Inventory Control Basics
As a restaurant operator, your daily routines will be much different from that of a clothing or electronics store. You’re preparing a perishable product for consumers to ingest and enjoy. In this way, your inventory management will be much different. Inventory control for restaurants is an important piece of the management puzzle, and responsible for a large portion of your expenses. Throughout this article, we’ll be discussing what effective restaurant inventory control can do for your operations, the basic inventory control measures, advanced measures, and expert measures, as well as exploring how inventory control software can help streamline your operations, and ultimately maximize your bottom line. Let’s jump in!
Why is inventory control so important for restaurants?
You may not know it, but effective inventory management can help you uncover larger issues that may be hiding in the weeds. Here’s a just a few of the important aspects of your restaurant management affected by inventory:
- maintaining proper stock levels
- upholding quality and freshness
- comparing prices between vendors
- being able to accurately calculate your cost-of-sales
- ability to spot theft
- maintaining up-to-date menu costing
Those are just a few of the reasons why, and there are many more, that your restaurant’s inventory controls must be up-to-date and become habitual in order to be effective. While you go through the paces of setting up the steps and routines required of your staff, there are important steps that you must take in order for the systems to work:
You must be patient
Rome wasn’t built in a day, and neither will your inventory management system and its benefits. In order to be undertaken properly, certain steps must be taken to properly implement your restaurant’s inventory controls. This doesn’t mean that new staff must be hired specifically for the role; many, if not all of these steps can be completed by existing staff at varying levels with proper training.
Use an inventory order guide
Set up to provide a list of all tracked items in your inventory, the inventory order guide allows you to track your inventory not only for how much you have on hand, but also for reordering purposes.
To make it easier for counting, you can divide the guide up into different sections based on storage areas, what you’re counting, or any variable that you decide. It’s all about what works in your restaurant. This also allows you to vary the frequency of your counting if you so choose. You may want to count your full inventory on a monthly basis, while fruits and vegetables you may want to count daily, and this allows you to do just that.
Take monthly inventory counts
Counting on a regular basis, and schedule, allows you to not only build a routine, but also allow staff to get acquainted with the new procedures. Staff must also be made aware of the importance of not only counting, but how their restaurant’s inventory management impacts not only the restaurant, but potentially their own jobs.
In order to get the full scope of your restaurant’s inventory and its needs, you need to be able to value your inventory. This can be calculated using:
- FIFO (First-In, First-Out)
- LIFO (Last-In, First-Out)
- Weight Average
Once you’ve determined how you’re going to value your inventory, you’ll need to count what you have on hand. This can all be done on your inventory guide. By multiplying the count by the value, we arrive at the total for that item, and if we summate the total value for each item, we arrive at our category’s total value.
By splitting your inventory into categories, you’re able to see a bird’s eye view of where the majority of the inventory is. The recommended category groups are:
- Food Groups
- Soft Beverages
- Beverage Groups
- Draft Beer
- Bottled or Canned Beer
These can be drilled down even further if you need or want that information for the rest of your operations.
Calculate the monthly cost of sales
The only way to get an accurate cost of sales is by counting your inventory. The method of calculating your cost of sales is by counting inventory at the beginning of the month, adding your purchases throughout the month, and then subtracting your inventory at the end of the month. To put this in an equation:
Cost of Sales = Beginning Inventory + Purchases – Ending Inventory
Calculate inventory turnover
It’s important to not only know your cost of sales, but how close your inventory is to being accurate on a consistent basis. Having too little means you won’t be able to meet demand, while having too much means that your spoilage will increase. By calculating the inventory turnover rate, you’ll be able to help ensure you have the property inventory levels for your restaurant. In order to calculate this, we use the following formula:
Inventory Turnover = Monthly Cost of Sales / Average Inventory on Hand
Based on this ratio, when looking at what is best for restaurants, the typical turnover rates for optimal performing restaurants are:
- Food: 4 – 6x per month (5 – 7 days of product on hand)
- Liquor: ~1x per month (varies by concept / sales mix)
- Bottled Beer: 2 – 3x per month
- Draft Beer: 1 – 2x per month (varies with number on tap / concept)
- Wine: ~1x per month
These rates allow a restaurant to control their inventory on a monthly basis, but what about the daily and weekly controls?
Calculate the weekly cost of sales
Taking weekly inventories and calculating your weekly cost of sales provides distinct advantages over only counting monthly. The two primary advantages are:
- Being able to identify problems earlier – because you’re counting on a much more frequent basis, you’ll be able to identify them much more quickly.
- Tighter control over inventory – by counting weekly instead of monthly, you’ll know how much you’ll need to order on a week-to-week basis instead of estimating month-to-month. This ensures you have more money in the bank instead of in your inventory.
