How to Optimise Days Inventory Outstanding (DIO) and Improve Cash Flow

If you’re holding onto inventory for too long, you’re tying up valuable capital and increasing storage costs. On the other hand, moving stock too quickly without proper planning can lead to stockouts and lost sales. Striking the right balance is crucial—this is where Days Inventory Outstanding (DIO) comes in.

Days Inventory Outstanding measures how many days, on average, your inventory sits in stock before being sold. A lower DIO means faster turnover, improved cash flow, and reduced storage costs. But how do you achieve this without disrupting operations?

This guide will break down actionable strategies to optimise your Days Inventory Outstanding, improve efficiency, and free up working capital—all with practical warehouse inventory management efficiency techniques that you can implement today.

What is Days Inventory Outstanding (DIO)?

Days Inventory Outstanding (DIO), also known as Days Sales of Inventory (DSI), is a key inventory management metric. It tells businesses how long – inventory days on average – existing inventory is held before it is sold. The higher the DIO, the longer inventory sits unsold, increasing storage costs and tying up cash flow.

For businesses managing inventory—whether wholesalers, distributors, retailers, or manufacturers—DIO is a critical measure of efficiency and profitability.

Days Inventory Outstanding Formula

The Days Inventory Outstanding formula helps businesses quantify how long their inventory is taking to turn into sales:

DIO=(Cost of Goods Sold (COGS)÷ Average Inventory​)× Inventory period (365 is the standard accounting period)

Where:

• Average Inventory = (Beginning Inventory + Ending Inventory) ÷ 2
• COGS (Cost of Goods Sold) = The direct costs associated with producing goods, found on the income statement.

How to Calculate Days Inventory Outstanding

Here’s a step-by-step breakdown of how to calculate DIO:

1️⃣ Determine Average Inventory

• Find your beginning inventory (value of stock at the start of the period) and ending inventory (value at the end of the period).
• Calculate the average:

Average Inventory = (Beginning Inventory + Ending Inventory​) ÷ 2

2️⃣ Find the Cost of Goods Sold (COGS)

• Locate the COGS on your income statement. This includes raw materials, direct labour, and production costs associated with selling goods.

3️⃣ Apply the DIO Formula

• Plug the values into the formula:

DIO = (COGS ÷ Average Inventory​)×365

Days Inventory Outstanding Example

Let’s say a company has:

• Beginning Inventory: $500,000
• Ending Inventory: $700,000
• COGS: $3,000,000

Step 1: Calculate Average Inventory

Average Inventory=(2500,000+700,000) / 2 ​= 600,000

Step 2: Apply to the DIO formula

DIO=(3,000,000 / 600,000​)×365

DIO=(0.2)×365=73 days

So, this business holds inventory for an average number of 73 days before selling it.

What is a ‘Good’ Days Inventory Outstanding Number?

A “good” Days Inventory Outstanding depends on the industry:

✅ Fast-moving consumer goods (FMCG), food, and retail: 30 days or less is ideal to avoid spoilage and ensure quick turnover.
✅ Wholesale and distribution: Typically between 30 to 60 days, depending on supply chain speed and demand cycles.
✅ Manufacturing: Can range from 60 to 120 days, as raw materials and production time add to the holding period.
✅ Luxury goods or high-value items: Often 100+ days, as products take longer to sell due to niche demand.

The goal is to keep Days Inventory Outstanding as low as possible while ensuring consistent stock availability. If DIO is too high, cash is tied up in unsold stock and inventory turnover is slower; if it’s too low, stockouts may occur and inventory turnover is high.

How Inventory Turnover Ratio Relates to DIO

The inventory turnover ratio and Days Inventory Outstanding (DIO) go hand in hand when it comes to measuring inventory efficiency. The inventory turnover ratio tells you how many times the stock is sold and replenished in a given period, while DIO shows how long, on average, inventory sits in storage before being sold. A high inventory turnover ratio means stock moves quickly, keeping DIO low—great for cash flow and reducing storage costs. However if the inventory turnover ratio is low and DIO is high, it could mean excess stock, slow-moving products, or inefficient order fulfilment. Keeping an eye on both metrics helps businesses strike the right balance—ensuring steady stock movement without overstocking or running out of key products.

Why Optimising Days Inventory Outstanding Matters

Getting your Days Inventory Outstanding under control isn’t just a financial exercise; it has real operational and business benefits:

1. Better Cash Flow – The longer your inventory sits unsold, the more money is locked up. Reducing DIO frees up capital that can be reinvested elsewhere.
2. Lower Storage & Holding Costs – Warehouses cost money to operate. The faster you move inventory, the less you spend on storage, insurance, and potential waste from damaged or obsolete stock.
3. Improved Customer Satisfaction – Efficient stock turnover means you always have the right products available when customers need them, leading to faster fulfilment and repeat business.

8 Practical Strategies to Optimise DIO

1. Improve Demand Forecasting

Poor demand forecasting leads to either overstocking (high DIO) or stockouts (low DIO). Use historical sales data, seasonal trends, and real-time analytics to predict demand accurately.

✅ Action Steps:

• Analyse past sales trends and seasonal demand fluctuations.
• Use forecasting tools integrated with your Warehouse Management System (WMS) to adjust stock levels dynamically.
• Align purchasing with sales trends to avoid unnecessary overstocking.

