Days Inventory Outstanding DIO

Days Inventory Outstanding (DIO), also called Days Inventory Held or Inventory Days, is a financial metric that measures the average number of days a company holds its inventory before it is sold. A lower DIO means inventory is being sold faster, which reduces storage costs and obsolescence risk.

What Is DIO?

DIO = (Average Inventory / Cost of Goods Sold) x 365

Or:
DIO = 365 / Inventory Turnover Ratio

DIO converts the inventory turnover ratio into days, making it easier to interpret as a operational timeline.

Interpreting DIO

– **Low DIO**: inventory is moving fast; less cash tied up in stock; lower storage costs
– **High DIO**: inventory sits longer; more working capital tied up; higher risk of write-offs
– **Rising DIO**: may indicate demand slowdown, product issues, or procurement inefficiency

Industry Benchmarks

| Industry | Typical DIO |
|———|————|
| Fresh produce/food | 5-10 days |
| FMCG (packaged goods) | 15-30 days |
| Pharmaceuticals | 45-90 days |
| Automobiles | 30-60 days |
| Jewellery | 90-180 days |

High-value, slow-moving goods (jewellery, luxury goods) naturally have higher DIO.

DIO in the Working Capital Cycle

DIO is the first component of the cash conversion cycle:
Working Capital Cycle = DIO + DSO – DPO

Reducing DIO shortens the cash cycle and frees up working capital.

Practical Example

An auto parts manufacturer has average inventory of Rs 100 crore and annual COGS of Rs 600 crore. DIO = (100 / 600) x 365 = 61 days. The company holds inventory for about 2 months before it is sold. If it can improve its just-in-time procurement to reduce inventory to Rs 70 crore, DIO drops to 43 days, freeing Rs 30 crore of cash.

Key Takeaways

– DIO = (Average Inventory / COGS) x 365; measures average days inventory is held before being sold
– Lower DIO is generally better as it indicates efficient inventory management and faster sales
– Rising DIO may signal weaker demand or excess stock accumulation
– Industry norms vary widely; compare DIO against sector peers, not across industries
– Reducing DIO is a key lever for improving working capital efficiency and reducing short-term financing needs