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

Stock 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. It is therefore necessary to aim for a high stock coverage rate in order to have maximum stock availability without resorting to stock replenishment. However, if your company has excess stock compared to normal demand, this can increase storage costs and complicate stock management. Furthermore, in the food sector, excess stock can cause products to lose their properties if stored for a long period of time.

How to calculate?

To calculate this performance indicator, you divide the amount of stock held on your premises by your average sales over a given period.Stock coverage = Stock / average salesThe lower the result, the greater the chance of the company running out of products. As an example, we could talk about a company that sells 10 doors a day. If the current stock volume is 40 doors, the stock coverage rate will be:40/10 = 4 As a result, we have 4, so the business has a stock coverage of 4 days of doors with the current average demand. We can also useforecasting to calculate the projected stock coverage. However, the method of calculation changes. We have to take the day on which stock 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. So the 40 doors sold mark is already reached on day 3.

How important is it?

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

How to implement Stock Coverage?

When implementing an Advanced Planning project, we often use this indicator to calculate how much we need to produce in order 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 master production plan will calculate the quantities needed to produce in the period in order to achieve the 10-day coverage target.