Days On Hand Analysis
QUESTION
Background: Days on Hand or Days in Inventory provides a metric for comparing supply chain operations within the same industry. The Days in Inventory metric represents “the average number of days a company holds its inventory before selling it.” A lower number of days indicates a lower cash investment and less inventory on the floor. Less inventory on the floor results in less floor space needed, less chance for obsolescence, and less chance for damage and theft.
Calculate Days on Hand by dividing the inventory dollars by daily COGS. Annual COGS (Cost Of Goods Sold, Cost of Revenue, or Cost of Sales) is on the Income Statement, and inventory is on the Balance Sheet. Each of these financial documents is in the companies’ annual report Form 10-K. Look for the “Financial Statements and Supplementary Data” section. (Refer to the section on Measuring Supply Chain Performance in Chapter 11 of the text.)
Improvement in operational efficiency, as indicated by a lower Days on Hand, yields two financial benefits. First, the reduced inventory results in a lower inventory carrying cost. Second, the reduced inventory results in a first-year reduction in expenditures (operations based on already purchased inventory) and, therefore, a positive cash flow impact equivalent to reducing inventory.
You cannot just declare a lower inventory level. You can not reduce inventory without reducing the need for inventory (i.e., variation in lead time, forecast accuracy, or quality). Reducing inventory without reducing the need results in problems in operations and customer satisfaction.
Assignment: Compare 2020 Days on Hand results to the 2019 Days on Hand results for Nike Inc. You can find the data you need in the annual reports for this company on the internet. Write an executive summary (follow the model provided) detailing the daily Cost of Goods Sold for each year, respective days of inventory for 2019 and 2020, and the financial impact of the higher inventory in 2020 as measured by the Days on Hand measure. Assume a 25% carrying cost ratio. There is information on how to do these calculations in the example provided.
Be careful to use the correct units for the financial impact. (Financial numbers in Income Statements and Balance Sheets are often in $ millions.)
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