Days in inventory (DSI or DII) measures how long it takes a business to generate sales equal to the value of its inventory. The metric is used to gauge the efficiency of a company’s inventory management and sales operations. If DII is too high, it may indicate the business is carrying too much inventory, with associated costs and risks; if too low, the probability of stockout events and logistical complications may increase. That said, DII in and of itself doesn’t always tell the whole story, so companies should be careful not to jump to conclusions without the proper context.
What Is Days in Inventory (or Days Sales Inventory)?
Days in inventory (DII) — also known as days sales in inventory (DSI), days in inventory outstanding (DIO) and inventory days of supply — is a metric that describes how many days’ worth of sales (in dollars) a business keeps in inventory. A common misconception is that DII means how many days it takes to clear out inventory. This implies that if your DII is 40 days, then in 40 days you can expect to have sold everything in stock. That holds true if you only sell one type of product, but if you sell multiple products, DII measures the average turnover of inventory, in dollars. You might have some products that clear inventory multiple times in that 40-day span, and others that take much longer to sell.
- Days in inventory is an efficiency metric that measures how long it takes a business to generate sales equal to the value of its inventory.
- The longer products remain on hand, the more a company’s cash is tied up in inventory. It may also mean production is too high or sales are slowing down.
- Days in inventory requires context and other metrics to be useful for making assessments and business decisions. There are many important factors it does not capture on its own.
Days in Inventory Explained
DII is a calculation that stems from a straightforward and intuitive question many business owners and managers would like the answer to: How many days will my inventory last? The standard modern DII calculation is based on accounting statements, so it answers that question in dollar terms and on average. In other words, DII tells you how long it takes, on average, for cumulative sales to equal your mean (or current) inventory. This average figure, usually calculated for a recent quarter or year, is used by companies and investors to evaluate — on a relative basis — efficiency and success at streamlining sales and inventory management.
When DII starts going up, it usually means the company is keeping extra inventory on hand or sales have started slowing. A lower DII is usually preferable, though the ideal spot varies by industry and company. The optimal point is always above zero — after all, you don’t want inventory to drop so dangerously low that you won’t be able to fulfill orders.
DII can be useful for planning purposes, providing the averages aren’t obscuring important cyclical variation. For example, if your business is seasonal, an annual average might not be helpful. It’s also important that nothing substantial be changing about your cost structure or sales environment from the beginning of the time period covered by the data until the end of the time period for which you’re planning. That means if you’re expecting something to happen that’s going to change your DII going forward, like a new supply chain or product launch, your historical DII is going to be less useful to planners.
Why Is DII/DSI Important?
On its own, it’s not. “But that’s ridiculous,” some financial analysts might say. “When comparing two very similar companies selling two very similar products, the one with the lower DII is almost invariably the company with more efficient inventory management!” And that’s true, but only because most companies don’t treat DII as their most important metric. That is, it’s useful as a way to observe business as usual, but it’s easy to “game” DII — i.e., artificially increase or decrease it — in a way that isn’t actually good for business. Think about what would happen if a company incentivized its employees to minimize DII numbers above all else: The company would constantly be running out of stock, disappointing customers and missing out on sales because employees would be loath to stock anything they weren’t confident would sell immediately.
This isn’t to say DII isn’t useful, but it has to be interpreted in a larger context. In general, a lower DII is better. It means less cash is tied up in inventory and a business is doing a good job selling what it has. But be careful not to paint with too broad a brush. There are good reasons why a company might make a decision that would increase DII. If supply chain issues make it harder to restock in a timely way, companies may want to keep more inventory on hand. If suppliers give price breaks at certain volume thresholds, the cost of having more inventory on hand may be well worth the discount for buying more. If being out of stock even once could cause you to lose customers, you’ll be more likely to want extra inventory on hand.
Why Businesses Should Care About Days in Inventory
Businesses should care about DII for three reasons:
DII is a measure of efficiency.
A single number for a single time period may not mean much in isolation, but when DII is tracked over time, it may uncover changes and trends that, in turn, could provide signals about inventory management. For example, a slow and steady decline in DII may be a sign that a new sales strategy is working, while a sudden jump may indicate a problem. (Remember not to diagnose a red flag solely on DII.) DII can also be used to compare similar companies in the same industry during the same time period.
DII is an important component of cash management.
Too much cash tied up in inventory can cause problems elsewhere, such as the inability to pay a supplier on time or invest in a new opportunity because all your money is tied up in inventory. For many businesses, storing inventory may be costly, too. Monitoring DII can help prevent those kinds of issues from happening.
DII is important for inventory management.
A business can use the backward-looking formula to see how it did in the last quarter or year, but applying the same logic to sales projections and current inventory levels — especially when tracked precisely in an enterprise resource planning (ERP) system — offers a window into where the business is heading as well.
DII calculations matter more for companies that deal primarily or exclusively in physical goods, and especially so for those that sell perishable inventory. DII drifting too high for products that go bad and become worthless could result in huge monetary losses, as opposed to more standard inventory, where upward DII means the business will likely incur slightly too high carrying costs and slightly too low liquidity.
