This isn’t to say DII isn’t useful, but it has to be interpreted in a larger context. 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. 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. “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. “But that’s ridiculous,” some financial analysts might say. 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. 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. For example, if your business is seasonal, an annual average might not be helpful. 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.ĭII can be useful for planning purposes, providing the averages aren’t obscuring important cyclical variation.

A lower DII is usually preferable, though the ideal spot varies by industry and company. When DII starts going up, it usually means the company is keeping extra inventory on hand or sales have started slowing. 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. In other words, DII tells you how long it takes, on average, for cumulative sales to equal your mean (or current) inventory. There are many important factors it does not capture on its own.ĭII 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. Days in inventory requires context and other metrics to be useful for making assessments and business decisions.It may also mean production is too high or sales are slowing down. The longer products remain on hand, the more a company’s cash is tied up in inventory.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.You might have some products that clear inventory multiple times in that 40-day span, and others that take much longer to sell. 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. This implies that if your DII is 40 days, then in 40 days you can expect to have sold everything in stock.

A common misconception is that DII means how many days it takes to clear out inventory.

What Is Days in Inventory (or Days Sales Inventory)?ĭays 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. 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. 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. The metric is used to gauge the efficiency of a company’s inventory management and sales operations. East, Nordics and Other Regions (opens in new tab)ĭays in inventory (DSI or DII) measures how long it takes a business to generate sales equal to the value of its inventory.

Inventory turnover formula days