Stock coverage represents the number of days that a company can cover its demand with the stocks it has in storage. The result is obtained by dividing the number of stocks by the average demand for a given period of time.
Stock coverage is a ratio that allows estimating the number of days that a company can supply its customers, without the need to buy new stocks from its supplier. To make this estimate, we must divide the number of inventories by the demand expressed in units.
The value obtained from this ratio is used for the planning and management of the company’s logistics. In this way, liquidity forecasts can be made so that the company can provision itself correctly. In addition to this, it is also possible to calculate how long in advance orders must be made to suppliers, based on their waiting times.
On the other hand, to perform the calculation of this magnitude and obtain realistic results, it is necessary to carry out a thorough inventory control. The stock units of each product must be well quantified. Any breakage or damage that certain goods may suffer during storage must also be accounted for.
Stock coverage formula
The formula used to calculate stock coverage would be the following:
Stock coverage = Stocks / average demand
We must take into account the reference period of the average demand, it depends on the periodicity with which we supply ourselves.
Stock coverage example
As we have seen before, to calculate stock coverage we need to divide the company’s stock by its average demand during a given period of time.
Suppose we own a chair company. After taking our inventory, we noted that we have 300 chairs in the warehouse. Our average demand per week is 100 chairs, therefore, we will divide 300 by 100 to obtain stock coverage.
Stock coverage = 300/100 = 3
The result is three, which indicates that we have three weeks without the need to be supplied by our supplier. Now suppose that the waiting time from when we request an order from our supplier until we receive it is five days.
In this case, it will be necessary for us to request the new stock order within a couple of weeks to ensure supply.
In conclusion, stock coverage is an indicator that measures the time that a company can be without provisioning, with the average demand that it has during a certain period of time.