Inventory planning

Days of inventory on hand: one formula, two decisions

Days of inventory on hand is units divided by units sold per day. Both halves of that division hide a decision, and the first one is whether stock you have already ordered counts as stock. The numbers below are invented so every step checks.

First, a definition, because the phrase carries two different meanings and search results mix them. In accounting, “days inventory outstanding” or DIO is a financial ratio: average inventory divided by cost of goods sold, times the days in the period. That is a whole-business efficiency measure read off a balance sheet. In day-to-day inventory planning, “days of inventory on hand” usually means something narrower and more immediate: the units of one SKU you can sell, divided by the units of it you sell per day.

This post teaches the second one — the operational, per-SKU version you reorder against, also called days of supply, days of stock or days of cover. If you came looking for the accounting ratio, that is a different formula and a different job. Take the units you can sell and divide by the units you sell per day, and the answer is how many days you have before the shelf is empty if nothing changes.

The formula is not where people go wrong. They go wrong on the two inputs, because each one is a choice dressed up as a measurement. The top line depends on what you agree to call “units available.” The bottom line depends on how far back you look to get a daily rate. Change either and the same SKU produces a different number of days, and neither number is wrong. They answer different questions.

This post walks the division as three decisions, in the order you make them, with one invented SKU carried all the way through.

The formula, and the two decisions hiding inside it

Days of inventory on hand = units available ÷ average units sold per day.

Say a SKU has 1,200 units in the warehouse and sells 40 a day. Days on hand is 1,200 ÷ 40 = 30. If the supplier takes 45 days from order to sellable, you are already late. If they take 10, you have time.

Now add one fact: 800 more units are on a purchase order that left three weeks ago. Are they “units available”? Physically, no. Financially and logistically, they are committed and on their way. Count them and the top line is 2,000 and the answer is 50 days. Leave them out and it is 30. Twenty days of difference on one SKU, from a definition.

Then the bottom line. Forty a day over what window? The last week might say 52 because a listing got featured. The last 90 days might say 31 because the summer was slow. Each rate gives a different day count from the same stock.

One SKU, one day, six defensible answers between 23 and 65 days — created by just two choices: what stock counts, and which sales window you trust. Anyone who tells you their days of supply is “30” without saying which row is not telling you enough to act on.

Days of supply is not a fact about the SKU. It is a fact about the SKU plus two choices you made, and the choices should be visible on the page next to the number.

Step 1: decide what counts as stock

This is the top line. The two honest positions are on-hand only, and on-hand plus units on open purchase orders. Each is right for a different question.

On-hand only answers: if every inbound order vanished tomorrow, how long do I last? It is the stricter reading. It assumes nothing about suppliers keeping their dates, and it will tell you to order sooner. It over-orders when your POs are reliable, because it ignores stock that is genuinely coming.

Including open POs answers: if everything arrives as promised, how long do I last? It is the realistic reading when your suppliers hit their dates. It under-orders when they do not, because it counts units that are still a promise.

In SKU Compass this is a single control rather than a spreadsheet convention. On the Supply Analysis screen, under Counting stock, the setting labelled Days of stock counts: has two positions: Include units on open POs and On-hand only. The caption under it says what it drives: the order math on the estimator, and the Days Supply column on the Inventory tab. The in-page help puts the trade-off in one line: on-hand only is stricter and tells you to order sooner, and the same SKU can look comfortable on one setting and urgent on the other.

Whichever you plan on, write the choice down where the number is read. A days-of-supply figure that travels without its definition is how a warehouse manager and a buyer end up arguing about the same SKU with two correct numbers.

Step 2: decide which sales rate you divide by

The bottom line is a daily rate, and a daily rate is always an average over some window. Short windows react fast and get fooled by a single good week. Long windows are stable and slow to notice that something changed.

There is no correct window. There is a correct question: does the last week look like the next month will? If a listing was suppressed for three days, the 7-day rate is too low and the 90-day rate is closer. If a competitor just left the category, the 7-day rate is the only one that has noticed.

The practical move is to look at several windows at once for the same SKU, and read the spread rather than any single figure. SKU Compass puts them in one row: the Sales Per Day tab shows SPD 7D, SPD 14D, SPD 30D, SPD 60D and SPD 90D next to each other, alongside the rate the order math uses, labelled SPD AP. When the five agree, the window does not matter much. When they fan out, as they do for the invented SKU above (52, 40, 31), the window is making your decision for you and you should know that before you sign a PO.

