Inventory days – an introduction
The e-commerce industry has experienced tremendous growth over the past few years, with businesses of all sizes leveraging technology and the internet to sell their products and services. While there are many e-commerce businesses that operate a dropshipping model, many building a brand hold inventory. Working capital management and more specifically inventory management are key to running a successful e-commerce brand. A critical metric for assessing the effectiveness of inventory management in e-commerce businesses is inventory days. This article looks at what this metric is, why it’s essential, how to calculate it, and offer some examples of successful businesses in the industry.
What is inventory days?
Inventory days, also known as days inventory outstanding (DIO) or days sales of inventory (DSI), is a financial ratio that measures the average number of days a company holds its inventory before selling it. In the context of e-commerce, it represents the period between purchasing inventory and selling it to customers online. As a metric, inventory days helps businesses understand how efficiently they are managing their inventory and how quickly they can turn it into sales.
Why is inventory days so important?
Inventory days is essential for e-commerce businesses for several reasons:
- Cash flow management: holding inventory requires capital investment. The longer inventory remains unsold, the more cash is tied up, impacting cash flow and working capital. Lower inventory days indicate that a business is managing its working capital effectively.
- Inventory management: efficient inventory management is crucial in e-commerce, as it directly impacts customer satisfaction.
- Competitiveness: a business that maintains low inventory days can respond quicker to changes in customer demand or market trends, helping it stay competitive in the fast-paced e-commerce landscape.
- Profitability: high inventory days can result in higher storage costs and the risk of inventory obsolescence, negatively impacting profitability.
What is good inventory days
A good inventory days metric varies depending on the size and exact nature of the business. However, some examples of successful e-commerce businesses with effective inventory days management are:
- Small Business: Beryl (https://beryl.cc/) - A UK-based e-commerce store specialising in innovative urban cycling gear, including bike lights, helmets, and accessories. With a focused product line and demand for their design-driven products, Beryl might have an Inventory Days range of 30-45 days, as it aims to maintain the right balance between meeting customer demand and managing inventory efficiently.
- Medium business: Gymshark (https://www.gymshark.com/) - A medium-sized online activewear retailer that has gained popularity for its fashionable, high-quality sportswear. Gymshark might have an inventory days range of 15-30 days, as it aims to provide the latest trends and styles while maintaining efficient inventory management.
- Large business: Amazon (https://www.amazon.com/) - A global e-commerce giant offering an extensive range of products across various categories, from electronics to clothing, to household items. Amazon might have an inventory days range of 8-20 days, as its vast network of suppliers, advanced logistics, and data-driven inventory management allow it to maintain low inventory levels while meeting customer demands efficiently and effectively.
What does inventory days look like?
It’s worth highlighting that inventory can and will fluctuate at various points in the year, depending on the seasonality of your products.
How do you calculate inventory days?
The formula to calculate inventory days is:
Inventory days = (Average inventory / Cost of goods sold) x Number of days in the period
Average Inventory = (Opening inventory + Closing inventory) / 2
Alternatively, if you’re familiar with ‘inventory turnover ratio’ then the formula is:
Inventory days = Number of days in the period / Inventory turnover ratio
Inventory days worked example:
If an e-commerce business has, as an example, the following data for the month of January:
- Cost of goods sold: £150,000
- Opening inventory: £100,000
- Closing inventory: £110,000
Average inventory: (£100,000 + £110,000) / 2 = £105,000
Inventory days = (£105,000/£150,000) x 31 days = 21.7 days
Inventory days is a crucial metric for e-commerce businesses, as it offers valuable insight into efficient inventory management, working capital, and overall competitiveness. By understanding and monitoring this metric, e-commerce businesses can optimise their inventory levels, improve customer satisfaction, and increase profitability.