Glossary
Inventory Days of Supply (for RM, WIP, PFG, and FFG)
Tags: Glossary
Total gross value of inventory for the category (raw materials, work in process, partially finished goods, or fully finished goods) at standard cost before reserves for excess and obsolescence, divided by the average daily usage. It includes only inventory that is on the books and currently owned by the business entity. Future liabilities, such as consignments from suppliers, are not included. Calculation: [5-Point Annual Average Gross Inventory] / [Calendar Year Value of Transfers / 365].
What is Inventory Days of Supply (for RM, WIP, PFG, and FFG)?
Inventory Days of Supply is a key metric used in logistics to measure the number of days a company's inventory can sustain its operations. It provides valuable insights into the efficiency and effectiveness of inventory management.
Inventory Days of Supply is calculated by dividing the total gross value of inventory for a specific category, such as raw materials (RM), work in process (WIP), partially finished goods (PFG), or fully finished goods (FFG), by the average daily usage. This calculation is based on the standard cost of inventory before accounting for reserves for excess and obsolescence.
It is important to note that Inventory Days of Supply only includes inventory that is on the books and currently owned by the business entity. Future liabilities, such as consignments from suppliers, are not considered in this calculation.
The formula for calculating Inventory Days of Supply is as follows: [5-Point Annual Average Gross Inventory] divided by [Calendar Year Value of Transfers divided by 365].
By analyzing the Inventory Days of Supply, companies can gain valuable insights into their inventory management practices. A high number of days of supply may indicate excessive inventory levels, which can tie up capital and increase carrying costs. On the other hand, a low number of days of supply may indicate insufficient inventory levels, leading to stockouts and potential disruptions in operations.
Optimizing Inventory Days of Supply requires finding the right balance between maintaining sufficient inventory levels to meet customer demand while minimizing excess inventory. This can be achieved through effective demand forecasting, efficient supply chain management, and implementing inventory control techniques such as just-in-time (JIT) or lean inventory management.
In conclusion, Inventory Days of Supply is a crucial metric in logistics that helps companies assess their inventory management performance. By understanding and optimizing this metric, businesses can improve their operational efficiency, reduce costs, and enhance customer satisfaction.