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

Inventory coverage is a Supply Chain metric that indicates the period — usually expressed in days — during which a company can meet customer demand using the inventory currently available. As such, you want a high inventory coverage rate to maximize availability without resorting to replenishment. However, if your company holds excess inventory compared to normal demand, this can drive storage costs up and complicate inventory management. In addition, in the food sector excess inventory can cause products to lose their properties if stored for too long.

How to calculate?

To calculate this KPI, you divide the inventory quantity at your facility by your average sales over a given period. Inventory Coverage = Inventory / Average sales. The lower the result, the higher the chance the company will run out of stock. As an example, consider a company that sells 10 doors per day. If current inventory is 40 doors, the inventory coverage rate is: 40/10 = 4. The result is 4, so the business has 4 days of door coverage at the current average demand. So with its available inventory, the company can fulfill orders for 4 days. We can also use the sales forecast (forecasting) to calculate projected inventory coverage. However, the math changes. We need to find the day on which inventory will 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 on day 2, 20 on day 3 and 2 on day 4. So the 40-door sold mark is reached on day 3.

Why is it important?

This indicator is very important to assess the health of a company's inventory. There's no reference value that can tell whether inventory coverage is high or low. Much of this depends on the company's Supply Chain strategy. For example, if it wants very high service levels, it will probably have higher coverage. But if it prefers to have less capital deployed into operations, it will likely have lower coverage.

How to implement Inventory Coverage?

In an Advanced Planning project, this KPI is commonly used to calculate how much we must produce to hit the coverage target. Say the company wants to maintain 10 days of coverage for products X, Y and Z. For those products, the master production schedule will calculate the necessary quantities to produce in the period to reach the 10-day coverage target.

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