Interpreting Your DIO

High vs low DIO: what it signals

• High DIO:

  • Excess or slow-moving stock, long production cycles, or demand over-forecasting

  • Potential cash traps and risk of write-offs

• Low DIO:

  • Efficient turns, lean inventory, or strong demand

  • Watch for stockouts or service misses if too low

Trend analysis and targets

• Track DIO monthly, compare TTM vs current quarter to detect seasonality.

• Segment by category/SKU and by location; enterprise averages can hide issues.

• Set targets by product family, tied to service-level and lead-time realities.

Peer benchmarking and context

• Compare to peers of similar model (retail vs manufacturing), accounting method (FIFO/LIFO), and seasonality. Normalize where possible (TTM, FIFO-adjusted COGS).

DIO, Inventory Turnover, and the Cash Conversion Cycle

Link to inventory turnover

• Turnover and DIO are inverses. Improving forecast accuracy, lead times, and replenishment increases turnover and lowers DIO.

Role within the CCC

• CCC = Days Sales Outstanding (DSO) + DIO − Days Payables Outstanding (DPO)

• Lower DIO reduces CCC, freeing cash.

Working capital implications

Cash impact sensitivity example:

• COGS (TTM) = $100M

• Daily COGS (365) ≈ $273,973

• If you cut DIO by 10 days, inventory falls by ≈ $2.74M

• If WACC is 10%, annual carrying cost saved ≈ $274k plus obsolescence/shrink benefit

Use this math to size initiatives and prioritize SKUs/suppliers.

Benchmarks and Comparability

Typical ranges by industry

Indicative annual DIO ranges (validate with your data and peer set):

• Grocery and convenience retail: 10–25 days

• Big-box/consumer electronics retail: 35–70 days

• Apparel and footwear retail: 60–120 days

• Industrial distributors: 50–100 days

• Automotive OEMs: 50–90 days; Tier-1 suppliers often higher

• Pharmaceuticals manufacturers: 120–180 days

• Consumer packaged goods: 40–90 days

• High-tech hardware: 60–120 days

Methodology notes:

• Use TTM COGS and average inventory from audited filings (10-K/20-F/annual report).

• Adjust LIFO reporters to FIFO using the disclosed LIFO reserve when comparing to IFRS/FIFO peers.

• Control for calendar vs fiscal year-end and major acquisitions.

Retail vs manufacturing vs ecommerce nuances

• Retail: Finished goods only; DIO driven by assortment breadth, seasonality, and markdown cadence.

• Manufacturing: Include raw, WIP, finished; longer cycles and batch sizes lift DIO.

• Ecommerce: Reverse logistics and returns inflate effective DIO; omnichannel transfer rules matter.

Accounting method impacts (FIFO/LIFO/WA)

• Under rising prices:

  • LIFO: Higher COGS, lower inventory, lower DIO

  • FIFO: Lower COGS, higher inventory, higher DIO

• IFRS prohibits LIFO; US GAAP allows it. Use LIFO reserve to restate when benchmarking.

Common Pitfalls and Variations

COGS vs sales in the denominator

• Best practice: use COGS. Sales includes margin and distorts DIO.

• Only use Sales if COGS is unavailable; label clearly and avoid peer comparisons.

Average vs ending inventory

• Average inventory reduces volatility and seasonality bias.

• Ending inventory can mislead for seasonal businesses or quarter-end pushes.

Seasonality and TTM calculation

• Use TTM COGS with monthly averaged inventory for the cleanest view.

• For seasonal lines, analyze pre-peak vs post-peak DIO separately.

Inventory scope: raw, WIP, finished goods, in-transit

• Include inventory you own: on-hand, in-transit, and at third parties.

• Exclude consigned stock you don’t own.

• Keep treatment consistent across periods and segments.

How to Improve DIO

Demand forecasting and replenishment

• Use a rolling statistical forecast plus override process.

• Shorten review periods and adjust safety stocks by variability and lead time.

• Implement vendor-managed inventory (VMI) where suppliers are capable.

SKU rationalization and ABC analysis

• Classify SKUs by velocity/value (A/B/C).

• Tighten policies for C items (longer reorder points, higher MOQ scrutiny, or discontinue).

• Consolidate duplicative or low-margin variants.

Supplier collaboration and lead-time reduction

• Negotiate smaller MOQs and shorter lead times.

• Share forecasts and commit to capacity windows to reduce buffers.

• Dual-source critical items to cut risk buffers.

Production planning and lot sizing

• Move toward smaller lots, level-loading, and SMED/quick changeovers.

• Pull systems (kanban) for repeatable demand, MRP for variable demand.

• Tie batch sizes to total cost (setup + holding).

Markdowns, clearance, and returns management

• Pre-plan markdown ladders for seasonal lines.

• Accelerate returns triage: re-shelve, refurbish, or liquidate within SLA.

• For ecommerce, improve size guides and packaging to cut return rates.

