DSI (Days Sales in Inventory) is a metric used to measure how many days' worth of sales are tied up in inventory. This calculation helps companies ensure they have an adequate amount of stock to meet customer demand without unnecessarily overstocking and tying up capital. DSI can be used as a standalone metric and a broader inventory management strategy. This post will explore DSI and how it can help businesses optimize their stock levels.
What Is DSI, And What Does It Measure?
DSI, or days sales in inventory, measures the number of days a company takes to sell its merchandise. In other words, it tells you how extended your inventory is "sitting on the shelves" before it's sold.
DSI is important because it's a good indicator of a company's financial health and performance. A high DSI ratio means your inventory is sitting around for a long time before it's sold, which ties up working capital and can lead to cash flow problems. On the other hand, a low DSI ratio means that your inventory turns over quickly, which is generally a good thing.
How Can You Use DSI To Improve Your Business' Performance
There are a few different ways you can use DSI to improve your business' performance:
1. Use it as a benchmark to compare your company's DSI ratio to other companies in your industry. This will give you an idea of where you stand regarding inventory turnover.
2. Use it as a goal to improve your company's overall financial health. Reducing your DSI ratio can free up working capital, which can be used to invest in other areas of your business or pay down debt.
3. Use it as a warning sign if your DSI ratio increases. A sudden increase in your DSI ratio could indicate that your sales are slowing down or that you're buying too much inventory.
Benefits Of Reducing Your DSI Ratio
A high DSI ratio indicates a company is struggling to sell its products, leading to cash flow problems and bankruptcy. On the other hand, a low DSI ratio means that a company is effectively selling its inventory and generating cash flow.
There are many benefits to reducing your DSI ratio, including:
Improved Cash Flow
Days sales in inventory (DSI) directly impact a company's cash flow. Businesses can improve their cash flow by reducing the number of days that inventory sits unsold.
Reduced Inventory Costs
Carrying excess inventory is expensive. It ties up working capital that could be used for other purposes and incurs storage costs. Reducing inventory levels can help businesses save money.
Improved Financial Ratios
Investors and lenders generally see a lower DSI ratio as a positive. It indicates that a company is efficient at selling its products and generating cash flow. This can help businesses obtain financing more efficiently and on better terms.
Ultimately, the goal of reducing DSI is to increase sales. By selling inventory more quickly, businesses can free up cash to reinvest in marketing and other growth initiatives, leading to even more sales.
Reducing your days' sales in inventory (DSI) ratio can be a challenge, but it's worth it. Doing so provides numerous benefits that can help businesses improve their financial health and grow their operations.
How to Calculate Your Company's DSI Ratio
There are a few different ways to calculate DSI, but the most common is days sales in inventory = (ending inventory/cost of goods sold) x days in the period.
Ending inventory is the value of your inventory at the end of a given period (usually a quarter or a year). The cost of goods sold is the total cost of all the goods and services you sell during that period. Days in period is the number of days in that quarter or year.
For example, let's say your ending inventory for the year was $1 million, and your cost of goods sold was $10 million. That would give you a DSI ratio of 10 days ((1 million / 10 million) x 365 days).
Tips For Reducing Your Days Sales In Inventory Ratio
There are a few different ways you can reduce your days' sales in inventory ratio:
1. Understand what DSI is and how it's calculated. This will give you a better sense of where your inventory stands and where you can make improvements.
2. Use cloud-based inventory management tools. These can help you keep track of your inventory levels in real-time, making it easier to adjust your days' sales in inventory ratio as needed.
3. Work with your suppliers to streamline your ordering process. An efficient system in place will help reduce the time it takes to receive new inventory, which can ultimately lower your DSI ratio.
4. Review your inventory regularly and get rid of slow-moving or obsolete items.
5. Implement just-in-time inventory management techniques to ensure that you're only ordering the amount of inventory you need when you need it.
6. Use technology to your advantage. Several software programs can help you keep track of your inventory levels and automate the ordering process.
Can You Reduce Your DSI Ratio Too Much, Or Is There A "Sweet Spot?"
It is possible to reduce your DSI ratio too much. If your DSI ratio gets too low, it could indicate that you're not ordering enough inventory to meet customer demand. This could lead to lost sales and a decrease in overall revenue.
There is no magic number for your DSI ratio, but most experts agree that a ratio of 10 days or less is generally ideal. Anything above 20 days is usually considered too high.
DSI is an essential metric for businesses to understand and optimize. By tracking days' sales in inventory, companies can ensure they have the right amount of stock on hand to meet customer demand without overstocking. At Conveyr, we build tools that help 3PLs manage their inventory effectively. If you need help getting started with inventory management or would like more information about our tools, contact us today. We're happy to help!
Recommended: What is Work in Process Inventory (WIP)?