demand runs hot or the shipment runs late, and it lifts the days of cover you want to keep.
• Reorder point turns days of inventory on hand into a trigger: the stock level at which an order has to go out.
• Stockout is what happens when days on hand reaches zero before the delivery arrives.

If you want the whole sequence rather than one term, the guide on when to reorder walks sales velocity and lead time through to an order date.