Inventory Calculation — Step-by-Step Breakdown

Inventory Calculation — Step-by-Step Breakdown

We calculate inventory performance using the following dataset from a Tier-1 automotive supplier.

• Opening Inventory: €9,200,000
• Closing Inventory: €11,600,000
• Annual COGS: €68,000,000
• Holding Cost Rate: 24%
• Warehouse Cost: €840,000/year
• Target DIO: 26 days

Step 1: Average Inventory

Average Inventory = (Opening + Closing) ÷ 2

= (€9,200,000 + €11,600,000) ÷ 2 = €10,400,000

Insight: This represents the capital tied up in inventory throughout the year.

Step 2: Inventory Turnover

Inventory Turnover = COGS ÷ Average Inventory

= €68,000,000 ÷ €10,400,000 = 6.5 turns/year

Benchmark: World-class = 12–20 turns → current performance is less than half.

Step 3: Days Inventory Outstanding (DIO)

DIO = (Average Inventory ÷ COGS) × 365

= (€10,400,000 ÷ €68,000,000) × 365 = 55.8 days

Interpretation: The plant holds nearly 56 days of inventory vs. a 26-day benchmark.

Step 4: Annual Carrying Cost

Carrying Cost = Average Inventory × Holding Cost Rate

= €10,400,000 × 24% = €2,496,000

Add warehouse cost:

€2,496,000 + €840,000 = €3,336,000/year

Insight: This cost is rarely visible in one place—but it directly impacts profitability.

Step 5: Target Inventory Level

Target Inventory = (COGS ÷ 365) × Target DIO

= (€68,000,000 ÷ 365) × 26 = €4,843,836

Interpretation: This is the optimal inventory level aligned with benchmark performance.

Step 6: Excess Inventory

Excess Inventory = Actual − Target

= €10,400,000 − €4,843,836 = €5,556,164

Key insight: This is cash locked in the warehouse that could be released without impacting operations.

Step 7: Financial Impact

Cash released:

€5,556,164 (one-time improvement)

Annual carrying cost saving:

€5,556,164 × 24% = €1,333,479/year

Warehouse cost reduction (proportional):

€840,000 × (€5,556,164 ÷ €10,400,000) = €448,240/year

Total annual savings:

€1,781,719/year

Impact: €5.5M cash released + €1.8M annual savings with no capital investment.

Inventory Is Not Stock — It Is Cash

Inventory is often treated as a necessary buffer in manufacturing. In reality, it is one of the largest and least optimized uses of capital in most organizations.

As this case demonstrates, excess inventory is not a marginal issue—it represents millions in tied-up cash and significant recurring costs.

By applying structured metrics such as turnover, DIO, and carrying cost, manufacturers can transform inventory from a passive asset into an active lever for financial and operational performance.

Final takeaway: The goal is not to minimize inventory—it is to optimize it. The right inventory level improves cash flow, protects production, and strengthens overall performance.

Why Partner with HNG Consulting?

At HNG Consulting, we help manufacturers transform inventory management into a cash and performance optimization system, delivering measurable financial and operational impact.

Inventory diagnostics and cash visibility

Quantification of inventory performance using turnover, DIO, and carrying cost to identify excess stock and hidden financial impact.

ABC-driven inventory management

Classification of SKUs and implementation of differentiated policies to focus effort and capital on high-impact items.

Replenishment and stock optimization systems

Deployment of demand-driven replenishment models (Kanban, ROP, safety stock optimization) to reduce inventory while maintaining service levels.

Impact: Manufacturers implementing structured inventory management systems typically release significant working capital, reduce carrying costs, and improve operational stability—without additional investment.