Average Age of Inventory

What it is

The average age of inventory (also called days’ sales in inventory, DSI) measures the average number of days a company holds inventory before selling it. It gauges how quickly inventory turns into sales and helps assess inventory-management efficiency.

Formula

Average Age of Inventory (days) = (Average Inventory / Cost of Goods Sold) × 365

Alternatively:
Average Age of Inventory = 365 / Inventory Turnover
where Inventory Turnover = COGS / Average Inventory

Use average inventory (often the mean of beginning and ending inventory for the period) and COGS for the same period.

What it reveals

• A lower number means inventory is sold more quickly — generally a sign of efficient operations.
• A higher number can indicate slow-moving stock, excess inventory, pricing issues, or potential obsolescence.
• Industry norms vary widely (e.g., groceries vs. heavy equipment), so compare to peers or historical company trends.
• Should be evaluated alongside other metrics (gross profit margin, inventory turnover, sales trends) before drawing conclusions.

Practical uses

• Purchasing and production planning — helps set reorder levels and safety stock.
• Pricing and discount decisions — high average age may prompt markdowns to increase cash flow.
• Risk assessment — longer holding periods increase exposure to obsolescence and potential write-offs.
• Financial analysis — used by investors and analysts to compare operational efficiency across companies.

Example

Company A
* Average inventory = $100,000
* COGS = $600,000
* Average Age = (100,000 / 600,000) × 365 ≈ 60.8 days

Company B
* Average inventory = $100,000
* COGS = $1,000,000
* Average Age = (100,000 / 1,000,000) × 365 = 36.5 days

On the surface, Company B turns inventory faster than Company A. However, further analysis (margins, product mix, seasonality) is needed to confirm overall efficiency.

Limitations and cautions

• Seasonal businesses should use appropriately timed averages (e.g., seasonal averages or rolling 12-month figures).
• A low average age isn’t always positive if achieved by sacrificing margins (excessive discounting) or reducing service levels.
• High inventory levels may be strategic (bulk purchasing discounts, preparation for demand spikes); context matters.

Key takeaways

• Average age of inventory shows how long, on average, inventory sits before sale.
• Compare across peers, time periods, and alongside profitability metrics.
• Use it for operational, purchasing, and financial decision-making, remembering industry context and other influencing factors.