Reorder point and safety stock: formulas and examples

Core formulas:

• Reorder Point (ROP) = Average Daily Demand × Lead Time (days) + Safety Stock

• Safety Stock (service-level method) = Z × Demand Std Dev × √Lead Time

• Safety Stock (simple method) = (Max Daily Usage × Max Lead Time) − (Avg Daily Usage × Avg Lead Time)

Example 1 (service-level method):

• Average daily demand: 100 units

• Lead time: 10 days

• Daily demand standard deviation: 30 units

• Target service level: 95% → Z ≈ 1.65

• Safety Stock = 1.65 × 30 × √10 ≈ 1.65 × 30 × 3.16 ≈ 156 units

• ROP = 100 × 10 + 156 = 1,156 units

Example 2 (simple method):

• Max daily usage: 130 units; Max lead time: 12 days

• Avg daily usage: 100 units; Avg lead time: 10 days

• Safety Stock = 130×12 − 100×10 = 1,560 − 1,000 = 560 units

• ROP = 100 × 10 + 560 = 1,560 units

Impact on DIO:

• Better-calibrated ROP and safety stock reduce excess inventory while protecting service, lowering DIO without raising stockouts.

Role-based playbooks

• FP&A:

  • Build SKU- and category-level DIO views.

  • Size cash impact (days to dollars) and prioritize initiatives.

  • Align targets with margin, service level, and WACC.

• Supply Chain:

  • Tune policies (ROP, safety stock, MOQ, lead times) by ABC class.

  • Launch pilot reductions with suppliers; measure fill rate and DIO weekly.

• Credit/Treasury:

  • Integrate DIO targets into working capital forecasts.

  • Tie supplier terms (DPO) and customer terms (DSO) to CCC goals.

Mini case studies

• Retail apparel: Pre-season buys drove DIO to 130 days. Introduced size-curation and mid-season markdowns; cut DIO to 95 days and improved full-price sell-through.

• Discrete manufacturer: Large batch sizes and 8-week setups kept WIP high. SMED reduced changeover by 50%; DIO fell 12 days, on-time delivery rose 6 points.

• Ecommerce: High returns inflated effective DIO. Implemented photo/fit improvements and faster refurbish loop; return rate dropped 3 points and DIO improved by 8 days.

Data Checklist and Tools

ERP fields to extract

• Item master: SKU, ABC class, unit cost, standard cost method (FIFO/LIFO/WA)

• Inventory balances: On-hand by location, in-transit, at 3PL/CMO, consignment flags

• Movements: Receipts, issues, transfers, returns, scrap, adjustments

• Lead times: Supplier quoted and actual (dock-to-stock), production cycle times

• Demand: Shipments, sales orders, forecast, returns

• Financials: COGS by month, inventory reserves/write-downs, LIFO reserve

Data hygiene: consignment, write-downs, cycle counts

• Exclude consigned stock not owned.

• Include inventory reserves consistently; disclose your treatment.

• Reconcile physical counts; address negative on-hand and phantom inventory.

• Separate obsolete/slow-moving inventory to manage markdowns.

30-60-90 Day Implementation Plan

• Days 0–30: Baseline and data

  • Extract 24 months of monthly inventory and COGS.

  • Clean data: remove consignment, reconcile negatives, confirm reserves.

  • Build DIO TTM and monthly views by SKU group and location.

  • Identify top 20 SKUs/categories by inventory value and high DIO.

• Days 31–60: Policy tuning and pilots

  • Compute ROP/safety stock for A/B SKUs; adjust for lead-time variability.

  • Negotiate with 3–5 key suppliers on MOQs and lead-time reductions.

  • Pilot smaller lot sizes on 1–2 production lines.

  • Set target DIO reductions and cash goals; track weekly.

• Days 61–90: Scale and embed

  • Roll successful pilots to additional SKUs/sites.

  • Implement markdown cadence for slow movers; accelerate returns processing.

  • Institutionalize a monthly DIO review in S&OP.

  • Update working capital forecasts with realized DIO improvements.

Looking to Take Control of Your Inventory?

If you want to take your inventory management to the next level, learn more about how Verve AI can help you and your e-commerce store.

FAQs

What is a good DIO for my industry?

It varies widely. Grocery can be 10–25 days, apparel 60–120, industrial distribution 50–100, pharma manufacturing 120–180. Always benchmark against similar business models and accounting methods, using TTM data.

Is DIO the same as DSI or Days on Hand?

Yes, DIO, DSI, and DOH generally mean the same thing. Confirm the formula your source uses (COGS vs sales; average vs ending inventory).

Should I use COGS or sales in the DIO formula?

Use COGS. Sales includes margin and will understate the true days on hand. Only use sales if COGS is not available and label it clearly.

Why use average inventory instead of ending inventory?

Average inventory smooths spikes from seasonality or quarter-end actions, providing a more representative figure for the period.

How does DIO differ for manufacturers vs retailers?

Manufacturers include raw, WIP, and finished goods, and often carry higher DIO due to production cycles. Retailers hold finished goods only and manage DIO with assortment planning, replenishment, and markdowns.

How does seasonality affect DIO and how should I adjust?

Seasonal builds can inflate quarter-end DIO. Use TTM COGS with monthly average inventory, and analyze pre-peak vs post-peak periods separately.

Can DIO be zero or negative?

Zero is possible temporarily if inventory is fully depleted. Negative DIO shouldn’t occur with standard inputs; if you see it, check for data issues (negative inventory balances, unusual COGS due to write-backs).

How does changing DIO affect cash and working capital?

Each 1-day reduction releases roughly Daily COGS in cash. Example: with $100M TTM COGS, a 1-day drop frees about $274k; a 10-day drop frees about $2.74M, plus carrying cost savings.