Stock coverage: days cover calculation and other stock metrics

Anyone who manages inventory is familiar with stock coverage. The question is, how do you measure 'days cover calculation' and other useful inventory metrics.

If you’re a distribution company, managing stock coverage is essential and having accurate stock measurements at your fingertips is the difference between turning a profit or not. The sooner you move your inventory, ship it at the lowest cost and not get caught with too much dead stock, the better your balance sheet.

Let's look at some of the more common measures involved with analyzing your inventory coverage.

• Stock on Hand (SOH) - Stock levels by SKU, by product group, or by warehouse location
• Sales History - You’re going to want to introduce the actual sales demand for your products to give you the basic supply and demand picture.
• Average Monthly Unit Sales - Incomes and sales average for the last 3, 6 & 12 months by product to give you a better understanding of how each product has been performing over time including seasonal influences on product sales (i.e. A pool chemical distributor will want to view demand by season Winter vs Summer, or a giftware company will want to track sales against Valentine's day vs Mother’s day vs Christmas, etc.
• Stock On Order (OO) or Stock In Transit (IT) – you will need to account for this and add to the stock levels since you will be receipting these goods into your warehouse once they arrive.
• Sales Back Orders (BO) or Committed Stock (CS) – these units will need to be added to the equation since this is stock that will be coming out of the inventory levels as it is being prepared to ship or waiting for stock to arrive.
• Min/Max levels – If you have them and use them, it is good to pull these into the picture for a couple of reasons a) you can see whether a product stock levels are within the range or b) see if you need to adjust your stock levels when looking at the sales and monthly averages – sales may be picking up or slowing down, and you need to be aware of this for future planning.
• Lead Time – the time it takes to get to your warehouse once an order has been placed on the supplier. Very important when you are comparing your true stock coverage and how long it will take to get your SKU’s topped up to optimal stock coverage levels.
  
  Check out the ultimate guide to inventory management software.

As you know, managing inventory levels is a dark art – part art & part science. So let's have a look at the scientific data-driven element. Using the above variables, we can now construct an equation that will help us with a day cover calculation.

It may vary from company to company, however, the process will look something like this:

Step 1 – calculate the true stock available (net stock levels)

(SOH + SOO + SIT) – (CS + BO) = Net Stock

Step 2 – calculate your avg. daily run rate using sales history

Total Unit Sales for 12 months/ 365 days = Avg. daily unit sales

Step 3 – calculate your stock coverage (in days)

Net Stock/ Avg. daily unit sales = Stock Coverage in days

So now that you can calculate your stock coverage in days (or months), you may want to compare this to your lead times (the time it takes to be receipted into your inventory). For example, if your stock coverage is 28 days and it takes 84 days (12 weeks) for stock to be delivered, there is a good chance you’re going to be Out-of-Stock for 56 days (8 weeks) if unit sales continue on trend for that SKU. And Out-of-stock (OOS) means lost sales, dissatisfied customers and maybe no commissions for a Sales Manager.

No doubt, you will be performing these calculations and taking into consideration the stats as you apply the ‘part art’ to the process. This takes into consideration all the other subjective things going on in the business i.e. new product launches, other products superseding obsolete stock etc. However, how up to date is your Stock Coverage report? How flexible can you roll up to a product group level or isolate to a specific warehouse location?

We see this time and again with companies who say we already do that. But what separates the amateurs from the professionals is how easily and quickly they can access this stock coverage information and then continue to interrogate the data with a point and click simplicity while they follow your train of thought. It’s the professionals who access up-to-date information without the need to cut and paste or further manipulate data in spreadsheets (often each new month). They don’t have any concern about cell formulas from month to month because they are getting regular feeds of information daily that update the database automatically.

They just log on in the morning and if they’re lucky open up their dashboard giving them a high-level view of what’s happening with easy to read graphs and colors indicating potential red flags. Should they be alerted to something nearing dangerous territory, they will just drill down into the data and investigate further. Furthermore, they can save and share this information creating a better collaboration in the business and avoiding hazards more easily.

The point is, if you can remove the hassle of simply trying to keep a spreadsheet up to date and remove the margin for error with incorrect cell references or formulas, you can spend more time analyzing the stock situation and ensure that there are:

• No Out of Stock situations
• You don’t get caught with large ‘dead stock’ quantities
• You can identify easily ‘slow-moving’ stock before it becomes a problem

Learn more about measuring stock in this free ebook: Data-driven inventory optimization