Allison has a Masters of Arts in Political Science. She has worked in the customer service and food industry since 2013.
PAR Level Inventory System
John supervises Dubbies, a four-star steakhouse in Dallas, Texas. As supervisor, he's in charge of ordering the inventory, which includes all items that a company must keep in order to perform their daily operations. In the case of Dubbies, this can be anything from the food ingredients to paper cups and bathroom supplies.
John has had a bit of trouble knowing how much of each item to order. For example, last week John had ordered ten 20-pound cases of chicken, ten 100-roll cases of toilet paper, and ten bottles of glass cleaner. This week, John had to throw out several cases of chicken and he has a large back stock of toilet paper and glass cleaner with no good place to store it.
Frustrated, John calls in his general manger, Lisa, who explains to him that, just like John expects the employees' work to be 'up to par,' he also needs to keep his inventory at a par level, a set quantity for each inventory item that should be on hand at all times.
While this system can be known as just a par level inventory system, many industries have formalized this system and even given it an official name: Periodic Automatic Replacement (PAR) level inventory system. A PAR level system determines the minimum level of inventory necessary to be on hand for a specific period and requires automatic replenishment if the level of inventory falls below that level. For John, this means that he has to determine the PAR level quantity for each inventory item. By following a PAR system, John can make sure that he has enough inventory on hand, but not too much.
Importance of the PAR System
After explaining the PAR level inventory system, Lisa tells John that the PAR system is a very helpful inventory tool to maintain a proper inventory balance. Dubbies, like all businesses, doesn't want to have too much inventory on hand, or the products readily available to them, but neither do they not want to have enough available inventory.
When there is an overabundance of inventory, it can tie up liquid assets, or readily available cash that could otherwise be used elsewhere. In addition, some businesses deal with perishable inventory items (like John's chicken), and over-stocking these items can cause waste which detrimentally affects profit. Also, in today's technology-filled world, inventory items can quickly lose value due to obsolescence, which again has an effect on profits.
On the other hand, there are also consequences that businesses may face if they don't have enough inventory on hand, the main one being inability to meet customer demand. A customer is not just the person who is purchasing the final product. In a hospital, where PAR systems are frequently found, customers can be the doctors, nurses, or any other personnel who need medical supplies readily available to perform their duties. So, for businesses, not enough inventory could cause them to lose out on a sale, lose a potential customer, or, in a hospital's case, even create a medical emergency situation.
How to Use the PAR System
Now that John understands why it's necessary to establish a proper balance for each inventory item, Lisa now gets down to the details in explaining to John exactly how to use the PAR system. The basis of the PAR system is that for a given period of time, each inventory item has a target level that should be maintained, and if the inventory falls below this level, the item should be automatically replenished or re-ordered.
Typically, this target level is found using historical data. This historical data could be what was used at the same time one year ago, or it could be what was used on this same day for the last month. All businesses have cycles, and it will take keeping good data, as well as using a good inventory tracking system, to successfully use the PAR system.
For example, John knows that he uses a case of chicken a day; so, combining John's historical data with his personal knowledge, the PAR level of chicken is determined to be one and one-half cases. This ensures he always has enough on hand, but not too much, so even if there is waste, it isn't going to be significant. Remember, the key to the PAR system is balance.
While this was a relatively simple example, it can be further complicated by the ordering days. If supplies are only ordered once a week, the PAR system must be used to develop an inventory level that keeps enough inventory on hand until the next delivery day.
A Periodic Automatic Replenishment (PAR) level inventory system is used to determine the quantity of inventory on hand that an organization should have at all times. This is named after a par level, which is a set quantity for each inventory item that should be on hand at all times. Remember that inventory refers to all items that a company must keep in order to perform their daily operations, and inventory on hand are the goods readily available. This is important in creating a balance between having too much inventory, which can create waste, and too little inventory, which can cause the loss of sales, and both of which can detrimentally affects profits. On the other hand, too much inventory can tie up liquid assets, or readily available cash that could otherwise be used elsewhere.
A successful PAR level inventory system will involve the use of historical data to determine the correct inventory level for each item. It will also require a good inventory tracking method to ensure that the inventory is always kept at the correct level. The PAR level inventory system can be used in any industry to help those in charge of ordering supplies to know how much to order and when.
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