What Days on Hand Actually Measures
Days on Hand (DOH) answers a simple question: at your current rate of sales, how many days will your inventory last?
It's one of the most practical inventory metrics because it translates abstract inventory units into something tangible—time. Telling your CEO you have 5,000 units on hand doesn't mean much. Telling them you have 47 days of inventory creates immediate understanding.
DOH is also essential for planning. When you know you have 47 days of inventory and your lead time is 21 days, you know you have about 26 days before you need to place your next order.
The Basic DOH Calculation
Days on Hand = Current Inventory ÷ Average Daily Demand
If you have 1,000 units in stock and sell an average of 25 units per day, your DOH is 40 days.
Simple enough. But there are several ways to calculate "average daily demand," and the method matters.
Method 1: Historical Average
DOH = Current Inventory ÷ (Total Sales Last 30/60/90 Days ÷ Days in Period)
This uses your recent actual sales to project forward.
Example:
- Current inventory: 1,000 units
- Sales in the last 30 days: 750 units
- Average daily demand: 750 ÷ 30 = 25 units/day
- DOH: 1,000 ÷ 25 = 40 days
Pros: Uses real sales data, easy to calculate
Cons: Assumes the future will look like the past—may not account for seasonality or trends
Method 2: Forward-Looking Forecast
DOH = Current Inventory ÷ Forecasted Daily Demand
Instead of historical sales, use your demand forecast for the upcoming period.
Example:
- Current inventory: 1,000 units
- Forecasted demand next 30 days: 900 units
- Forecasted daily demand: 900 ÷ 30 = 30 units/day
- DOH: 1,000 ÷ 30 = 33 days
Pros: Accounts for expected changes in demand
Cons: Only as good as your forecast
Method 3: Cost of Goods Sold Method
DOH = (Average Inventory ÷ COGS) × Days in Period
This is the accounting version, commonly used in financial analysis.
Example:
- Average inventory value: $50,000
- Annual COGS: $450,000
- DOH: ($50,000 ÷ $450,000) × 365 = 41 days
Pros: Standard financial metric, good for benchmarking
Cons: Works at aggregate level, less useful for SKU-level decisions
Which Method Should You Use?
For operational planning, use Method 1 or Method 2 depending on your situation:
Use historical average (Method 1) when:
- Demand is relatively stable
- You don't have a formal forecasting process
- Looking at SKU-level decisions
Use forward forecast (Method 2) when:
- Demand is seasonal or trending
- You have reliable forecasts
- Planning for promotions or launches
Use COGS method (Method 3) when:
- Reporting to finance or investors
- Comparing against industry benchmarks
- Analyzing overall inventory efficiency
What's a Good DOH?
This varies dramatically by industry and product type. Some benchmarks:
Fast-moving consumer goods (FMCG): 15-30 days
General consumer products: 30-60 days
Seasonal products (off-season): 90-180 days
Fashion/apparel: 60-90 days
Import-heavy products: 60-120 days
More important than hitting a benchmark is understanding what drives YOUR optimal DOH:
Lead time matters. If your supplier takes 45 days to deliver, you need at least 45 days of inventory plus safety stock. A 30-day DOH target with 45-day lead time guarantees stockouts.
Demand variability matters. Highly variable demand requires more buffer (higher DOH) than stable demand.
Cash constraints matter. Lower DOH frees up cash but increases stockout risk. Find the balance that works for your situation.
DOH by Product Category
Calculate DOH separately for different product segments to get actionable insights:
A-items (best sellers): These should have consistent, well-managed DOH. Aim for the lower end of your range since they turn quickly and stockouts hurt the most.
B-items (moderate sellers): Can tolerate slightly higher DOH. Less urgent to optimize.
C-items (slow movers): Often have very high DOH by nature. Focus on reducing the count of C-items rather than optimizing their DOH.
New products: Will have artificially high DOH until sales ramp. Track separately and don't let them skew your averages.
Using DOH for Inventory Decisions
Reorder Timing
When DOH drops below lead time plus safety stock days, it's time to order.
If your lead time is 21 days and you want 7 days of safety stock, trigger reorders when DOH hits 28 days.
Identifying Problem Areas
Sort your products by DOH to find outliers:
- Very low DOH (under lead time): At risk of stockout, needs immediate attention
- Very high DOH (3x+ your target): Potential dead stock, may need markdowns
Comparing Channels
Calculate DOH by channel or warehouse to identify imbalances:
- Warehouse A: 35 days
- Warehouse B: 62 days
Either Warehouse B is overstocked or Warehouse A is understocked. Investigate and rebalance.
Tracking Trends
DOH trending up over time suggests declining sales or over-purchasing. DOH trending down suggests strong sales or under-purchasing. Either trend warrants investigation.
Common DOH Mistakes
Mixing units and dollars. DOH should be consistent—either all unit-based or all dollar-based. Mixing creates meaningless numbers.
Ignoring stockout periods. If you were stocked out for 10 of the last 30 days, your "average daily demand" is artificially low. You would have sold more if you had inventory.
Using the wrong time horizon. 7-day historical average is too volatile. 365-day average obscures recent trends. 30-60 days usually hits the sweet spot.
Not segmenting. Overall DOH across all products hides important patterns. A-items might be understocked while C-items are overstocked, averaging to a "healthy" DOH that masks problems.
Forgetting in-transit inventory. Your true DOH includes inventory on the way to you. Depending on your question, you may want to include or exclude this.
DOH and Cash Flow
DOH directly impacts your cash conversion cycle. Every day of inventory represents tied-up capital.
Example:
- Average inventory: $200,000
- Target DOH: 45 days
- If you reduce DOH to 35 days, you free up: $200,000 × (10/45) = $44,444
That's real cash that can be invested elsewhere. But reducing DOH also increases stockout risk. The goal is finding the right balance for your business.
Key Takeaways
- DOH tells you how many days your inventory will last at current sales rates
- Calculate using historical demand for stability or forecasted demand for accuracy
- Optimal DOH depends on lead time, demand variability, and cash constraints
- Track DOH by product segment to find specific problems
- DOH below lead time plus safety days means you need to order
- DOH reduction frees cash but increases stockout risk—find your balance
Frequently Asked Questions
How often should I calculate DOH?
For operational planning, calculate DOH weekly. For A-items or fast-movers, daily calculation may be warranted. For financial reporting, monthly or quarterly is standard.
Should I use units or dollars for DOH?
For operational decisions (when to reorder specific products), use units. For financial analysis and benchmarking, use dollars. Be consistent within each analysis.
How do I handle products with zero sales?
Products with zero sales have infinite DOH mathematically. In practice, flag these separately as dead stock. Don't include them in your average DOH calculations—they'll skew everything.
What about seasonal products?
For seasonal products, calculate DOH using expected seasonal demand, not historical average. If you're sitting on holiday inventory in October, don't use August's slow demand—use your November/December forecast.
How does DOH relate to inventory turns?
They're inversely related. Inventory Turns = 365 ÷ DOH. If your DOH is 45 days, your turns are about 8. Higher turns mean lower DOH. They're two ways of expressing the same thing.