If you run an ecommerce business, understanding days sales in inventory (DSI) is crucial. This simple metric reveals how quickly you turn inventory into sales.
A healthy DSI means your products are moving, cash flow is positive, and your warehouse isn’t overflowing with unsold stock. But a poor DSI can be cause for concern.
At Red Stag Fulfillment, we specialize in helping ecommerce businesses streamline their operations. Effective inventory management is a key part of that success.
In this article, we’ll break down:
- What days sales in inventory means.
- How to calculate average days to sell inventory.
- Why this metric is so important to track.
- Strategies to optimize your days sales in inventory for increased profitability.
Key takeaways
- Days in sales inventory is a metric used to evaluate how efficiently a company manages its inventory by measuring the average number of days it takes for a company to sell its entire inventory.
- The average days to sell inventory formula is DSI = (average inventory/cost of goods sold) x 365.
- Knowing how to calculate days sales helps you make data-driven decisions, optimize stock levels, improve forecasting, and streamline operations.
- A high days sales in inventory signals potential problems with overstocking, slow-moving products, or sluggish sales.
- Other metrics to track include inventory turnover ratio and days inventory outstanding and contribute to a complete picture of inventory health.
What is days sales in inventory?
Days sales in inventory (aka DSI) is a financial metric that reveals the average number of days it takes your business to convert inventory into sales.
You might also hear people refer to it as days sales of inventory, days sales inventory, inventory days on hand, days inventory outstanding, and average age of inventory.
Think of DSI as your inventory’s speedometer. It tells you how efficiently you’re managing stock—are products flying off the shelves or gathering dust?
Knowing your days’ sales in inventory helps you:
- Optimize inventory levels. Avoid overstocking (which ties up cash) or understocking (leading to lost sales).
- Identify problem areas. Certain products might be slow sellers, taking up valuable warehouse space.
- Analyze your cash flow. High DSI is bad news for cash flow. Excess inventory ties up money you could use to invest in growth, market new products, or respond to sudden market changes.
How to calculate days sales in inventory
Here’s how to calculate day sales in inventory:
Days sales in inventory = (average inventory value / cost of goods sold) * 365
- Average inventory value — The average inventory value over a specific period of time (e.g., a quarter or a year). To get the most accurate figure, add your beginning inventory and your ending inventory and divide by two.
- Cost of goods sold (COGS) — The direct costs associated with producing or acquiring the goods you sell.
For example, imagine your business has the following figures:
- Average inventory value — $100,000
- Cost of goods sold — $500,000
Put these numbers into the formula: DSI = ($100,000 / $500,000) * 365 = 73 days
This means it takes your business, on average, 73 days to sell its entire inventory.
Average DSI across industries
Researching average days sales in inventory for your industry will help you determine whether your results are concerning or on track.
Keep in mind there is no single “perfect” DSI number. Days sales in inventory can vary widely between industries.
Let’s look at some examples:
Retail
- Fast-moving consumer goods (FMCG)
Think supermarkets, pharmacies, and drugstores. These businesses generally have lower DSIs due to high inventory turnover and consistent demand. - Luxury goods
High-end apparel, jewelry, and electronics tend to have higher DSIs, as they often sell less frequently.
Below, you’ll find a list of the average DSI for various retail categories.
Manufacturing
- Simple products
Items with short production cycles and readily available materials likely have lower DSIs. - Complex products
Lengthy production times, specialized components, or supply chain disruptions can lead to higher DSIs.
Wholesale
- Product types and customer demand patterns heavily influence DSI. Wholesalers stocking perishable goods or seasonal items might see significant DSI fluctuations.
Note: Even within industries, DSI can fluctuate. Factors like pricing strategy, product mix, and operational efficiency all play a role.
How to interpret your DSI
You’ve calculated your days sales in inventory, but what exactly does the number mean?
High DSI
A DSI significantly higher than your industry average suggests potential issues.
- Slow-moving inventory — Are certain products failing to attract buyers?
- Overstocking — Do you have too much inventory relative to your sales?
- Inefficient sales — Are your sales and marketing strategies underperforming?
Low DSI
While a low DSI indicates strong sales, a very low DSI can be a double-edged sword. For example:
- Stockouts —You could be missing out on sales because you’re not keeping up with demand.
- Lost opportunities — A low days sales in inventory could mean it’s time to expand your product lines or target new markets.
Limitations of DSI
While DSI is a powerful tool, it’s important to be aware of its limitations to avoid misinterpretations. Take a look at the following considerations.
Seasonality
If your business experiences predictable spikes (holiday surges and seasonal slumps), your DSI value will typically fluctuate throughout the year. Tracking DSI each month can help spot trends beyond short-term irregularities.
Sudden changes in demand can also dramatically impact your DSI. Monitoring this metric closely helps you react quickly to minimize stockouts or overstocking and the financial consequences they bring.
