How to Effectively Manage Your Restaurant’s Inventory

How to Effectively Manage Your Restaurant’s Inventory
Amanda McCorquodale

By Amanda McCorquodale

Is your restaurant struggling? Get a better grasp on the reigns by effectively managing your inventory to control costs and boost profits.

Consider two worst-case scenarios: A customer orders extra guacamole but your restaurant is all out of avocados or, on the other hand, you’ve just walked past a crate of rotten, un-useable (and expensive!) avocados in the stock room. Both situations could have been prevented with proper inventory management, which gives restaurant operators better oversight over what’s in stock and how it is used.

There are plenty of good reasons to take inventory on a regular basis: Your restaurant can avoid running out of a key ingredient mid-service. You’ll also be less likely to order too much of any ingredient, which leads to food waste. And you’ll have a better handle on food disappearing due to employee theft, which happens a lot more than you may think.

The bottom line is that when inventory is taken regularly and accurately, your operation’s profits could increase by as much as 24% annually
. While doing inventory is critical to the success of your restaurant, it’s also incredibly tedious and time-consuming. That’s why we’re presenting you with all you need to know about inventory’s essential steps, best practices, and helpful resources below.

The Basics of Restaurant Inventory Managment

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Do a little research to figure out the best method for taking inventory in your operation. You could choose to track and record inventory by hand with count sheets, or use an app or software on your computer. (We’ll dive deeper on inventory software below.)

Counting

Inventory starts with counting. You should take physical inventory on everything from edible ingredients and cleaning supplies to dinnerware, uniforms, and tabletop items – anything you need to order more of. Kitchen items should be counted separately from the front-of-house and bar inventory.

Ideally, it’s a good idea to enlist two staff members to take inventory separately and then compare numbers to highlight any potential errors. You should also use the same employees week-to-week, which will allow them to get faster at the process over time. And because taking inventory is such a tedious task, consider offering incentives for those charged with overseeing stock – their focused attention while at the task is worth it.

One obstacle in doing inventory is that it needs to be done when your kitchen is not in service and when it is not accepting deliveries. An industry best practice is to find a time and day before the restaurant opens or after it closes, and take inventory at that exact day and time each week or month. That way you can minimize fluctuations in results. You make it easier on yourself by doing an inventory count on the day before your deliveries when stock is at its lowest and there is less to count.

The industry standard is to take inventory once a week, at the same day and time. However, you may want to do it once a day or twice a week depending on demand. Another method is taking perpetual inventory, in other words, a running balance of what is on hand, sometimes called the sitting inventory.

Typically, taking inventory involves five rows of information.

  1. Type of Item: For example, tomatoes
  2. Unit of Measure: Do you order tomatoes by the crate? The pound? Make sure this unit of measurement stays consistent in order to avoid common inventory miscalculations.
  3. Inventory Amount: How many of the unit of measure you have currently in stock (e.g. 4 crates of tomatoes)
  4. Unit Cost: Divide the cost of one unit by the amount of that item you have. Because the price of some items changes from week to week, make sure you use the latest price paid as the standard.
  5. Total Cost: Multiply the unit price of each item by the amount of that item that you have in your inventory.

It may seem obvious but the more organized you are, the faster taking inventory will go. Make sure you also have a set system for cycling out perishable goods to ensure that items are being used on a First-in-First-Out (FIFO) basis. Group similar items together on shelves to streamline the process even further.

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Ordering

Whatever inventory system you choose, make sure you set specifications and procedures for ordering and purchasing. One method is par inventory, in which you set a minimum supply required in-store after each food inventory delivery. The par amount for each item is determined by figuring out how much inventory of each food item is depleted between each delivery and then adding a little more in case of emergency, spillage, waste, or big orders. Par sheets can be conveniently accessed via tablets that can be used when counting stock. Your order amount would then be the difference between the item’s par level and what is currently in stock.

Deliveries

Think about how you will efficiently receive deliveries and doublecheck incoming orders. The quantity and quality of the items delivered must be carefully checked against what was ordered and may require that items be weighed and/or counted. Before signing the invoice, make sure that any and all discrepancies have been taken care of or acknowledged on paper. Otherwise, that missing crate of tomatoes becomes your responsibility.

Requisitions

The purpose of stock is that it’s eventually and efficiently used by staff, but make sure you keep tabs on when, how, and by whom it is used. To effectively manage inventory, each time an item is transferred from storage to the kitchen for use, it should be recorded. For example, if a chef needs more flour, a requisition form must be filled out with the name of the requester, the use, amount and date. You’ll be able to see how departments are using inventory, keep a better oversight on expensive stock like meat, and because there is a paper trail, staff is more likely to get just what they need and no more.

Reconciling Inventory

Despite your best laid plans and well-executed procedures, there will always be some discrepancies in what should be in stock and what’s actually in stock. The goal is to keep theat difference very, very small. To doublecheck numbers, compare inventory totals of two separate employees as mentioned above.

