Mastering DIOH: A Key to Smarter Inventory Management

DIOH, or Days Inventory On Hand, is an inventory management metric that can be extremely useful both on an individual component/item level and in the aggregate. There can be some confusion about DIOH and inventory turnover, but suffice it to say that the two metrics are just two sides of the same coin.

DIOH can be measured either by units or dollars. Typically, at the unit or component level, DIOH is computed by units. In the aggregate, as in a product hierarchy group or a company’s entire inventory asset, DIOH is usually calculated using dollars. For example, if you wanted to measure the DIOH for a company’s entire inventory, you would divide the month-end inventory dollars by a daily cost of goods factor. A good way to compute this factor is by taking the total prior 12 months’ Cost of Goods, divided by 365 days, which would give you a historical average.

Let’s say your month-end inventory asset is 2,500,000. Over the past 12 months, the cost of goods shipped, per your P&L, is 3,000,000. Dividing the 3,000,000 by 365 days produces a daily cost of goods factor of $8,219. Finally, dividing the $2,500,000 inventory assets by $8,219 gives approximately 304 Days of Inventory On Hand. This means that, given the recent shipment history, it would take your company 304 days to completely deplete the current inventory on hand.

To compute the inventory turnover, we divide our 304 days into 365 days (365 / 304) to get a 1.2X turnover ratio. This means that we are turning over the total inventory 1.2 times per year. As a general rule, we use DIOH because it has more applicability to other inventory-related computations than turnover, but that decision is up to you. We will produce more content on this important subject, so stay tuned.

Chase Morrison
https://lnkd.in/gQagk9iG

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