Product lifecycle
Newly introduced products may have unpredictable sales patterns in the initial stages, making DSI less reliable as an indicator until demand patterns stabilize.
Industry comparisons
DSI is most meaningful when used to compare your own performance over time or against direct competitors.
But make sure you’re actually looking at competitors in your same industry. Venturing too far away from what you do won’t provide the insights you need.
For instance, comparing a seasonal retailer to a business with steady year-round sales probably won’t produce anything helpful.
DSI best practices for ecommerce businesses
Whether you’re a sole proprietor or an established enterprise, the following strategies can help you take control of your DSI and improve your company’s cash flow.
Conduct demand forecasting
Knowing what inventory you need at various times of the year can bring a big boost to your bottom line. But that doesn’t mean it’s easy.
In fact, demand forecasting can be pretty tricky. Keep the following tips in mind to make things a little easier for you.
- Analyze historical sales data. Dig into patterns, seasonality, and trends to anticipate future demand for different products.
- Don’t ignore external factors. Market research, competitor activity, and economic indicators all influence demand forecasting.
- Use forecasting tools. Software solutions can significantly enhance accuracy and save time compared to manual calculations.
Track additional inventory metrics
DSI should be considered one of several inventory metrics you track—but not the only one. When used in conjunction with other data points, DSI can provide even more valuable insights into your company’s inventory management health.
- Inventory turnover ratio refers to the number of times you sell and replace inventory over a period. High inventory turnover generally complements low DSI.
- Stockout rate is the frequency or percentage of times when a product is out of stock when a customer order comes in.
- Inventory accuracy indicates how closely the physical inventory matches the inventory records or system data.
Avoid stockouts and overstocking
- Set reorder points. Calculate when to reorder based on lead times and average sales velocity to avoid running out of stock.
- Consider safety stock. Keep a buffer of inventory on hand to mitigate unexpected demand surges or supply chain delays.
- Embrace automation. Inventory management software can automate reorder point calculations and even place orders for you.
Use promotions strategically
- Target slow-moving items. Strategic discounts or bundles can help clear stagnant inventory and boost your DSI.
- Beware of overuse. Frequent promotions can erode brand value and train customers to expect constant sales.
- Track results. Measure the impact of promotions on DSI to determine their effectiveness in the long run.
Partner with suppliers for faster turnaround
- Open communication. Share sales forecasts and proactively discuss potential supply issues.
- Negotiate favorable terms. Explore options for smaller batch sizes, faster lead times, and flexible ordering.
- Consider dropshipping. In some cases, dropshipping from suppliers can eliminate the need to hold inventory yourself, dramatically reducing your DSI.
Implement lean inventory management
Consider using the following strategies to streamline inventory management further.
- Focus on “just-in-time” (JIT) principles. Order inventory as it’s needed to minimize holding costs.
- Eliminate waste. Identify and remove non-value-adding activities in your inventory process, such as unnecessary movement or excess storage.
- Track the right data. Focus on metrics like lead time and inventory accuracy to improve efficiency and avoid stock issues.
How a 3PL can help optimize your DSI
Third-party logistics (3PL) providers can help you achieve a healthy DSI by optimizing your inventory process.
3PLs can help you find the sweet spot between sufficient stock and overstocking. They can also help you manage unpredictable surges or dips in sales, which directly impact inventory levels.
Inventory management
A 3PL can help optimize inventory levels by implementing sophisticated inventory management systems.
These systems help reduce excess inventory and avoid stockouts by analyzing demand patterns, monitoring stock levels, and suggesting appropriate reorder points.
Data and analytics
Manually tracking your DSI on your own by using the number of days sales in inventory formula is a great start. However, partnering with a high-quality 3PL gives you access to their advanced analytics.
This can be a valuable way to monitor your company’s inventory ratio and make sure you always have enough products in stock without going into excess.
Many 3PL companies offer advanced technology solutions, such as:
- Warehouse management systems.
- Transportation management systems.
- Inventory tracking software.
These solutions provide real-time visibility into sales trends, stock levels, and DSI calculations. This can improve forecasting and decision-making to optimize your inventory turnover.
Warehouse network advantage
3PLs often have extensive networks of warehouses and distribution centers strategically located to reduce transit times and lower carrying costs.
A distributed warehouse network lets you position client inventory closer to customers, allowing for shorter shipping times, quicker inventory turnover, and a lower DSI.
When expertise matters, consider Red Stag Fulfillment
If you need help managing days sales in inventory or accessing the resources to optimize your inventory, reach out to Red Stag Fulfillment.
We’re a third-party logistics provider offering robust inventory management systems and forecasting tools, aggregated data and deep ecommerce industry expertise and strategic warehousing to improve shipping speed and reduce inventory turnover time.
We also offer shrinkage and accuracy guarantees you won’t find anywhere else in the industry. Reach out now to see how Red Stag can help your business.
