PAR levels are used widely in industries that handle perishable items – such as hospitality and pharmaceuticals – to calculate the level of inventory needed for a given item so businesses don’t run out before their next delivery.
Here we give you the complete guide to PAR levels – including what they are, who can use them, their benefits, the PAR level formula, examples, and tools you can use to manage your inventory using this method.
What is a PAR level?
Periodic Automatic Replacement (PAR) is an inventory control system that tells you what levels of inventory you should have in stock in order to fulfil demand.
The PAR level determines the optimum amount of inventory stock needed on hand after each order delivery. However, PAR levels will change depending on factors such as seasonality, celebrations, and events or even the day of the week.
This is especially important in those industries dealing with perishable goods, and PAR levels are particularly useful for the food & beverage, hospitality, healthcare, and pharmaceutical industries.
In a restaurant, for example, preventing food spoilage is an important way to cut costs and to boost profitability. Finding the right PAR level ensures the restaurant can deliver on customers’ orders while reducing excess stock that can tie up cashflow and/or lead to unused inventory and food waste.
How are PAR levels used in inventory management?
PAR levels are generally used by businesses that handle perishable products or those with specific use-by-dates. It ensures the availability of a predetermined level of necessary inventory stock items when needed while safeguarding against over-stocking and inventory waste.
PAR levels guide inventory management because for any given item, the quantity in stock plus the order quantity should match a predetermined PAR level.
For example, if the PAR level for aioli is set at 15 jars but you only have 4 in the storeroom, then the order quantity is 11. When placing an order with the supplier it is necessary to compare amounts already in stock with the set PAR level to determine order quantities.
What are the benefits of using PAR levels in inventory management?
Successful PAR level strategies benefit inventory management in restaurants and other industries by assisting with cost savings through:
- Helping to reduce food and perishable product waste
- Mitigating against overstocking or understocking
- Creating a healthy inventory turnover rate
- Promoting greater control over inventory ordering
- Ensuring the correct inventory stock is ordered
Should your inventory ever be higher than your PAR level?
There are times when holding inventory higher than PAR levels is necessary for certain industries. Businesses may experience seasonal fluctuations in demand, and certain periods – such as holidays and special events – where demand is higher.
For example, in the hospitality industry, holding stock higher than PAR levels is important in times of high demand – such as when seasonality and events dictate demand for food and beverages may be higher.
This could simply be weekends that are traditionally more popular for dining out, or holiday periods, wedding seasons, or any other events that bring about a period of higher demand. During these periods, the restaurant will want to hold more food inventory than the established PAR level.
Delivery issues or shipping delays may also mean restaurants carry higher than PAR level inventory to ensure their stocks tide them over – such as for long weekends, holidays or in the case of supply chain issues.
What is the difference between a PAR level and a reorder point?
PAR level inventory replenishes inventory by ordering a quantity of an item to bring stock numbers up to the product’s PAR level.
Reorder point inventory differs in that it orders to a maximum quantity that ensures there is on-hand inventory stock to prevent lost sales and mitigate against shipping delays.
The aim of both of these systems is to reduce on-hand stock while also ensuring the business doesn’t run out of that stock, and knowing the right time to reorder products is critical to achieving this balance.
Here’s a more detailed description to give you a better idea of how these two systems differ:
- PAR level inventory management is based on identifying when stock has fallen below a pre-set level. The PAR level is the amount of an inventory item needed to meet the demand of customers while cushioning against unexpected demand. When inventory drops below the calculated PAR level, an order should be placed to restock the item back to that level.
- Reorder point inventory methods look at product lead-times to determine the reorder point when stock quantities drop to a pre-determined minimum level. When the reorder point is reached, an order is placed for large quantities of high turnover goods. Retailers want to ensure they never miss a potential sale; therefore, these businesses will often calculate reorder points based on peak sales or possible supply chain interruption and delays. Reorder points generally work better in the retail industry, which tends to have the space and capital required to maintain higher levels of inventory stock.