If you think you don’t have time to count, consider that you could be saving 2 – 10% on your bottom line, which could be anywhere from tens of thousands to hundreds of thousands of dollars each year.
Daily key item inventory tracking
If you have inventory items that are key to your operations, and especially your food costing by being high in cost, you should be tracking the sales and purchases of these on a daily basis. By comparing the actual usage vs. theoretical usage, it will allow you to find any areas of wastage, or potential areas in your operations that can be tightened to make that gap smaller. If your actual is close to your theoretical, you’re on the right track, and if it’s equal, you’re in the perfect situation.
Once we’ve addressed monthly, weekly, and daily inventory controls for your restaurant, and can see that they’re working, it’s time to move on to the expert level of inventory management.
Calculate the ideal food cost
The ideal food cost is one that every restaurant strives to attain. This ideal food cost, or theoretical food cost, is what you expect to see over a given period of time should proper portions, yields, and waste are taken into account.
First, we start by determining the cost for each portion, al the way down to the individual ingredients. This is key to determining the ideal cost, as ingredient prices will change over time. Next, you’ll need to determine what your sales mix is. As the mix of low and high cost items change, so too will your ideal cost.
Keeping track of your sales for individual items is a simple task that should be able to be done through your POS, and will provide you with a starting point in determining what your theoretical food cost should be, by breaking out individual ingredients, multiplying them by the units sold and arriving at the total for each.
By taking this theoretical cost, we can compare this to the actual food cost by counting the inventory at both the beginning and end of a period, accounting for purchases, and finding how much was sold, multiplying the number of individual ingredients in recipe items sold by their cost. It’s important to do this, as you can break it down from the overall food cost, to department food cost, down to individual ingredients as needed. By doing this, you don’t have to spend additional labor hours hunting through individual ingredients when a slightly less deep view is required. Actual vs. theoretical is equally important when looking at food, liquor, and even your cleaning products.
Put in place inventory control software
If you have all of your other inventory control measures in place, the next step is to make these processes much more efficient, and this can be done by implementing inventory control software. By using software like Optimum Control, you can have all of your systems centralized, making it easier to access all of your information and analyze it. With these systems however, there needs to be complete buy-in within your organization, from the front-line employees all the way up to management. While some multi-unit organizations may have people dedicated to inventory management specifically, individual locations and many chains will need their employees and management to handle many aspects of this. In addition to this buy-in, employees will need to be meticulous in working the routine of counting inventory in set intervals in order to ensure the software is able to utilize it to its fullest, and provide you with the correct critical information to make the right decisions.
In order to properly prepare yourself for using inventory management software like Optimum Control, there are a few items that need to be addressed:
- Inventory Masters: In order to properly utilize your restaurant’s inventory management software, you’ll first need to create an inventory master, which is a list of all ingredients that you purchase. This list needs to include the following information for each ingredient:
- Pack and Case Size
- Purchase Unit
- Purchase Price
- Par-Level of Inventory to have on-hand (when you record purchases, the quantity on-hand will increase)
- Batch Recipes: Each of your prepared items must have batch recipes created for them. These batch recipes will each include a specific quantity of the raw ingredients from the inventory master you created, or other batch recipes. You will also need to calculate your yields for both individual ingredients and batches. This will be a labor intensive process during setup, but will be less intensive when you are adding or removing single items, such as new recipes, or making changes.
- Menu Item Recipes: Each of your menu items is composed of either raw ingredients and/or batch recipes, and requires a recipe of its own. In order to ensure your inventory is correctly adjusted when items are ordered, each of these menu items should have a matching description in your POS.
- Inventory Locations: You’ll want to set up your inventory storage locations to ensure that physical counts can be undertaken. You’ll be able to print off countsheets for each inventory location, or export to a mobile device to use an application (such as OC Mobile) to conduct counts.
- Vendors: All vendors you purchase from will need to be entered into the software and assigned their own vendor ID for each purchased product. In many cases, your chosen inventory management software will be able to interface with the vendor systems in order to get these numbers.
- POS System Setup: In order to accurately track ingredient usage in menu items, you need to enter your menu items into your POS system. This includes any modifiers or substitutions that may be possible, such as onion rings instead of fries, or adding bacon and cheese to a burger. Daily specials, special features, and other modifiers need to be programmed in, as well as when new recipes are added. This presents more actions for your staff to enter orders, and for programmers to try and track ingredient usage.
As you can see, inventory is an important piece of your restaurant management puzzle, and one that should not be taken lightly. The slightest change to a recipe or your operations can create a ripple effect through your entire organization; as such, needs to have an established set of procedures and systems in place to ensure everything runs smoothly and efficiently so that you can control your costs and maximize your profits.