💡 Example: If a wholesaler knows that customer demand for certain electronics spikes during holiday sales, they can adjust procurement accordingly—reducing unnecessary stock build-up during slower months.

2. Streamline Inventory Replenishment

Replenishing stock too early results in unnecessary holding costs, while late replenishment causes stockouts. Automated inventory tracking helps strike the perfect balance.

✅ Action Steps:

• Set up automated reordering with minimum and maximum stock levels in your WMS.
• Track stock movements in real-time to avoid over-ordering.
• Review replenishment cycles regularly based on updated sales trends.

💡 Example: A food distributor using Datapel Cloud WMS can automate reorder points for perishable items, ensuring fresh stock while preventing waste.

3. Use FIFO & FEFO for Better Stock Rotation

If stock isn’t rotated correctly, older inventory sits longer, increasing Days Inventory Outstanding. First In, First Out (FIFO) and First Expiry, First Out (FEFO) methods prevent stagnation.

✅ Action Steps:

• Arrange warehouse shelves so that older stock is picked first.
• Use batch tracking and expiry date management to prioritise older inventory.
• Train warehouse staff to follow FIFO/FEFO picking strategies.

💡 Example: A pharmaceutical company must follow FEFO to ensure medications with the closest expiration date are sold first, reducing expired stock losses.

4. Identify & Reduce Excess Stock

Slow-moving inventory is a silent killer of efficiency. By using the inventory outstanding metric to identify excess stock early, businesses can clear space and recover capital.

✅ Action Steps:

• Run inventory reports to identify slow-moving or obsolete stock.
• Offer discounts or bundle promotions to move excess stock faster.
• Adjust purchasing to prevent recurring overstock situations.

💡 Example: A fashion retailer may run flash sales to clear out unsold seasonal clothing before launching a new collection.

5. Increase Inventory Turnover with Efficient Layouts

A poor warehouse layout slows down picking times and delays order fulfilment, indirectly impacting inventory turnover.

✅ Action Steps:

• Organise fast-moving products in easily accessible zones.
• Implement barcode scanning and digital picking lists to speed up retrieval.
• Reduce picking errors with automated location tracking in your WMS.

💡 Example: A hardware supplier places their best-selling tools near packing stations, reducing picking time and speeding up order processing.

6. Strengthen Supplier Relationships

DIO is affected by how quickly stock arrives and how efficiently it is replenished. A reliable supply chain ensures inventory flows smoothly.

✅ Action Steps:

• Negotiate shorter lead times with suppliers.
• Diversify suppliers to prevent bottlenecks in case of disruptions.
• Track supplier performance using purchase order management tools.

💡 Example: A business relying on overseas shipments could negotiate bulk discounts but order smaller, more frequent deliveries to prevent excess inventory and stock buildup.

7. Improve Order fulfilment efficiency

Slow order processing delays stock turnover, increasing DIO. Faster, more accurate order fulfilment means stock moves out quicker.

✅ Action Steps:

• Use batch picking or wave picking to fulfil multiple orders efficiently.
• Automate stock allocation to reduce order-picking errors.
• Implement real-time stock visibility to prevent overselling.

💡 Example: An eCommerce brand integrates Datapel Cloud.WMS to sync inventory across warehouses and marketplaces, ensuring seamless stock updates and faster order processing.

8. Leverage Inventory Management Software for Greater Control

An Inventory Management System provides real-time insights into stock levels, inventory turnover ratio rates, and demand patterns—crucial for reducing DIO.

✅ Action Steps:

• Use automated alerts for low, high, or stagnant stock levels.
• Implement barcode scanning to reduce manual counting errors.
• Analyse WMS reports to fine-tune inventory strategies.

💡 Example: A distributor using Datapel Cloud.WMS benefits from automatic reordering, expiry tracking, and seamless and efficient inventory management synchronisation, ensuring optimal stock levels at all times.

The Bottom Line

Managing Days Inventory Outstanding (DIO) is about efficiency, accuracy, and strategy. By improving demand forecasting, optimising warehouse processes, and inventory management practices and leveraging technology, businesses can reduce holding costs, improve cash flow, and ensure products move faster.

By implementing these strategies, your business can maintain an optimal inventory balance—keeping customers happy while avoiding unnecessary costs. Use DIO as a metric to determine inventory efficiency and sales performance.

Frequently Asked Questions (FAQs)

1. What is a good DIO for my business?

It depends on your industry. For fast-moving goods (e.g., FMCG, food), a DIO under 30 is ideal. For industries like manufacturing, where production cycles are longer, a higher DIO may be acceptable.

2. Can reducing DIO lead to stock shortages?

Yes, if not managed carefully. That’s why demand forecasting and real-time inventory tracking are essential. Using a WMS helps maintain the right stock and inventory levels.

3. How often should I review my DIO?

At least quarterly. However, businesses with seasonal fluctuations may need to review DIO monthly to adapt inventory performance to changing demand.

4. How does WMS help with DIO?

A Warehouse Management System (WMS) like Datapel Cloud WMS provides real-time stock visibility, automated alerts, and accurate tracking, ensuring inventory management efficiency without overstocking.