Days inventory on hand, also known as a days of supply, along with inventory turns, is a measure of inventory investment. While turns may be one of the most basic measures of an organization’s “leanness,” days inventory on hand perhaps helps lean practitioners better visualize the magnitude of (excess) inventory and its impact on a value stream’s lead time. This is especially applicable when the notion of inventory extends beyond parts and finished goods to transactional (i.e., files, contracts, etc.) and healthcare (i.e., tests, reports, etc.) value streams. There are two basic approaches to calculate days inventory on hand: 1) divide the number of days that the value stream is operating by the inventory turns, or 2) divide average inventory by daily usage. Mathematically, it gets you to the same place. It is often more actionable and meaningful if the days inventory on hand is not only calculated with total inventory, but also by raw material and finished goods and even by other inventory sub-categories. Like with many of the Lean Math entries, some math convention considerations bear discussion:
- Number of days. Financial folks will often use 365 or 360 days as their nominator. That is reflective of reality IF the value stream is in operation virtually every day of the year, like Walmart®. However, most value streams are working something less than that – often 250 days a year or so. The purpose of the measure is to provide insight into how much cholesterol is really accumulating in the value stream. Use a number that mirrors the value stream’s available days during the year or use the second basic approach of dividing average inventory by daily usage (of course, apply the same logic when determining daily usage). Bottom line – understand your math convention and those against whom you might be benchmarking.
- Inventory value versus inventory units. Inventory value is often used to calculate inventory turns and, as reflected in the separate inventory turns entry, it has its pros and cons. A unit-based approach does eliminate much of the “noise” that inventory valuation methods and high mix may introduce. Furthermore, units, especially in the area of finished goods, are what the customer “feels,” and the value stream experiences. See below for examples using value and units.
Related post: Inventory Turns Calculation