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Days inventory on hand, also known as a days of supply, along with inventory turns, is a measure of inventory investment. While turns may be one of the most basic measures of an organizations leanness, days inventory on hand perhaps helps lean practitioners better visualize the magnitude of (excess) inventory and its impact on a value streams lead time. This is especially applicable when the notion of inventory extends beyond parts and finished goods to transactional (i.e., files, contracts, etc.) and healthcare (i.e., tests, reports, etc.) value streams. There are two basic approaches to calculate days inventory on hand: 1) divide the number of days that the value stream is operating by the inventory turns, or 2) divide average inventory by daily usage. Mathematically, it gets you to the same place. It is often more actionable and meaningful if the days inventory on hand is not only calculated with total inventory, but also by raw material and finished goods and even by other inventory sub-categories. Like with many of the Lean Math entries, some math convention considerations bear discussion:
Financial folks will often use 365 or 360 days as their nominator. That is reflective of reality IF the value stream is in operation virtually every day of the year, like Walmart®. However, most value streams are working something less than that often 250 days a year or so. The purpose of the measure is to provide insight into how much cholesterol is really accumulating in the value stream. Use a number that mirrors the value streams available days during the year or use the second basic approach of dividing average inventory by daily usage (of course, apply the same logic when determining daily usage). Bottom line understand your math convention and those against whom you might be benchmarking.
Inventory value versus inventory units.
Inventory value is often used to calculate inventory turns and, as reflected in the separate inventory turns entry, it has its pros and cons. A unit-based approach does eliminate much of the noise that inventory valuation methods and high mix may introduce. Furthermore, units, especially in the area of finished goods, are what the customer feels, and the value stream experiences. See below for examples using value and units.
Related post:Inventory Turns Calculation
I am looking to calculate DOH of both Raw Material & Finished Goods on a monthly basis. What is the best practice for doing this? Should I be referencing the COGS and Inventory levels only during the given month, or is it best to capture the average COGS over a period of a few months?
Thanks for your question. One relatively common practice is to calculate the DOH on a 6 month rolling average. But, in order to do that youll certainly have the data to do it for a discrete month. So, I would suggest looking at both, at least initially and see what the data and graph tells you (aka practical and graphical analysis).
We always need to go back to the purpose of such metrics – to be able to identify gaps between the current and target condition, to determine if the countermeasure(s) is(are) having the desired measurable impact, and, with that, figure out if performance getting better, worse, or staying the same.
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Lean Math. Now, theres a name that evokes passion in the heart of every lean practitioner!?
But, the truth is effective lean transformations require some level of math, whether its the often deceptively simple calculation of takt time, sizing kanbans, calculating process capability, or anything in between. Its hard to get away from math-free lean and certainly math-free six sigma!
Lean Math is not intended to be some purely academic study and it does not pretend to be part of the heart and soul of lean principles. Rather, its a tool and a construct for thinking. Here we want to integrate lean math theories and examples with experimentation and application.
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Exhibit 1 Cash Conversion Cycle Formula CCC =
+ Days Receivables Outstanding – Days Payables Outstanding This equation can be expanded as follows: CCC = [Average Inventory / (Cost of Goods Sold / 365)] + [Average Accounts Receivable / (Net Sales / 365)] – [Average Accounts Payable / (Cost of Goods Sold / 365)]
Analyzing liquidity: using the cash conversion cycle: method incorporating time complements static measures such as the more common current ratio
The CCC has three components: days sales outstanding (DSO),
(DIO) and days payables outstanding (DPO).
The flaws and obsolescence of product forecasting; one EMS provider has defined a new model that competes against low-cost, offshore suppliers by being more efficient in all aspects of production
Conversely, $140 million also represents less than four days of accounts receivable or inventory meaning a slight up-tick in CCC days can turn cash flow negative quite quickly (days sales outstanding were 36,
were 48 on average in fiscal 2010).
Fitch Rates Jabil Circuits Proposed $300MM 10-Year Sr Unsecured Notes BBB-
(DIO), rose by nearly 9 percent, in part as a result of the dramatic drop off in sales many companies experienced.
REL Research Alert: Recession Hit Working Capital Hard in 2009; As Collections Slowed Dramatically, Inventories Spiked to New Highs
Days Delay Enroute Authorized As Leave
Days Delay Enroute Chargeable As Leave
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