Two habits keep this honest. First, weeks you were out of stock show zero sales, and zero was never the demand. A 30-day rate that includes a nine-day stockout is divided by 30 days when only 21 were sellable, so it materially understates the true rate — by about a third if demand held steady while you were out. Second, a single spike that is already in the history will inflate the short windows for as long as it sits inside them, then fall out of the 7-day rate a week later and out of the 30-day rate a month later. If the rate drops with no change in the business, check whether a spike just aged out.

Step 3: read both answers for the same SKU before you order

Here is the step that turns a definition into money. Take the invented SKU: 1,200 on hand, 800 on an open PO, 40 a day, and say you plan to cover 60 days of demand, which is 2,400 units.

On-hand only: you have 1,200 against a need of 2,400, so order 1,200.

Including the open PO: you have 2,000 against 2,400, so order 400.

The gap is 800 units. It is exactly the open PO. If you planned on the strict reading and forgot the inbound order existed, you would place a second PO for units that are already on the water. Nothing about the arithmetic is wrong. The stock is simply counted in one reading and not the other, and the two readings were never put side by side.

In SKU Compass the comparison takes two clicks. On the Order Estimator, set Days of stock counts: to On-hand only and read Need to Order. Switch it to Include units on open POs and read it again. The setting is used by the order math, so the number moves, and the difference between the two readings is what your open POs are already covering. The help text on the column describes what the number is: projected sales over your coverage window, minus what you already have, never below your safety-stock floor.

The same setting relabels the column on the Inventory tab, so the definition travels with the number: the header reads Days Supply (incl PO) or Days Supply (excl PO) depending on which position you chose. That is the “write the choice down next to the number” habit from step 1, done for you.

Which setting to plan on

Plan on the one that matches how your suppliers actually behave, and check the other one before every PO.

Review your recent PO history per supplier. If the actual arrival record gives you confidence those orders will land in time, include the open POs. Planning on-hand only in that situation buys stock you do not need, and you will feel it as cash sitting in cartons.

If that same history shows orders arriving late, or one of them is currently stuck at a port, on-hand only is the honest number for the SKUs on that PO. Counting an inbound order that might land next month as if it were on the shelf is how a comfortable 50 days becomes an empty shelf in 30.

Either way the real comparator is not the days figure on its own. It is the days figure against the days it takes to get more. If a SKU shows 30 days of supply and the supplier needs 45 days from PO to sellable, you are 15 days late regardless of which numerator you used. The reorder point formalises that: average daily demand times lead time, plus safety stock, is the stock level at which you must order. Put your own rate and lead time into a reorder point calculator and compare the result to your on-hand figure. Days of supply tells you how long you have. The reorder point tells you whether that is enough.

Where days of supply stops being useful

When the rate is near zero

A SKU that sold two units in 90 days has a daily rate of 0.02, and 40 units on hand becomes 1,800 days of supply. The arithmetic is fine and the number is meaningless. For slow movers, look at units and the last sale date, not days.

When demand is lumpy

If a SKU sells 0, 0, 0, 60, 0, 0, 45, the average is real but no single week looks like it. Days of supply built on that average will be right on average and wrong every week, and a simple average becomes less useful the lumpier the demand gets.

When the next 30 days will not look like the last 30

Every trailing rate assumes tomorrow resembles yesterday. A promotion you have booked, a listing about to be suppressed, a wholesale order landing next week: none of those are in the history, so none of them are in the rate. When you know something the data does not, adjust the rate you divide by rather than trusting the trailing one. That is its own post; the point here is that days of supply inherits every assumption baked into the rate underneath it.

What to do this week

1. Decide, and write down, what counts as stock. On-hand only, or including open POs. If it is a setting in your tool, set it deliberately instead of leaving the default. In SKU Compass that is Days of stock counts: under Counting stock.
2. Look at the rate over more than one window. When 7-day, 30-day and 90-day rates fan out, the window is choosing your order quantity. Pick the one that matches what you know about the next month, and say why.
3. Read the order quantity under both stock definitions before every PO. The gap is stock you already committed to. Do not buy it twice.

Days of inventory on hand is the simplest number in the building. It is also the one that travels furthest without its definition, and the definition is where the money is.