Inventory Days

Recently I received questions from multiple people about the inventory days of supply metric. This metric has been part of SCOR since — I guess — the beginning, but some of our practitioners/trainees confuse the days for lead-time.

Question: If I have 5 days worth of inventory does this mean it would take five days to get to zero inventory (assuming I do not buy or make more?)

Answer: No. In the ideal world, IF you have the right mix of goods, materials, lead times and capacity the answer would be yes, but the realities of mix issues, inventory aging and lead times will mean that it takes substantially longer to deplete all inventory.

Question: If I have 5 days worth of inventory in WIP does this mean that it takes five days to make the product?

Answer: No, there is no correlation between Make lead-time and inventory days of supply in WIP. For example: if it takes 10 days to make the product but I book the raw material issuance, consumption and the finished goods increase all at the same time, then I would not report any material in WIP – this is known as backflush costing. But even environments where materials are issued pre-production, materials may remain in WIP well beyond the typical duration of the physical make process. For example: material rejected for quality reasons that may remain in WIP until the material is reworked. Or consider the impact of creating sub-assemblies as part of a postponement strategy.

Question: Does 5 days inventory days of supply mean I have 5 inventory turns per day?

Answer: No. Inventory turns is like the multiplicative inverse of inventory days of supply. If inventory days of supply is 5 days the your will have 365/5 = 73 turns per year (or 1/5 turns per day).

So why do we use this days of supply to express inventory? Two reasons. First because inventory is part of the bigger cash-to-cash cycle time which is expressed in days. And secondly because an absolute inventory number does not tell the whole story. I always ask the training attendees: I have 2 gallons of milk in the fridge — is that a lot or not? The answer is: it depends. If I use it only to cream my daily cup of coffee; it will last me well beyond the expiry date. If however you have a couple of teenage kids, it may last less than a week.

This blog entry was originally published by the author on the now demised SCC website.

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Caspar Hunsche

About Caspar Hunsche

Caspar Hunsche is a Managing Director at PCG with over 20 years of experience in Supply Chain Management. He served as Research Director of Supply Chain Council and is co-designer of OpenReference's emerging global standard in supply chain strategic business management.