Retail Dogma

Days Sales in Inventory

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.

Days Sales in Inventory Formula

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

Example

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

Or

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 CategoryInventory TurnoverDSI
Family Clothing Stores3.2114
Furniture Stores3.4107
Supermarkets14.525
Pharmacies14.226
Cosmetics Stores4.287
Office Supplies Stores8.344
Household Appliances Stores4.778

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