Par level inventory is a method businesses use to maintain a specific quantity of an item in their stock. The term “par” is an abbreviation for “Periodic Automatic Replacement” and represents the minimum amount of a product that should be on hand to meet customer demand between supplier deliveries. This approach helps ensure that a business has enough product available without tying up too much money in excess goods.
Think of it like setting a standard for a coffee shop’s milk supply. The manager knows they need a certain number of gallons to get through the busiest days. The par level is that target number, ensuring baristas don’t run out of milk for lattes while also preventing spoilage from over-ordering. This system provides a clear and simple target for restocking.
How Par Level Inventory Works
The par level system operates on a straightforward, cyclical process designed to maintain optimal stock quantities. It begins with a staff member conducting a physical count of a specific item in inventory. This could be a daily, weekly, or otherwise regularly scheduled check, depending on how quickly the item sells.
Once the current stock is counted, that number is compared to the predetermined par level for that item. The par level itself is the ideal amount of inventory that should be available right after a new delivery arrives. The difference between the par level and the current on-hand count reveals the quantity that needs to be ordered to return the stock to its target.
For instance, a restaurant manager might set a par level of 20 bags of flour. If they count the inventory and find only seven bags remaining, they know they need to order 13 more. This simple subtraction (Par Level – On-Hand Inventory = Order Quantity) removes guesswork from the ordering process. When the order arrives, the stock is replenished back to the par of 20 bags.
Calculating Par Levels
Determining the right par level is a balancing act that relies on analyzing business data. A precise calculation prevents the problems of stockouts and overstocking. The standard formula is: Par Level = (Average Daily Usage × Lead Time in Days) + Safety Stock.
The first variable, Average Daily Usage, is the amount of an item sold or used each day. Businesses calculate this by reviewing historical sales reports over a specific period, such as a month or a quarter, to find a reliable average.
Next, Lead Time represents the number of days it takes for a supplier to deliver an order after it has been placed. This period must be accurately measured, from the moment the order is sent to the moment the goods are received and ready for use.
The final element is Safety Stock, which is the extra inventory kept on hand as a buffer. This additional quantity protects against unforeseen circumstances, such as a sudden spike in customer demand or unexpected shipping delays from the supplier. A common approach is to set safety stock at 20-30% of average usage, but this can be adjusted based on the item’s importance and supply chain reliability.
Benefits of Using Par Levels
Adopting a par level inventory system offers several advantages for managing a business’s stock. One of the primary benefits is the prevention of stockouts. By setting a minimum quantity for items, companies can ensure they consistently have popular products available to meet customer demand, which helps avoid lost sales and customer dissatisfaction.
This method also simplifies the ordering process. With a clear target for each item, the task of reordering becomes routine and less reliant on subjective judgment. This straightforward approach reduces errors and saves valuable time that can be allocated to other tasks.
Par levels help control operational costs. The system is designed to prevent over-ordering, which can tie up significant capital in unsold goods. By maintaining optimal stock levels, a business can reduce storage costs, minimize the risk of inventory spoilage, and improve overall cash flow.
Disadvantages and Limitations
Despite its benefits, the par level inventory system has limitations. The method hinges on the quality and accuracy of the data used for its calculations. An incorrect forecast for average usage will cause consistent overstocking and wasted capital, while an underestimate will result in frequent stockouts and lost revenue.
The system is also less effective for items that experience significant or unpredictable fluctuations in demand. Products with strong seasonal appeal or those subject to sudden trends can be difficult to manage with a static par level. For example, a par level set for a winter coat will lead to excessive inventory in the summer.
There is also a risk of overstocking if demand for a product suddenly declines. If a once-popular item loses its appeal, a business using a par level system may be left with excess inventory that it cannot sell. This ties up capital and storage space that could be used for more profitable items.
The process can be labor-intensive. A par level system requires regular physical counts of inventory to compare on-hand quantities to the established par. For businesses with a large number of products, this can be a time-consuming task, and the manual nature of the counting process can introduce human error.