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Par Level: System & Definition

Lesson Transcript
Instructor: Allison Tanner

Allison has a Masters of Arts in Political Science. She has worked in the customer service and food industry since 2013.

This lesson defines a PAR level inventory system and its importance to an organization. It also describes how the PAR system works and how businesses can use it to ensure they have the items they need when they need it.

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.

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  • 0:00 Par Level Inventory System
  • 1:38 Importance of the PAR System
  • 3:00 How to Use the PAR System
  • 4:23 Lesson Summary
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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.

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