Days of Supply Formula Definition
The inventory days of supply is the average number of days a company requires to sell the entire inventory. It is the average time between the company purchasing and selling the product to end users.
Significance of Days of Supply Formula
Days of supply formula is an essential factor for e-commerce businesses to calculate the amount of inventory they require. It offers several benefits, including:
- It also gives you an idea about customer demand when the company sells inventory fas
- It tells you about your inventory cycle
- It helps the management team to balance inventory policy holding factors. These include use of warehouse space, order fluctuations, lead times, and more
Application of Days of Supply Formula
Analysts use the days of supply formula to determine a company’s sales efficiency. Some general applications for this formula include:
- It gives you an idea about capital to invest back in the business
- With days of supply formula, companies can place orders to prevent product shortage and save costs
Days of Supply Formula
Average Total Inventories – Average of inventory over two or more accounting periods.
The Cost of Good Sold – The direct cost included in manufacturing the product.
Days in Accounting Period – The standard is to consider an accounting period as 365.
Understanding With the Help of an Example
Suppose you have 365 days of the accounting period, which is a full calendar; if your average total inventory cost is ₱60,000 and your COGS for the entire year is ₱300,000 going by the formula–
60,000 / (300,000/365) = 73 days
The days of supply formula is an important metric to understand and optimize the inventory within time. The merchant can sell their stock based on available inventory, and they order the new stock based on customer demand and the number of days it will last.