Maintaining adequate supply in the supply/demand equation helps to ensure desired service levels, product availability, and consumer access to therapies. In simple terms, the inventory measurement of days-on-hand is a bellwether metric that advises both manufacturers and distributors of the overall status of product supply across the various distribution center stocking locations. Based on average sales velocity on a daily basis, the amount of inventory on hand can be interpreted as a supply for ‘X’ number of days; hence the days-on-hand metric. Appropriate inventory levels help the manufacturer to expect and plan for regular replenishment orders while knowing that their products are always available to the end customer without an oversupply in the demand chain.
The above graphs represent industry average days-on-hand levels for branded, generic, and specialty products as well as an aggregate DOH number – the averages used represent average sales over a 90 day time frame and average inventory over 90 days (inclusive of ending inventory quantity + inventory held for designated purposes).
The formula is:
Average Inventory over 90 days divided by Average Sales over 90 days
This ratio reveals the extent of product returns to product sales occurring only within the distributor segment of the channel. Returns can be indicative of product challenges requiring replacement due to product shelf life, returns policy, demand changes in the marketplace and competing products.
This ratio can be unusually high or low from month to month, because sales returns are usually related to shipments made in previous months; consequently, a high sales month may have very low associated sales returns, which instead will appear in the ratio for the following month. To alleviate this problem, the ratio should be aggregated on a rolling quarterly basis, so that returns will be more likely to be matched against related sales.
The formula is:
Total sales returns divided by Gross sales