DII/DSI Formula and How to Calculate
DII can be calculated a few different ways, but the most common formula takes the following shape:
Days in inventory = [(average inventory) / (COGS)] x (days in time period)
Average inventory is the average value in dollars (not units of inventory) of inventory over a time period, and COGS is the cost of goods sold for that same time period. For an annual calculation, you’d take the year’s average inventory divided by COGS for that same year, then multiply the result by the number of days in that year. If the company is producing its own goods, inventory should include works in progress, too.
Note that results from this method are sensitive to how you calculate “average” inventory. The most common way is to add beginning inventory and ending inventory, then divide by two, for the time period in question. But think of two companies with a January 1 to December 31 fiscal year. They both begin the year with $1,000,000 of inventory and end the year with $1,200,000 of inventory. Both companies would report an “average inventory” level of $1.1 million. But if one company’s inventory rose from $1 million to $3 million before declining back down to $1.1 million over the course of the year, while the other company’s inventory dropped to $500,000 before rising back up to the same endpoint, those “average” calculations could be obscuring important annual patterns and not reflect an average day for either company.
The formula can also be slightly modified to make its result more forward-looking — meaning, how many future days of inventory are on hand at that moment. To calculate, replace average inventory with current inventory (or as recent as possible), while keeping the rest of the formula the same. This version assumes that the cost structure of current inventory and the rate at which it will sell won’t differ substantially from those values during the time period used for “days” and “COGS.”
DII/DSI vs. Inventory Turnover
Inventory turnover is a metric that works hand in hand with days in inventory. Whereas DII tells you how long it takes a business, on average, to sell its inventory, inventory turnover tells you how many times, on average, the business sold and replaced its inventory in a given period.
DII and inventory turnover are closely related in both concept and math. If a business’s DII for the last fiscal year equaled seven days (a week), that means inventory turnover would be 52, equal to the number of weeks in a year. Likewise, if DII equaled a month, then inventory turnover would be 12.
Note that inventory turnover, like DII, is an average, meaning the number can mask how long it takes a business to sell every last individual item in inventory. In other words, some products may turn over faster than others.
Benefits of Calculating Your Days in Inventory
One of the main benefits of calculating DII is for benchmarking purposes. A business can compare how it’s doing against publicly traded competitors and also itself over time. A slow and steady reduction in DII may reflect improvements in inventory management or sales forecasting, for example, while the reversal of the trend might alert leaders to an issue, such as with personnel or suppliers, that might have otherwise escaped executive attention. DII’s direction over time, in conjunction with other related metrics, can also help inform strategic decision-making.
When benchmarking, a business should make sure to compare apples to apples. If it sells phones, comparing itself to a company like Apple, which also sells computers, digital music and more, may be inappropriate. Similarly, quarter-over-quarter comparisons for a seasonal business would be misleading as well.
Some investors also like to see DII, so if your financial statements aren’t public or routinely scrutinized, including the calculation in reports and slide decks may be appreciated.
Examples of Days in Inventory (DII/DSI)
Let’s go through a few different ways of calculating DII. First, we’ll start with a well-known, publicly traded company that sells primarily physical products: Target, whose basic financial statement data can be found here.
Example 1: Between the end of fiscal years 2020 and 2021, Target’s inventory rose from $8.99 billion to $10.65 billion. For fiscal year 2021, its total COGS was $65.7 billion. To calculate Target’s DII for fiscal year 2021, we apply the formula:
DII = [(average inventory)/(COGS)] x (days in time period)
In this case, average inventory = ($8.99B + $10.65B) / 2 = $9.82B, and COGS = $65.7B. So:
DII = ($9.82B/$65.7B) x 365 = 54.6 days
Example 2: Now let’s say we’re less interested in how Target did over the year and want the most recent data possible. We’re going to base our calculation on the most recent quarter (instead of the whole year), and we’re going to use the ending inventory number instead of calculating an average. The most recent data available at the time of this writing is from Target’s quarter ending October 31, 2021, when COGS was $18.13 billion and inventory was at $14.96 billion. Applying our formula:
DII = ($14.96B/$18.13B) x 90 = 74.3 days
We see a much higher result for this last quarter — a jump of over a third. So what do these numbers mean?
Interpreting the results: Historically speaking, the results of both calculations are higher than in previous periods, and the quarterly DII is higher than the same quarter a year ago, as well. The most recent quarter seems to be driving the jump in DII for the entire year.
With positive sales growth in most recent quarters and in every recent year, one may ask: Has Target become less efficient in managing inventory and forecasting sales? One could spin a plausible story about labor shortages and supply chain difficulties. But one could also surmise that increasing inventory levels is a smart and direct response to those supply chain difficulties, especially heading into the winter holiday season when customers are going to do a lot of shopping in a short period of time and stockout events could be particularly costly. Increasing inventories could be a deliberate attempt to “play it safe” and reduce potential shortages.
