Inventory management is one of the most important aspects of any retail business. When products move quickly through the pipeline, the business isn’t saddled with unsold inventory taking up space and cutting into the store’s working capital. Retailers track their inventory from the time it’s sourced through order fulfillment with the goal of having the right products in the right place at the right time.
The retail supply chain continues to expand across the globe as well as through broader contacts in the local community, which makes ensuring a ready supply of in-demand products much trickier. This point was driven home to retailers as they responded to supply interruptions caused by the COVID-19 pandemic. It’s vital to have an inventory supply system that helps protect the business from these and other risks.
Two inventory management approaches used commonly by retailers are par level inventory, which is used by many restaurants to avoid food waste, and reorder point inventory, which sets a unit quantity that triggers an automatic reorder to the full-shelf level. Here’s a closer look at the factors that retailers should consider when choosing between these two inventory management methods.
What Is Par Level Inventory and How Is It Used?
For restaurants, preventing food spoilage is one of the best ways to boost profitability. The trick is to do so while ensuring your restaurant never runs out of the items your customers love. Finding the perfect balance between the two makes a good restaurant inventory management system a wise investment.
For many restaurants, the most effective inventory management technique is par level inventory. A product’s par level is the minimum number or amount that needs to be on hand to meet customer demand until a fresh shipment arrives. The goal is two-fold:
- Make sure you don’t miss any sales because you ran out of inventory.
- Don’t have cash tied up in products sitting on shelves for long periods, and even worse, don’t let products go bad before they can be sold.
You calculate a product’s par level by examining past inventory data to find its average sales and then add a “safety stock” of about 25 percent to accommodate any spike in demand or delay in shipments. For example, if a restaurant used 100 pounds of potatoes each week over the past year, the par level for potatoes would be 125 pounds on hand. Your orders of potatoes should be sufficient to ensure that you’ve always got 125 pounds in stock.
Factors to consider when determining a product’s par level include the frequency of deliveries, the seasonality of certain items, and the impact of fluctuations in a product’s wholesale price on your restaurant’s budget. The inventory management features in a modern cloud-based POS system help restaurants and other businesses track inventory via automatic alerts, precise data on usage, and monitoring of use-by dates.
How Does Reorder Point Inventory Management Differ from Par Level Inventory?
The goal of all inventory management systems is to minimize stock on hand while ensuring stock never sells out. To meet both criteria, businesses need to know the perfect time to reorder the products. The reorder point inventory method is intended to calculate that time by finding the product’s lead time demand, and then adding a safety stock.
Two factors must be determined to pinpoint a product’s lead time demand:
- Average daily sales
- Average lead time, which is the amount of time between the order being sent and the shipment arriving
For example, if a hardware store sells 100 rolls of duct tape each week, and it takes one week for an order of duct tape to arrive from the supplier, then the reorder point would be the amount required to ensure 100 rolls of duct tape are on hand, plus the safety stock in the event of the unexpected occurring.
Finding a product’s optimal safety stock is an important component of the reorder point inventory management approach. In many instances, a product’s availability from suppliers and customers’ demand for it will vary due to a range of circumstances, including seasonality and changing consumer tastes.
A formula for calculating the safety stock level of a product compares the maximum sales per day (or other anperiod) and maximum lead time to the product’s average sales and lead time. Using the duct tape example above, if the maximum sales per week are 200 rolls and the maximum time for an order to arrive is two weeks, then the safety stock for duct tape would be 400 rolls.
Which Inventory Approach Is Best for My Business?
The primary distinction between par level inventory and reorder point inventory is whether you want to set a “soft floor” for your inventory levels via par levels, or a ceiling by using the reorder point method.
- The goal of par level inventory is to set an alert level when stock on hand falls a preset level below the product’s par level.
- Conversely, the goal of reorder point inventory is to set a full shelf quantity for a product that ensures stock on hand in the event of a surge in demand or delays in reorders arriving, or both.
Because restaurants tend to be more sensitive to inventory overstaying its welcome, the par level technique tends to be the favored approach. Retailers that have the space and capital required to maintain higher levels of products in inventory can ensure they never miss a potential sale by calculating the reorder point for their items based on the best-case scenario (peak sales) and the worst-case scenario (delayed reshipments).
Whichever inventory management method your business uses, make sure your POS system supports your inventory tracking and other processes today and in the future. The systems provide business owners and employees with up-to-date inventory counts for sales made online and in person.
The best way to keep your customers happy is by ensuring that the products they want are available when they want them and at a price they can afford. Inventory management is the key to products being both available and affordable.
When you partner with talech for your retail technology needs, we devote our time to identify your business challenges. We use this information to work with you to apply an innovative POS solution that allows you to implement an effective inventory management technique, such as par level inventory.
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