Key Performance Indicators (KPIs) are the metrics used to measure the performance of a business. Similarly, ecommerce metrics are the KPIs that can help online businesses evaluate their performance, set benchmarks, and take corrective measures to steer the business in the right direction.

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In this ecommerce metric refresher, you will learn what is Inventory Days on Hand (DOH), how to calculate Inventory Days on Hand (DOH), why should businesses calculate Inventory Days on Hand (DOH), benefits of reducing Inventory Days on Hand (DOH), and the strategies to reduce Inventory Days on Hand (DOH).

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What is Inventory Days on Hand (DOH)?

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Inventory Days on Hand (DOH) is an ecommerce metric used to determine how quickly a business utilises its inventory levels on average. The inventory days on hand (DOH) value represents inventory liquidity, i.e. the number of days the inventory remains in stock.

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The following illustration shows the inventory days on hand (DOH) formula:

Let's see how to calculate inventory days on hand (DOH) with an example,

1. Let's assume, you have inventory worth INR 2,00,000 for the year 2019.
2. Its cost of goods sold is INR 12,00,000.
3. Therefore, inventory days on hand (DOH) = 2,00,000 / 12,00,000 X 365 = 60.83 days

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Note: A low inventory days on hand (DOH) indicates you are efficient with how you purchase, store and sell your stock. In contrast, a high inventory days on hand (DOH) shows that you are struggling to clear your stock.

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Why should businesses calculate inventory days on hand (DOH)?

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There are many reasons for businesses to calculate inventory days on hand (DOH), such as:

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• Determine the average duration that cash is tied up in inventory
• Predict and manage accurate inventory levels
• Evaluate the risk of inventory becoming obsolete
• Formulate an effective sales plan

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Benefits of reducing inventory days on hand (DOH)

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1. Lower costs

When you store your inventory, storage costs depend on the duration of time. That means the fewer inventory days on hand (DOH) you have, the more money you can save on warehousing and upfront inventory investment.

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2. Fresher products in front of your customers

When products sit on the shelves for too long, they literally go stale, especially those with expiration dates. Even seasonal clothing gets hard to sell. If you bring your customers new products and refreshed stock more often, you can create a positive and creditable brand image.

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3. Faster profits

By reducing your inventory days on hand (DOH), you increase the rate at which you deplete inventory. That means you’re moving inventory quicker and thus generating revenue faster.

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How to reduce inventory days on hand (DOH)

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There are various strategies to reduce inventory days on hand (DOH), such as:

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1. Discount the stock
   You can clear out inventory in a matter of days by offering discounts. A flash sale catches the eye of budget-conscious customers and boosts sales in an instant.

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2. Bundle the stock
   You can use merchandising techniques such as product kitting, to bundle multiple single items into one unit of sale. This offers an opportunity to rebrand deadstock and also maximises product exposure. It will enable you to sell your inventory as quickly as possible and increase your Average Order Value (AOV).

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3. Donate the stock
   Consumers trust the brands that are committed to a cause. If you have excess stock that’s been sitting on your shelves for too long, you can go ahead and donate it.

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Bottom line

It's crucial to manage inventory wisely as it takes up one of the largest portions of operational capital. By calculating inventory days on hand (DOH) and applying it, you can determine the average duration of cash tied up in inventory and take revenue-oriented decisions.

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