Contributed by: Annabelle Crawford, Inventory Specialist at Compeat
Today’s restaurants operate on tighter margins than ever before. With food costs running at approximately 30% or higher, learning to accurately manage inventory & prevent common mistakes is critical in successfully driving down costs and maximizing profits.
Inefficient management practices, improper storage, gaps in inventory logs, theft, and waste are among the top reasons that cause even the most successful kitchens to fail. Fortunately, all of these can be prevented by knowing and avoiding top mistakes and implementing best practices around each of them.
First, let’s break down the two types of inventory costing, Actual and Theoretical.
- Actual Food Cost (COGS)
- A straightforward calculation
- Beginning Inventory + Purchases – Ending Inventory = Actual Cost of Goods Sold (COGS)
- Theoretical Food Cost
- A perfect-world snapshot
- Beginning Inventory + [Purchases, Prep Production, Transfers] – [Transfers, Waste, Donations] – Theoretical Usage (Sales Mix) = Theoretical Ending Inventory
- Your Theoretical Variance is the difference between what you actually have vs. what you should
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Correcting common inventory mistakes is the first step you should take when you need to tighten those inventory variances and increase that bottom line. Below are the Top 5 Inventory Mistakes and how to correct them:
Mistake #1. Inaccurate, Infrequent Counts. To be able to correct a problem, you need to know when and how it happened. Your first step should be to conduct more frequent counts.
- Conduct weekly inventories in addition to monthly valuations. Counting weekly pains an accurate picture of how you are using your product and take action to correct problems.
- Count your prepped items to improve your theoretical variance. Since your prepped items are technically still product that is sitting on your shelves, not counting that means that your theoretical variance will increase since we don’t know where those raw ingredients went.
- Organize your storage locations for expedited counts. Organize like products together and make sure that when they are received that they are always stored in the exact same place. Instead of walking from one side of the restaurant to the other as you move down your list, the items will be in order, speeding up the counting process immensely.
- Use your counts to create accurate par levels. By using par levels actually based on your real usage and not just a ‘guess’, you’re much more likely to order the correct amount of product.
- Schedule your counts consistently; always count on the same day of the week, same time, before/after service. Keeping that cadence will allow you to spot any inventory anomalies much quicker – something like, we’ve never run out of shrimp on a Monday before, what happened this week? If you count sporadically, you’ll be less likely to notice when something unusual happens.
Mistake #2. Failing to Streamline the Ordering Process. When it comes to ordering, organization is key to saving time and money.
- Utilize a customized, organized guide which categorizes items by storage location, list items in order (shelf to sheet), includes pars, and is either electronic or on a clipboard.
- Order on time. Rushing through an order does not allow efficient time to count on-hand inventory accurately, which will lead to mistakes in your orders.
- Use a budget system to ensure you are proactively managing your spending. It’s easy to over buy if you are not using a budgeting system.
- Reduce the number of deliveries. Every time a truck pulls up to your back dock, it costs you money. Consolidating vendors and the number of deliveries made each week will save you money.
- Manage your amount of inventory. Inventory is expensive. Having too much inventory on hand ties up cash, encourages theft, results in spoilage, and leads to overuse. Try to keep an average of only 7 days of inventory value on hand
Mistake #3. Improper Receiving Procedures. Improper receiving has an effect on all other aspects of your inventory management system, from future counts being slower since you didn’t organize correctly, product being spoiled or it’s shelf life shortened from being left out, and being shorted product you need and still getting charged for it.
- Hire competent personnel to receive orders, and train them on quality control, paperwork, specs, and storage. Employees that you designate as receivers should be able to not only recognize various quality levels of merchandise, but also be trained on how to handle the necessary paperwork and any digital recordkeeping if necessary. However most importantly, you need your receiver to know what to do when something out of the ordinary arises.
- Make sure you have the proper equipment needed to check in your goods; An accurate and appropriately sized scale, temp probes, calculators, rule measures, dollies, bar code readers, etc.
- Schedule your deliveries carefully by designating appropriate receiving hours with your vendors. Make sure that you always have a trained receiver on hand during these hours.
- Have the receivers reconcile the invoices with the purchase orders. Have a written list of the order readily available to ensure what was expected was actually received.
Mistake #4. Poorly Maintained Storage. Properly maintained storage really is the backbone of your inventory management system because it prevents the loss of merchandise, particularly through spoilage. Follow the four steps below to avoid throwing your product, and your money, literally in the garbage. Luckily, spoilage is an issue that can be considered somewhat controllable.
- Rigid sanitation standards need to be maintained to decrease spoilage. Appropriately zone storage so that like items are with like items. Maintain physical cleanliness of storage areas.
- Use the First in, first out system (FIFO). FIFO simply means newer stuff at the back, older stuff in the front, to ensure that the older stuff doesn’t go bad before you get a chance to use it. Train your receiver to rotate your merchandise as it is received, as well as anyone else who will be depleting or maintaining the storage area.
- Keep a Waste Log to reduce your theoretical variance. The act of logging waste will reduce its frequency and it creates an actionable data point to begin narrowing down the rest of your variance.
- Always date and label everything. EVERYTHING.
Mistake #5. Sloppy or Nonexistent Issuing System (Theft/Pilferage). Theft is rampant in the restaurant industry. 1/3 of employees steal from their companies at least once a year. Approximately 5-8% of foodservice gross sales are lost to internal theft. 75% of inventory missing in restaurants is from theft. With intense competition and shrinking profit margins, it’s in your company’s best interest to take a closer look at the procedures currently in place when issuing some of your most vulnerable (and valuable) inventory items.
- Implement a ‘buddy system’ for counts; one person calls, the other person marks. This creates an accountability under the assumption that it’s less likely for two people to conspire to steal together than for one person to secretly snag things.
- Make sure there is adequate supervision in the production and service areas. Leaving hourly employees alone for hours on end with thousands of dollars’ worth of product and an easy back door exit to their car creates temptation.
- If possible, restrict access to storage areas and receiving facilities to only authorized personnel to reduce opportunities for pilferage.
- Use your weekly order counts to narrow down which items may require a product requisition system. These will be your items with the highest variances. Create a product requisition system for these items. This could be as simple as a log sheet where it is noted every time this product is used, creating accountability and alerting employees that it will be noticed when items go missing.
I’ll conclude by saying CONSISTENCY. Keep up with the systems you create. You can print out logs but if you don’t use them, you are not organized. The system is the action, not the setup. There are many tools to help you create a successful inventory management system, but it does not completely substitute the human touch. Train your staff on these systems and be consistent.