How do you calculate PAR inventory levels?
To calculate PAR inventory levels, use the following formula:
- PAR level = (amount of inventory used each week + safety stock) ÷ (number of deliveries each week)
To improve inventory management through the PAR level strategy requires you to know inventory usage trends and the of frequency of product delivery. With this information you can calculate PAR levels:
- Look at historical inventory usage to establish an average weekly usage.
- Add safety stock to contend with unexpected spikes. For a restaurant, best practice is to factor in safety stock at around 25% of average inventory usage.
- Document the delivery frequency of each product.
Different industries may use similar calculations to determine PAR level inventory, but the key difference is that safety stock levels vary for every item. Using the 25% rule for safety stock allows for unexpected demand, but it’s also important for businesses to review sales reports and inventory turnover rate, which will allow for better predictions of inventory requirements that avoid food waste or overstocking.
An example of calculating PAR levels in inventory
When setting a PAR level, first consider the frequency of deliveries for the inventory stock needed. While perishable foods like fresh bread and produce may be delivered daily, other ingredients such as butter or flour might be delivered weekly. For this process, the more suppliers you have, the longer it will take.
Next, establish the quantity of each food item depleted between each delivery to set the PAR order amount.
Imagine that your restaurant goes through 200 serves of chips per week. Each bag of frozen chips you buy is enough to provide 10 serves of chips in your restaurant. That means the amount of inventory used each week is 20 bags of chips.
In this case, your safety stock safety buffer to cover spillage, waste, or unexpected demand is 20% – so 4 bags of chips.
And your supplier delivers bags of frozen chips every Monday – so once a week.
So your par level for bags of chips is:
20 bags + 4 bags = 24 bags
What industries use PAR levels?
PAR level inventory strategies are regularly employed in the hospitality industry, specifically those businesses that are food & beverage based. This is largely due to the need for high turnover perishable inventory stock.
However, other industries such as healthcare, pharmaceutical and even hospitals benefit from the implementation of PAR level inventory methods.
For these industries, PAR level inventory management helps to mitigate against problems like shortage of pharmaceutical drugs. It helps to protect against theft or loss as well as overstocking, and assists with the management of expiry dates.
Additionally, PAR inventory management helps to support the need for a steady supply of products – such as the PPE and MRO inventory necessary to support the day-to-day running of healthcare operations.
How do pharmacies use PAR levels?
Pharmacies use PAR level inventory to manage pharmaceuticals with expiry dates and short shelf-life. Certain vaccinations and medications, for instance, need to be handled and stored under strict cold-chain procedures to keep them viable. Dispensaries tend to have limited cold-chain storage space, so using the PAR level inventory method allows chemists to better manage these medications.
Chemist shops and pharmacies also stock a variety of goods that are subject to seasonal demand – such as cold and flu tablets in the winter months, and sun protection products in the summer months. PAR level quantities of these items would be adjusted to ensure they have adequate supply on-hand to meet seasonal demand.
How are PAR levels used in hospitals?
Procurement departments in hospitals use PAR levels to decide when and how often each point-of-use item should be scheduled for replenishment. A primary objective is to minimise total inventory holding costs while ensuring the necessary inventory stock is on-hand when required – which is critical in the hospital context.
In addition, hospital medication inventory represents a further challenge due to the complicated combination of medications stocked and the protocols involved. PAR inventory is critical to ensuring availability – and that expiration dates are managed – within this complex environment.
PAR levels can also be used for towels and linens required for hospital patients and aged-care residents to ensure adequate supply.
For example, a hospital ward may have 80 beds. Each bed requires two beds sheets per day and a safety stock of 25% to allow for times when a bed needs to be remade more than once.
The general PAR level formula is:
- PAR level = (amount of inventory used each week + safety stock) ÷ (number of deliveries each week)
So here, the PAR level for sheets = (1120 bed sheets + 280 safety stock) ÷ (two deliveries per week)
So here the PAR level is 1400 bed sheets.