You can also make sure that you are properly managing your inventory by checking the variance, that is, the ideal remaining stock according to the recipes and orders placed through your Point-of-Sale (POS) system and the actual physical stock on shelves.

Ideally, this number should be around 2 to 5%. Anything much larger and you should investigate possible avenues of food waste. A recent study found that food waste
in fast-food restaurants is about 9.55% whereas full-service operations waste 11.3% of the total amount of purchased food.

A large variance could also mean that staff may be pocketing items for personal use. According to the National Restaurant Association, internal employee theft is responsible for 75%
of inventory shortages and about 4% of restaurant sales. What’s more, three-quarters of employees steal from the workplace at least once, according the study, while half steal multiple times.

Inventory Managment Best Practices

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You now have accurate counts of your cucumbers and pounds of mozzarella, but don’t stop there. Analyzing all that inventory data will help you determine any areas for improvement, ultimately improving operations as well as your bottom line.

Because inventory management best practices are so reliant on accuracy, consistency, and a host of insightful calculations, this is the perfect chance to let smart software take over some of the heavy lifting and automate tasks so you can get back to making well-informed business decisions that better your restaurant.

What is the best restaurant inventory management software?

Inventory and labor are the biggest expenses to control to run a svelte, effective restauaurant. Many companies have emerged with software in the past few years built to put valuable inventory data to work for you.

If you're looing to shave labor costs by 5 to 7% like Smoothie King, a employee scheduling app can help. If it's inventory waste thatseating your margins, the right software can help you save up to another 5% in food costs.

The best inventory management software for your restaurant depends on your particualr needs and situation. Popular software such as ChefTec, CostGuard, Upserve Inventory, and Orderly can control and organize every aspect of your stock, maintain a smooth flow of supply, and help you boost your overall profit–especially when integrated with your restaurant’s POS system.

Here are 7 advantages to using inventory malmanagement software:

  1. It counts the beginning and end stock, and automatically calculates the balance.
  2. When integrated with POS, when a server makes a sale, ingredients for that menu item are automatically removed from the perpetual inventory.
  3. Inventory management software can prompt you to reorder when you run out of supplies. You can even customize a reorder level for items. As soon as the ingredient reaches that level, a reminder email will be sent to you to re-order that ingredient in advance.
  4. By factoring in how much of an ingredient in used in a menu recipe, inventory management software can calculate exactly how many days of an ingredient you have left.
  5. Inventory management software can calculate and keep tabs on variance as described above to make sure it stays under 5%. Once it rises, you can investigate the cause before it gets out of hand.
  6. You can better manage shelf life of products via software by specifying how long they can be preserved and subsequently used, before getting spoiled.
  7. Inventory management software can generate detailed reports of inventory trends so you can easily see which ingredients are the most popular or are under-utilized.

David Scott Peters, a restaurant management expert and founder of TheRestaurantExpert.com offers some helpful tips from his own experience to help you lower food costs and manage accurate inventories.

Cost of Goods Sold

Keeping on top on inventory means you’ll be able to calculate key metrics used to determine how business is going for your restaurant. One such number is Cost of Goods Sold, or CoGS, which represents the cost required to make each menu item you sell. It’s found by adding the dollar value of your beginning inventory to any purchases during the period and then subtracting the value of your inventory at the end of the period.

Next break down your food items into groups and set guidelines that govern how much to spend in each category. Your total CoGS for all groups should not exceed 31%. If it does, you might want to examine whether your menu prices are set too low, which ingredients may be too expensive to use, whether their price can be negotiated, and to make sure staff is only using the recipe-required amount to prevent expensive waste. (You’d be surprised by how using just a tablespoon extra of Himalayan salt can really add up over time.)

By using your inventory numbers to find CoGs, you can then calculate another very important measure of your restaurant’s financial health, Prime Cost, which is the total of your CoGS and your labor costs. As a general rule, your combined CoGS and labor costs should not exceed 60% of your gross revenue
. If they do, it’s time to analyze how inventory is being ordered, used and possibly wasted. And it may be time to also adopt measures that can save money on labor costs such as 7shifts scheduling software.

Inventory Turnover Rate

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Maintaining reliable inventory numbers means you will be able to uncover your Inventory Turnover Rate (ITR), that is, how long who hold onto items before they generate revenue. Knowing this number can help reveal if there is not enough turnover, causing food to spoil and locking up your assets in stock not being used. For instance, when the ITR rate of McDonald’s and Wendy’s was compared, the golden arches’ low ITR meant it had more available cash flow to devote to opening new locations.

The long story short is that if you aren’t taking accurate and consistent inventory at your restaurant, you’re missing out on a 20+% increase in profits. If you are already tracking inventory, semi-regular and by hand, you can cut your food costs by another 5% by enlisting in smart inventory management software that can streamline inventory tracking and deliver insights about where the operation can improve on what’s coming in and going out.

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Amanda McCorquodale
Amanda McCorquodale

Amanda McCorquodale is freelance writer based in White Plains, NY.