An optimized warehouse and inventory management is a crucial aspect for both manufacturing and commercial companies: their success often depends on the ability to provide customers with the right product, in the required shop and at the right time.
It is therefore necessary to identify the right level of inventory to correctly balance the need to meet customer demand with the minimization of costs related to the capital.

As the quantity of products available in stock increases, the benefits and costs are:

  1. Benefits:
    1. Availability of products
    2. service level
  2. Costs:
    1. Physical space in the warehouse
    2. Absorption of working capital
    3. Risk of obsolescence.

It is therefore necessary to adopt a system that allows to monitor the inventory and to calibrate it to the optimal level, also thanks to the monitoring of some parameters such as the average number of days goods remain in the warehouse (DIO, Days Inventory Outstanding).
In order to manage the working capital, this measurement will be combined with the detection of the average days needed by the company to get the receivables after sales (DSO, Days Sales Outstanding).

Days Inventory Outstanding (DIO)
The indicator measures the days required for a “rotation” of the inventory.
The objective of this indicator is the evaluation of the impact of an improvement in the average days of inventory (Days Inventory Outstanding or DIO) on the company cash flow.

How to measure the DIO?
The formula for the calculation is as follows:
DIO= (average inventory / cost of goods sold) x 365

How can I improve DIO?
Some examplesi:

  • Analysis of articles with lower rotation, on which to make special discounts
  • A reduction in the number of product variants reduces the number of raw materials and semi-finished products required
  • Check with suppliers the possibility of reducing lead times to obtain lower “safety stock” level requirements
  • Implement forecasting and demand planning tools (SKU level vs. product families)

Days Sales Outstanding (DSO)
The indicator measures the average age of accounts receivable.
The objective of this KPI is the assessment of the impact of an improvement in the average age of accounts receivable on the company cash flow (how much should the company turnover increase to achieve the same improvement in cash flow?).

How to measure the DSO?
The formula for the calculation is as follows:
DSO = Average Accounts Receivable / Total Credit Sales /365

How can I improve DSO?
Some examples:
– Evaluate the impact of early payment discounts
– Try to get advance payments from customers
– Introduce a corporate Credit Policy to determine the limits of assignment to customers
– Use information sources to get a counterparty rating.

Contact us for a free check-up on how to adopt such suggestions in your company: sales@smartvco.com