What it means
Imagine running a bakery. You need enough flour to bake your daily bread, but if you buy enough for the next ten years, your storage costs will soar and the flour might spoil.
Months of Supply helps you strike the right balance between having enough goods to meet customer demand and not tying up too much money in unused products. In business, cash is king.
When you purchase inventory, that money is effectively trapped until the item sells. By calculating your months of supply, you can see precisely how many weeks or months of cushion you have.
A high number means your money is sitting on shelves gathering dust, while a low number means you might run out of items before new shipments arrive. Managers use this metric to make smarter purchasing decisions.
If seasonal demand is about to drop, you want your months of supply to shrink so you do not get stuck with unsold seasonal goods. Conversely, if supply chains are slowing down, you might intentionally raise your months of supply to protect against delivery delays.
Tracking this over time also highlights inefficiencies. If your months of supply keeps creeping up, it is a red flag that your sales are slowing down or you are ordering too much.
It forces you to investigate, clear out old stock with a sale, and adjust future orders to protect your working capital.
In practice
Real-world examples.
Example
An online candle boutique has 600 lavender candles in stock and sells 150 each month. Dividing 600 by 150 gives them 4 months of supply, which is ideal for their production schedule.
Example
A local bicycle repair shop holds 30 replacement tyres. They use an average of 10 tyres per month for repairs. This gives them exactly 3 months of supply to handle upcoming customer tune-ups.
Example
A boutique clothing store has 1,200 winter coats left in March. As they only sell 100 coats monthly now, they have 12 months of supply, meaning they will not sell out until next winter.
Think of it
“Think of it like stocking food in your pantry. If you eat two cans of soup a week and have eight cans on the cupboard shelf, you have four weeks or one month of soup supply.
Formula
Calculation
Months of Supply = Current Inventory Level divided by Average Monthly Usage or Sales. For example, if a bookstore has 4,000 novels in stock and sells 800 novels per month, the calculation is 4,000 divided by 800, which equals 5 months of supply. This means the shop has enough books to cover five months of customer purchases without buying more.Case study
Seen in the real world.
Oak Furniture Ltd, a growing regional retailer, noticed their bank account was running low despite steady sales. The finance manager decided to calculate the months of supply for their inventory. They discovered that they had an average of nine months of supply sitting in their warehouse, largely due to bulk ordering discounts that looked appealing at the time. However, this bulk buying had trapped 150,000 pounds in wooden tables and chairs that were taking up valuable space and moving slowly. The management team paused all new furniture orders and ran a targeted promotion to clear out older lines. Within six months, they successfully reduced their months of supply down to a healthy three months. This freed up 100,000 pounds in cash, which the company used to fund a new marketing campaign and improve their online store, ultimately boosting overall annual profits.
Watch out
Common mistakes.
- Using outdated sales figures during seasonal shifts, which ruins the accuracy of your calculation.
- Ignoring damaged or obsolete items that are still counted as available inventory.
- Assuming that higher months of supply is always safer, rather than recognising the cash flow trap.
Questions
People also ask.
What is considered a good months of supply?
It depends heavily on your industry. Retailers might aim for two to four months, while businesses with long manufacturing lead times might need six or more.
How does this differ from inventory turnover?
Inventory turnover measures how many times your stock is sold and replaced over a year, while months of supply tells you how long current stock will last in time.
Can my months of supply be too low?
Yes. While low supply means less cash tied up, it also puts you at high risk of running out of stock and disappointing your customers.
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