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

Inventory coverage is a measure used in the Supply Chain that indicates the time, usually expressed in days, that a company can meet customer demand with the stock available in its inventory. Therefore, it is necessary to aim for a high inventory coverage rate to have maximum stock availability without resorting to stock replenishment. However, if your company has excess inventory compared to normal demand, this can increase storage costs and complicate inventory management. Furthermore, in the food sector, excess inventory can cause products to lose their properties if stored for an extended period.

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 . As an example, let's talk about a company that sells 10 doors per day. If the current inventory volume is 40 doors, the inventory coverage rate will be: 40/10 = 4. As a result, we have 4, so the business has an inventory coverage of 4 days of doors with the current average demand. Thus, with its available inventory, this company can fulfill orders for 4 days. We can also use sales forecasting to calculate projected inventory coverage. However, the calculation method changes. We have to take the day on which the inventory would be insufficient to meet 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 day 3, and 2 doors on day 4. Therefore, the mark of 40 doors sold is already reached on day 3.

What is the importance?

This indicator is very important for evaluating the health of a company 's inventory. There is no single reference value that can define whether inventory coverage is high or low. Much of it depends on the company 's supply chain strategy. For example, if it wants to have very high delivery volume, it will likely have higher coverage. However, if it prefers to have less capital employed in the operation, it will likely need lower coverage.

How to implement inventory coverage?

In the implementation of an Advanced Planning project, it is common to use this indicator to calculate how much we need to produce 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 during the period to achieve the 10-day coverage target.

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