Inventory Growth Decomposition and Efficiency Analysis
Separate price, quantity, activity volume and efficiency in inventory growth; then read turnover, DIO, excess stock and cash-release potential.
Decompose inventory growth into price, quantity, activity volume and efficiency; then read DIO, excess stock and cash that could be released.
An inventory increase is not, by itself, inefficiency. Sales growth, unit-cost inflation, FX, longer lead times, safety-stock policy and seasonality can all raise stock. Change should be read after separating activity volume from cost and from days-on-hand.
Results
Notes on inventory growth and DIO
Why decompose inventory growth?
The headline change mixes cost inflation, physical volume, mix and days-on-hand. Decomposition shows which of those moved.
What is the price / unit-cost effect?
Holding previous quantity fixed, it is Q0 × (P1 − P0): the revaluation of last period’s units at this period’s unit cost.
What is the quantity effect?
Holding previous unit cost fixed, it is (Q1 − Q0) × P0: extra (or fewer) units valued at last period’s cost.
What is DIO?
Days inventory outstanding = average inventory / COGS × days. It is the stock-days analogue of DSO.
How is inventory turnover calculated?
COGS / average inventory. Turnover × DIO ≈ days in the period.
How is excess inventory calculated?
When current DIO exceeds the target, excess ≈ (DIO − target DIO) × COGS / days. If DIO is below target, the gap is a possible stock-out buffer, not “excess”.
Is every inventory increase inefficiency?
No. Activity growth, cost inflation, FX, longer lead times and deliberate safety stock can all raise the balance. That is why volume is separated from days-on-hand.
Safety stock versus excess stock?
Safety stock is a policy buffer for lead-time and demand uncertainty. Excess relative to a DIO target is working capital above that policy — not automatically “waste”.
How is inventory financing cost calculated?
Apply the financing (or full carrying) rate to average inventory, and separately to excess inventory if you want the cost of the gap versus target DIO.
What is GMROI?
Gross margin / average inventory. It shows margin generated per unit of inventory investment, not a credit rating.
Why age inventory?
Aging and slow-moving shares locate where cash is tied up, without implying an automatic accounting write-down.
Simplifying assumptions
- Previous-period stock is treated as the opening stock of the current period when averaging.
- Previous-period DIO uses period-end stock unless you enter a previous average.
- The CFO three-way split uses current unit cost for volume and efficiency so the identity closes.
- FX is subtracted from the price effect only when you opt to split it; it is never added twice.
- ABC uses cumulative inventory value (80 / 15 / 5). Aging is analytical, not an impairment test.
This calculator is for education and decision support. Results follow from your inputs and are not a credit opinion, write-down or audit conclusion.