Days Sales in Inventory (DSI) measures how many days it takes to sell the company’s inventory. It is used together with other metrics like inventory turnover ratio and GMROI to track how efficiently a company manages its inventory.
While a low DSI can be positive or negative; ie it could mean that either the company is selling its inventory fast and turning it frequently or it is being understocked, a relatively high DSI is most of the time a negative sign.
A high Days Sales in Inventory means the company is either overstocked or having very low sales relative to its inventory holding. This is bad because for a retail company inventory = cash. Having inventory sitting around for long times means cash being trapped and not being used for better purposes. It also means paying extra storage and warehousing fees for no valid reason.
Read Also: How to reduce your Amazon storage fees?
Days Sales in Inventory Formula
Days Sales in Inventory can be calculated by dividing the average inventory by the cost of goods sold and then multiplying the result by 365 to get DSI for a year. It can also be calculated by dividing the inventory turnover ratio by 365.
DSI = (Average Inventory ÷ COGS ) x 365
Can also be calculated as
DSI = 365 ÷ IT
Sales for the last year = 125,000 $ at 45% margin
Beginning Inventory (at the beginning of the year) = 50,000 $
Ending Inventory (at the end of the year) = 60,000 $
Average Inventory = (50,000 $ + 60,000 $) ÷ 2 = 55,000 $
COGS = 125,000 $ x (1-0.45) = 68,750 $
IT = COGS ÷ Average Inventory = 68,750 $ ÷ 55,000 $ = 1.25
DSI = (55,000$ ÷ 68750 $) x 365 = 292
DSI = 365 ÷ 1.25 = 292
This result means that it takes 292 days to sell the average inventory of this company.
What Is a Good Days Sales in Inventory (DSI) for Retail?
A good DSI for a retail business will vary depending on which category the retail business is operating in. Here we have compiled retail industry benchmarks by category and below is a snapshot for Inventory Turnover & Days Sales in Inventory.
|Retail Category||Inventory Turnover||DSI|
|Family Clothing Stores||3.2||114|
|Office Supplies Stores||8.3||44|
|Household Appliances Stores||4.7||78|
As you can see from the benchmarks, supermarkets have a low Days Sales in Inventory at 25 days, while clothing stores and furniture stores typically have a higher DSI at 114 & 107 days respectively.
This is because supermarkets tend to turn their inventory many times during the year, due to dealing with perishable goods. Fashion stores, on the other hand, tend to buy their inventory in seasons and trade them for the whole season.
Read More: Open to Buy – A Complete Guide
Based on your retail category, you can calculate the different inventory metrics for your business, and then compare them with industry’s benchmarks to see how efficiently you are buying & managing your inventory.
Read also our Inventory Management Guide
Retailer & Founder of Retail Dogma, Inc.
Rasha has 12 years of retail & ecommerce experience. She has started an ecommerce business in 2008, and later worked at H&M, Bath & Body Works, Victoria’s Secret and Landmark Group. She has lived in 4 different countries, speaks 3 different languages and holds a master’s degree in Strategic Management & Marketing.