How to Set Up Inventory Management for Your Co-Packer

We’ve got 8 pallets of gel packs sitting here taking up space, we don’t need anymore.
We just noticed we’re completely out of bands and can’t finish your product this week.

Do you have non-food inventory that needs to be managed to be able to complete production of your product? Do you need a Goldilocks amount – not too much (because of storage space), not too little (because you’ll run out before the next delivery), but just right?

Then you should set a PAR Level on these items and direct your co-packer to re-order and certain thresholds.

Click Here for an Example Spreadsheet

What’s a PAR Level?

Periodic Automatic Repenishment (PAR) Level. The minimum amount of inventory you need to have to satisfy customer demand. Dependant upon weekly usage, safety stock, and your vendor’s lead time for that supply. But how do you calculate that? Here’s the formula I use:

PAR level = (weekly usage * vendor lead time) + safety stock

In plain English: You go through 500 boxes in a week. Your vendor’s lead time is 2 weeks to deliver an order. You build in a 10% safety stock margin to cover a spike in orders. So (500 boxes * 2 weeks) + 50 boxes = 1050 boxes for the PAR level.

How do you use it?

Set a regular time to take inventory each week. If inventory is below that PAR level, place an order.

How to make it work for regularly scheduled deliveries

If you’ve set up an automatic delivery schedule (weekly, bi-weekly, monthly) then you’ll need to manage this a little differently. You’ll still need to calculate a PAR level. But instead of using the PAR level as a minimum to trigger an order, you can either calculate a maximum that prevents an order or adjust the amount of your next order.

Option 1: Set a Maximum
The easy math is just to double your PAR level. If you hit this maximum, cancel the next regularly scheduled delivery.

Example: You’ve been going through 400 boxes a week instead of 500. You’ve slowly been building up excess box inventory and are running out of warehouse space for it. Once you hit 2100 boxes, cancel your next regularly scheduled delivery. You’ll burn through the excess inventory before the next scheduled delivery happens.

Option 2: Adjust the order amount
This takes a little more math. You’ll need to calculate the excess on hand and adjust the amount of the next delivery.

Formula:
Order amount = PAR Level – Inventory On Hand

Example: You’ve been temporarily going through 400 boxes a week instead of 500. You still have 200 boxes on hand when it’s time for you to confirm your next order. Since you’ll have an extra 200 boxes on hand, you’ll only need 850 boxes to hit your PAR level.

This isn’t set it and forget it

You can’t hand this off to your co-packer and just walk away. Weekly usage and order fluctuations will affect your PAR Level. You’ll need to re-evaluate this level quarterly or even monthly to make sure you stay in your Goldilocks zone.