Managing an inventory is the backbone of the supply business. It is essential to know how long one’s inventory is going to last and plan accordingly. Inventory days on hand is a make-or-break part of the business cycle, hence it is essential to know how it works.
With accurate stock levels, your customers can easily buy the product without waiting for it, whatever be the demand. Keeping track of inventory days on hand will help with forecasting, tracking, and calculating how soon a present lot of inventory will last or get exhausted. In this regard, it is important to remember that inventory performance is based on individual SKUs rather than a class of SKUs.
Inventory forecasting combined with tracking of inventory days on hand can, thus, help you quickly determine the products sold on average and can correctly and precisely predict future inventory levels.
Inventory Days on Hand
Inventory days on hand (also called ‘days of inventory on hand’) is a measure of how much time is needed for a business to exhaust a lot of inventory on average. By knowing the current and exact value of inventory days on hand, a business can reduce its ‘stockout days.’ The lower the number of inventory days on hand, the better it is for the company.
Significance of Inventory Days on Hand
For supply businesses, managing inventory is the backbone of operations and success. With a more globalized world and companies acquiring customers worldwide, predicting the inventory count, managing inventory in general, and managing inventory costs have become extremely challenging tasks.
Apart from the usual growth in numbers for these supply companies, the increased quantum of sales during various festivals and season-end sales adds to the challenge for some companies. Firms can face a serious risk of running out of stock.
This generally results in customers moving to a different company and the business losing a significant number of customers. Some customers might cancel their orders due to a stockout or inventory delay, while others may put up negative reviews for the company, the product, or both.
Historically, supply businesses have relied heavily on Inventory Turnover Ratio (ITR) as an indicator for calculating the company’s efficiency in terms of their inventory turns and generating sales from that inventory. Nowadays, however, people primarily look at inventory days on hand as an effective method to forecast dates for restocking inventory levels. If the inventory turnover for a business is high, the value of inventory days on hand for the business will fall.
Inventory Days on Hand: Its Importance for a Business
The values and tracking of inventory days on hand are significant for any business for three reasons:
The lower the number of your business’ inventory days on hand, the less money you will need to spend on your warehousing facilities. The cost for your upfront inventory investment also decreases substantially. A low value of inventory days on hand will also mean reduced inventory storage cost, depending on where you decide to store your inventory.
Every business, whether supply or otherwise, aims to earn profits as quickly as possible. If you can speed up the rate at which you go through your inventory, which will reduce the inventory days on hand, you will be able to move your inventory quickly and increase your sales value. Thus, you can quickly turn profits.
By correctly and precisely calculating the inventory days on hand, you can record correct reorder points. This will help you have the right amount of stock almost every time, especially when you need it. When you have fewer stockouts, you may expect a more consistent customer experience and positive feedback, and you would not have to give them ‘out of stock’ notices anymore.
The calculation for inventory days on hand
Calculating the inventory days on hand requires a simple formula involving the average inventory for the year for your business and the cost of goods sold. To calculate, we multiply the average inventory for the year by 365 and then divide it by the value of the cost of goods sold.
Inventory Days on Hand = (Average Inventory for the Year / Cost of Goods Sold) X 365
Mr. Raju Kumar owns a business that manages a huge amount of inventories. Let us assume that Mr. Kumar’s company owns an inventory worth Rs. 50,00,000 during the year 2020. The Cost of Goods Sold (COGS) for Mr. Kumar’s company is Rs. 5,00,000 for the same year.
Therefore, the Inventory Days on Hand for Mr. Kumar’s company will be,
Inventory Days on Hand = (50,00,000 / 5,00,000) X 365 = 3,650 Days
This means that Mr. Raju Kumar’s company had an average of 3,650 days of inventory during 2020.
Lowering the inventory days on hand should be a priority for any business. It is not only important to have proper and effective inventory control but good inventory management as well. By having correct and precise information about the inventory days on hand, one can always account for the inventory levels and prevent stockouts. All businesses, large or small, should adopt the method of calculating and tracking inventory days on hand to make their operations more effective and efficient.
Especially when it comes to e-commerce, tracking and managing inventory days on hand becomes more important. It has been seen that when an e-commerce business grows, the inventory costs grow rapidly. It starts getting difficult to manage the inventory levels, and it becomes both challenging and expensive to maintain in-house facilities. In such a case, the company can always take the help of a trusted expert order fulfillment company.
Just like Razorpay is India’s best payments brand, there are plenty of expert order fulfillment companies that can help with inventories. They are extremely successful in managing the inventory turnover rate and can also help reduce the inventory carrying costs, helping you save money.
So, calculate your company’s inventory days on hand, and manage your company accordingly. You will then see a stark difference in how you save on both time and money, reducing or even eliminating the risk of stocking out on an item.
The impact of cancelled orders
Earlier in the article, we mentioned how customers cancel their orders due to stockout or inventory delays. Though the procedure of cancellations of orders is just a mere step for the buyer, the same cannot be said for the seller.
Return to origin costs can be regarded as the biggest challenge for sellers that offer cash on delivery as a payment method. That’s why we at Razorpay Thirdwatch, have accumulated a meticulous amount of data on how e-commerce sellers can safely offer CoD without any consequences.
Let’s look at some of the features that Thirdwatch has to offer:
- Flag risky orders: Before you confirm and process an order, flag risky orders, stop potential order cancellations, and make a decision on whether the order is deemed “risky” or not.
- Get insightful analytics: Through Thirdwatch’s dashboard, get detailed reviews on RTO insights, problems regarding RTO, and the efficiency and effectiveness of your business.
- Covert CoD orders to prepaid: With the one-of-a-kind PrePay CoD feature, you can send payment links to your customers and convert risky orders into prepaid. In addition, you can send payment links in Hindi with our vernacular feature too!
- Smooth automation of your business: To save your operational costs, Thirdwatch’s automation sets workflows that flag potential risky orders, accepts & rejects orders based on risks involved, automates order confirmations and so much more!
Also read: How To Enable And Use Automated Order Confirmations On Your Online Store