Another interpretation is that Target predicted faster sales growth than in previous years. Remember that the pace of sales is measured by backward-looking COGS; if sales were to grow dramatically, it wouldn’t take the full 74 days to turn over inventory in one quarter.
So is there a cause for concern? Target investors sure don’t seem to be worried about this sudden increase in a metric that some sources say may indicate plummeting efficiency. In fact, as of this writing, Target stock has outperformed the market over trailing one-, six- and 12-month periods. Given the confidence of Target’s investors, its growing business and knowing that increasing inventory levels might be a prudent response to supply chain difficulties and unpredictable spikes in demand, we can conclude this increase is likely due to a shift in strategy, rather than sudden inefficiency.
This example illustrates how you can’t use DII alone to measure the health of a business, even when the numbers seem stark.
Low and High DII/DSI
What is a low DII versus a high DII? The answer will vary by industry, company and situation. If a business sells milk, DII of 50 days is probably way too high. But in the above example, Target’s DII is more than 50 days, and it seems to have deliberately pushed its DII upward. This is why it’s often more helpful to ask about “higher” and “lower” than about “high” and “low,” but even then, numbers should be examined in context.
For internal use, a business may want to calculate DII for different products as well. Think about the milk-seller versus Target, keeping in mind that Target sells milk, too. But that doesn’t mean it has 74 days of milk on hand. That’s an average number, and if the DII for different product types vary greatly — maybe it’s 10 days for dairy products and 100 days for furniture — the blended figures may not be particularly telling. It could be that in addition to context, more specificity is also required.
Free Days Sales in Inventory Template
One of the best ways to understand a metric is to compute it yourself and see how it responds to changes in inputs.
How Does Inventory Management Software Help?
Inventory management software is all but mandatory when using DII for decision-making purposes. The old way of calculating DII from financial statements — which themselves take time to compile so they don’t necessarily reflect the latest data — doesn’t provide enough information, specifically in corporate forecasts; run “what if” scenarios; or look at periods of time that aren’t complete quarters or fiscal years. Leading inventory management software improves the accuracy of financial statements and with greater expediency, though the ability to calculate metrics in real time to answer specific questions is the real value that good software brings to the table.
Manage and Monitor Inventory Values With NetSuite
NetSuite Inventory Management helps businesses monitor and track their inventory. Among the benefits, the software allows for the quick compilation of data and computation of metrics that can be customized and exported elsewhere for other analyses. The software also offers features for inventory optimization, which can directly impact DII.
Another advantages to using inventory management software such as NetSuite Inventory Management — either stand-alone or as part of a larger ERP system like NetSuite ERP, which integrates data from across the business — is the ability to collect data granular enough to calculate something similar to DII for individual products, instead of one number for the whole company. This gets around the problem of blending everything together in averages, discussed above. That kind of data can be valuable to many business leaders, from product managers up to the CEO.
Days in inventory is an important metric for understanding the health and efficiency of a business’s inventory management process. It is not, however, meaningful enough on its own to be used to draw conclusions. Rather, DII must always be considered in the broader context of your business and the challenges you face.
Days in Inventory FAQs
Should my business have low or high days in inventory? Which one is better?
Generally speaking, lower is better, but you don’t want to go so low that you risk a stockout event, which could frustrate customers, or increase your costs by needing smaller, more frequent replenishments.
What’s the difference between days in inventory and inventory turnover?
DII calculates how long it takes a business, on average, to sell its inventory. Inventory turnover calculates how many times, on average, the business sold and replaced its inventory in a given period.
What is an ideal inventory time or number?
There’s no one-size-fits-all number of ideal days in inventory. Target time will vary by industry, company, geography and situation. For example, supply chain threats will likely increase the ideal time, while dealing in perishable goods will put a fairly hard cap on how high would be considered acceptable.
How can inventory management software help?
Inventory management software helps companies keep better track of their inventory and, as a result, all of the metrics that get calculated about inventory. Instead of waiting for financial statement compilations to get quarterly or annual numbers, good software will let you generate metrics in real time for any length of period you want.
How can businesses improve days in inventory?
Businesses can improve their days in inventory by improving their forecasting so as not to order too much of slow-selling products, by changing their delivery schedules to keep less on hand while still meeting all their customers’ needs and by increasing sales, which most businesses are trying to do anyway. Be careful when attempting to reduce days in inventory; not every way to make it lower is a good business decision. For example, having no inventory gets the metric to zero, but that also drives revenue to zero as well.
How do you calculate days in inventory?
Days in inventory is calculated by dividing average inventory (in dollars) over a given time by cost of goods sold (COGS) during that period and multiplying the result by the number of days in the period (typically a quarter or a year).
What is the meaning of days of inventory?
Days in inventory is a metric that measures how many days it takes to sell your current or average level of inventory. Inventory is measured in dollars, not units, so it doesn’t necessarily mean every item in stock would be sold.