Inventory coverage: what it is, its importance and how to calculate

Inventory coverage is a measure used in Supply Chain that indicates the deadline, usually expressed in days, that a company can meet customer demand with the stock available in its stock. Thus, it is necessary to seek a high inventory coverage rate to be maximum inventory availability without resorting to inventory replacement. However, if your business has too much inventory compared to normal demand, this can increase storage costs and complicate inventory management. In addition, in the food sector, too much inventory can cause products to lose their properties if stored for a long time.

How to calculate?

To calculate this performance indicator, you divide the amount of inventory stored in your facilities by your average sales over a given period. Inventory coverage = inventory / average sales, the lower the result, the greater the chance of the company's lack of products. As an example, we can talk about a company that sells 10 doors a day. If the current inventory volume is 40 doors, the inventory coverage rate will be: 40/10 = 4 As a result, we have 4, then the business has a 4 -day doors inventory coverage with the current average demand. Thus, with its inventory available, this company can fulfill orders for 4 days. We can also use the forecasting ( forecasting ) to calculate projected inventory coverage. However, the manner of calculation changes. We have to take the day when inventory would be insufficient to meet the demand. Following the example above, we have 40 doors in stock, and the sales forecast is 18 doors on day 1, 2 doors on day 2, 20 doors on the 3rd and 2 doors on the 4th. Thus, the 40 -door brand is already hit on the 3rd.

What is the importance?

This indicator is very important to evaluate the health of the company's inventories. There is no reference value that can define whether inventory coverage is high or low. Much of this depends on the company's supply chain strategy. For example, if she wanted to have a very high delivery, she will probably have a higher coverage. However, if she prefer to have a lower capital employed in the operation, she will probably have to have a lower coverage.

How to implement inventory coverage?

When implementing an Advanced Planning project, we commonly use this indicator to calculate how much production we need to meet the coverage target. Let's say the company wants to maintain 10 days of coverage for products X, Y, and Z. For these products, the mesproduction plan will calculate the quantities needed to produce in the period to meet the 10-day coverage target.

‍