Calculate Days on Hand for Inventory For Shopify D2C Brands

What are Days on Hand for Inventory - A quick explanation

Days on Hand for Inventory, also known as Inventory days or Days of inventory on hand (DOH), measures how long it takes for a company to sell its on-hand inventory.

Days on Hand Inventory Formula

The Days on Hand Inventory (DOH) formula calculates how long, on average, inventory stays in stock before being sold. Here’s the corrected formula:

Example Calculation

Let’s say a Shopify brand has:

Beginning Inventory: $50,000
Ending Inventory: $40,000
COGS for the month: $90,000
Number of days in the month: 30

Step 1: Calculate Average Inventory
Average Inventory = (50,000 + 40,000) / 2 = 45,000

Step 2: Calculate Daily COGS
Daily COGS = 90,000 / 30 = 3,000

Step 3: Calculate Days on Hand
Days on Hand = 45,000 / 3,000 = 15 days

This means it takes 15 days on average to sell the inventory.

Analysing the value for Days on Hand Inventory

Low Days on Hand Inventorysome

a) A low DOI suggests that a company is able to sell its inventory quickly.
This is often a sign of efficient operations, strong demand for products, and effective inventory management.

A High Days on Hand Inventorysome text

b) A high Days on Hand Inventory indicates that a company holds its inventory for a longer period before selling it. This suggests poor sales performance, ineffective marketing, or issues with product relevance.

Higher DOI can lead to increased costs related to storage, as well as higher risks of obsolescence.

How Prediko simplifies this calculation for Shopify D2C brands

Prediko offers a simple and straightforward way of calculating and managing Days on Hand for Inventory. Prediko automates and refines the process of calculating days on hand for inventory, offering Shopify brands a seamless approach to inventory management

Automatic Inventory and COGS Tracking: Prediko integrates with your Shopify store to automatically track inventory levels and COGS, ensuring your calculations are based on accurate and up-to-date data.

Real-Time Insights: Get instant visibility into your inventory performance, enabling you to make informed decisions quickly.
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Optimization Recommendations: Based on your days on hand and other key metrics, Prediko provides actionable recommendations to optimise inventory levels, reduce carrying costs, and improve cash flow.

Inventory Days on Hand vs. Inventory Turnover

Inventory Days on Hand (DOH) and Inventory Turnover Ratio are two key inventory management metrics, but they provide different insights.

Metric	Definition	Formula	What It Tells You
Days on Hand (DOH)	The number of days it takes to sell inventory	DOH = Average Inventory / Daily COGS	Lower DOH means inventory moves quickly, higher DOH may indicate slow-moving stock
Inventory Turnover Ratio	The number of times inventory is sold and replaced in a given period	Inventory Turnover = COGS / Average Inventory	A high turnover ratio means efficient inventory management, while a low ratio suggests overstocking

Relationship Between DOH and Inventory Turnover

These two metrics are inversely related:

Days on Hand = 365 / Inventory Turnover Ratio
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For example, if a company has an inventory turnover of 12, its Days on Hand would be:

365/12 = 30.4 days

This means, on average, inventory is sold and replaced every 30 days.

How Can I Optimize My Days on Hand Inventory to Improve Cash Flow?

Managing Days on Hand (DOH) inventory effectively is crucial for improving cash flow and maintaining financial stability. The faster you turn inventory into sales, the quicker you free up capital for reinvestment. Here are some key strategies:

1. Improve Demand Forecasting with Data-Driven Insights

Use historical sales data and market trends to predict future demand accurately.
Implement AI-powered inventory management tools like Prediko to generate precise demand forecasts with real-time analytics.

2. Streamline Inventory Replenishment

Work with suppliers to establish flexible order quantities based on real-time demand.
Implement Just-in-Time (JIT) inventory strategies to minimize excess stock while ensuring timely restocking.

3. Optimize Product Pricing and Promotions

Identify slow-moving inventory and use strategic discounts or bundles to accelerate sales.
Run limited-time promotions or flash sales to clear out excess stock and improve inventory turnover.

4. Reduce Holding Costs

Optimize warehouse space by prioritizing fast-moving items for easy access and fulfillment.
Regularly audit your inventory to remove obsolete or dead stock that ties up working capital.

5. Improve Sales and Marketing Alignment

Align marketing efforts with inventory data to promote high-stock items effectively.
Use targeted email campaigns or loyalty programs to encourage repeat purchases.

6. Leverage Real-Time Inventory Insights

Set up automated alerts for low or excess inventory levels.
Monitor Days on Hand trends to adjust purchasing and sales strategies accordingly.

What Is a Good Benchmark for Days on Hand Inventory in eCommerce?

The benchmarks for Days on Hand (DOH) inventory in eCommerce can vary significantly based on industry, product type, and business model.
While specific benchmarks may differ, understanding average inventory turnover rates across industries can provide valuable insights.

Industry-Specific Inventory Turnover Rates:

Retail: 13.79
Consumer Discretionary: 5.94
Consumer Non-Cyclical: 5.73
Technology: 7.82
Healthcare: 3.00

Source: https://www.readyratios.com/sec/ratio/inventory-turnover/

How Does Days on Hand Inventory Impact Inventory Turnover Ratio?

Days on Hand (DOH) and Inventory Turnover Ratio are two sides of the same coin — they are directly linked through the following formula:

Days on Hand = 365 / Inventory Turnover Ratio

The relationship between DOH and Inventory Turnover is straightforward:

Higher DOH → Lower Turnover → Risk of excess stock and tied-up capital.
Lower DOH → Higher Turnover → Efficient sales but risk of stockouts.

Most successful eCommerce businesses aim for an inventory turnover ratio between 6 to 12 times per year (or a DOH between 30 to 60 days), depending on the product category.

Why Native Days on Hand Calculation in Shopify May Not Meet All Business Needs

Many Shopify merchants have raised concerns about the limitations of Shopify's native "Days of Inventory Remaining" report:

Delayed Data Refresh – Shopify’s report can take days to update, making it unreliable for fast-moving businesses.
No Manual Refresh Option – Merchants can’t manually update the data, leaving them dependent on Shopify’s refresh cycle.
Inconsistent Data – The report often conflicts with real-time inventory data from other sources.
Lack of Flexibility – The report offers limited customization and visibility into historical trends

Link to the original discussion‍

Strategies to fix Days on Hand Inventory for your Shopify brand

Accurate Demand Forecasting
Utilise sales data and market trends to predict future demand accurately. Tools like Prediko can easily be installed just for your Shopify store to make these predictions.

Optimize Your Warehouse Layout. Create an efficient design for your warehouse layout to facilitate easy access to older items, promoting their sale.
Collaborate with your sales, marketing, and finance teams to refine sales forecasts based on multiple perspectives, ensuring a more accurate demand forecast. Or, you can generate one using Prediko in just 1-click.
Adjust inventory levels based on seasonal demand fluctuations to ensure optimal stock levels throughout the year.