Since inventory cost represents the opportunity cost of funds, the Days of Inventory indicates how well inventory is being managed. Days of Inventory shows the average number of days an item is held in inventory before it is sold.
A high 'Days of Inventory' indicates that the company is not moving inventory fast. This could be a sign of low demand for the product. On the other hand a low 'Days of Inventory" could lead to the company running out of inventory. If your company runs out of inventory then your profits will most likely decrease.
The formula to determine the Days of Inventory is
Current Stock Level / Daily Usage
Where Daily Usage = Usage over Assessment Period / Assessment Period Days
If current Stock Level of an Item is 50 and the usage over an assessment period of 100 days is 250 then
Daily Usage = 250 / 100 = 2.5
Days of Inventory = 50 / 2.5 = 20 Days
To assist you in determining the Days of Inventory you will find that Ostendo will do this for you as follows:
In preparation for running the Days of Inventory Inquiry go to File>System Configuration>User-Defined Constants where you will see two Constants.
Usage History Period in Days: You can define the number of day's history which Ostendo will use to determine the Daily Usage
Add Re-Order Level to Leadtime: If this is set to 'True' then the Re-Order Level will become the basis for assessing the 'Overstock Days'. If set to 'False' then the current Inventory will be used.
Now go to Inventory>Inquiries>Inquiry – Days of Inventory and run the Inquiry which will show the following information against each Item:
Overstock Days: If: