The inventory coverage indicator is an essential metric for efficient inventory management in any company. It allows you to assess how long the current inventory can meet demand, and is essential for planning and strategic decision-making. This minimizes costs associated with excess inventory and tied up capital, in addition to preventing stockouts.
Calculating the stock coverage indicator is relatively simple:
Figure 1: Calculation of the stock coverage indicator. Source: ILOS
Average inventory is the average quantity of products available in inventory during a specific period, while average daily demand is the average quantity of products sold per day. For example, if a company has an average inventory of 1.200 units and an average daily demand of 100 units, the inventory coverage would be 12 days. This means that with the current demand, the company's inventory will last 12 days.
When it comes to calculating inventory coverage, it is crucial to decide whether to use historical data or sales forecasts to determine average demand. Historical data is sufficient when demand is stable and predictable. Companies operating in markets with little seasonal variability or minimal changes in consumer behavior can rely on historical data to calculate this indicator with good accuracy. The main advantage of historical data is its reliability and ease of collection.
On the other hand, sales forecasting is essential in dynamic markets where demand can vary significantly due to factors such as seasonality, market trends or marketing campaigns. However, this approach requires advanced statistical techniques and specific software tools, as well as a robust database to generate reliable forecasts.
It is also possible to calculate the average inventory coverage using the data disclosed in the companies' financial statements:
Figure 2: Calculation of the inventory coverage indicator using financial information. Source: ILOS
Using information from standardized financial statements, such as Cost of Goods Sold (COGS) and inventory values, an idea is obtained of the efficiency of the company's inventory management during the reporting period, since this indicator considers the inventory of all products, whether finished products, in process or raw materials.
Comparing this metric over time within your company or with publicly traded competitors is a very valuable exercise and can provide interesting insights into the efficiency of your inventory management. Since there is no magic number to define what constitutes a good result for this indicator, since this depends on the particularities of the market and the reality in which the company operates, this benchmarking activity can help the company direct its actions, assisting in the identification of effective practices and the continuous improvement of inventory management.
Figure 3: Stock coverage indicator of publicly traded companies in 2023. Source: 4Q 2023 financial reports obtained from the CVM website. Analysis: ILOS
In short, the inventory coverage indicator is a very important tool for efficient inventory management, providing a clear view of the company's ability to meet demand with the available resources. Companies with very high inventory coverage may be holding excess inventory, which unnecessarily ties up capital, while those with very low coverage may be at risk of stockouts, negatively impacting sales and customer satisfaction.
References
- Securities and Exchange Commission – https://www.rad.cvm.gov.br/
Fernanda Monteiro
More than 11 years of experience in training and consultancy projects, focusing on Logistics and Supply Chain. In consultancy, he carried out projects such as Transformational Logistics Plan, Diagnosis of logistics operations, Strategy and Calendarization of Transport Operations, Measuring the Cost of Serving, Market Study, Mapping of Inventory Reduction Opportunities, Review of the S&OP Process, Management Plan Training and Implementation of Commercial Processes in companies such as Nestlé, Raia Drogasil, Ipiranga, Lojas Americanas, B2W, Coca-Cola, Andina, Embraco, Martins Atacado, Loja do Mecânico, Santo Antônio Energia, Ecoporto and Silimed. She is currently one of the teachers of the Inventory Management Course taught every six months by ILOS. She worked on the development and management of Online Courses in Logistics and Supply Chain, Supply Processes, Demand Planning, Inventory Management and Industrial Management. Still in the training area, she was responsible for applying ILOS business games in companies such as Raia Drogasil, Fibria, NEC, Novartis and Moove.