When the twice weekly linen orders are placed, the PAR level minus the number of bedsheets on hand is the quantity that needs to be ordered.
What is a PAR level in healthcare?
In healthcare, pharmaceuticals and surgical equipment are high-demand products, and the sheer quantity of single-use items in the industry makes it critical for healthcare providers to manage inventory stock efficiently. Frequently used items such as MRO inventory products, PPE, swabs, syringes, bandages, cleaners and disinfectants must always be on hand – and so PAR levels are often used in this context.
How are PAR levels used in the hospitality industry?
Restaurants, bars, cafes and other hospitality businesses work with high volumes of perishable food & beverage inventory that is sensitive to waste. Because of this, and the reliance on rapid inventory turnover, the PAR level method offers a better system of inventory management.
To calculate a product’s PAR level, examine historical inventory data to determine average weekly usage before adding the safety stock allowance to accommodate a spike in demand or shipping delay.
For example, if over the past year the restaurant used 20kg of potatoes each week, the PAR level for potatoes would be 25kg on hand (including 25% safety stock). Orders for potatoes should then be sufficient to ensure 25kg of potatoes are always in stock.
Factors to consider in this case include the frequency of potato deliveries, whether seasonality plays a role in demand and supply, whether menu items that included potatoes in the dish have been added or removed from the menu, and the impact any pricing changes will have on the restaurant’s budget.
What are the benefits of using PAR levels to manage stock?
Proper ordering and keeping accurate inventory records gives businesses a clear picture of when new stock items need to be ordered. Better inventory planning, more exact and consistent ordering using the PAR level system will also lead to better supplier relationships.
Other benefits of PAR level inventory management for businesses include:
- Less food waste. For hospitality businesses, food costs account for around 30% of a restaurant’s total expenses, and nearly 10% of food purchased goes to waste before it reaches the consumer.
- Efficient supply management. The PAR level system ensures that supplies are delivered continuously at the correct rate, and enables better management of purchases and payments to vendors.
- Better cashflow. Using PAR levels can make budgeting more efficient and reduce cash tied up in unused or expired inventory.
- More satisfied customers. Customers at businesses like restaurants and cafes will become repeat diners when consistently fresh ingredients are on hand to deliver all the menu items on offer.
- Greater profitability. PAR inventory management reduces waste, lowering the cost of goods sold and ultimately increasing revenue.
- Overall inventory management. PAR closely tracks inventory purchases and allows business to effectively manage and control inventory.
How do you use PAR levels when you reorder stock?
It’s important to note that the PAR level is not the order amount unless your entire supply of that inventory item has been depleted. The actual order amount is what you need to restock to meet PAR levels. That means that when you place an order, you need to first check what stock you have on hand, then work out what you need to meet your set PAR level.
For example, with the bags of chips example above. If your PAR level for frozen chips is 24 bags, and you have 8 bags already, you will order 16 more to get your stock up to your PAR level.
What’s the best way to manage PAR levels?
The two common methods for managing PAR levels are using Excel worksheets or inventory management software:
- A PAR level worksheet is usually made using an Excel spreadsheet. This method requires you find out information such as current stock levels and input this manually.
- Inventory management software provides an up-to-date and accurate record of how much of each item you have sold or used, giving you real-time information to make your PAR level calculations.
While businesses can and do use both of these methods to manage PAR levels, a cloud-based inventory system has several advantages.
By integrating with your POS software, your inventory system automates your stock control – meaning you don’t run the risk of human error when data is input, and that your data is always up to date. An inventory system also gives you better visibility over long-term and seasonal trends, so you can better forecast spikes and troughs in inventory usage.
When it comes to managing stock levels, you can set alerts for low stock with your inventory software, and auto-populate purchase orders when you’re ready to reorder. And if you use more than one supplier, your software will provide you with accurate lead time information so you can make informed decisions on which to use.
Another benefit is that inventory software gives you full visibility over expiry dates – essential for industries like food & beverage, hospitality and pharmaceuticals.
- Read more about the features retail inventory software offers.