Your Go-To Guide for Restaurant Inventory Management

Your Go-To Guide for Restaurant Inventory Management
D. J. Costantino

By D. J. Costantino

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, unusable (and expensive!) avocados in the stock room.

Both situations could have been prevented with proper restaurant 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.

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 Management

Stacks of produce inventory for a restaurant.

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.

The Compare Method

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.


When and How to Take Restaurant Inventory

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.

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 double check 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 the difference very, very small. To double check 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 to the study, while half steal multiple times.

Inventory Management Best Practices

1. Keep Inventory Accessible and Organized

Make sure there's a place for everything, and everything has a place. Uniform labeling, standardized locations, and a clean storage space goes a long way in creating a better managed inventory. You also want to make sure everything is visible and accessible for everyone—so high shelving should be avoided as much as possible.

2. Find the sweet spot for inventory levels

When you keep track of your inventory turnover, you can make sure you're not overordering ingredients, which can lead to high food waste, akin to throwing money away. You can also be sure that you're not underordering, which may force you to '86 a top menu item and leave customers upset in the process. It's an important metric to track the freshness of your ingredients, too.

By calculating inventory turnover ratio, you can find the sweet spot for ordering and make sure you always have the right amount.

3. Automate fundamental supply reordering

Restaurant inventory management software is a tool that helps digitally track and manage your kitchen inventory. Think about it: no more stacks and folders full of invoices, no clipboards and checkmarks, no guessing when it comes to food costs. Some inventory management software can even automatically re-order those items that you know you'll always need.

4. Award your team for excellent inventory management

Poor inventory management effects everyone—and can lead to stressed employees and upset customers. Give the team transparency into the costs of inventory—and reward them for staying under certain thresholds. For example, if your team can keep food costs below an industry average 30%, then they may earn a bonus for that month. This extra incentive can go a long way into ensuring that watchful eyes fall upon your storage room.

5. Leverage sales forecasting

Effective inventory management is largely dependent on sales forecasting. Wasted inventory is one of the most avoidable expenses that a restaurant can make. Through sales forecasting, you can use historical sales data to predict how many burgers you'll sell today, this week, and even next month. To complete this process successfully, you can focus on data-driven sales so that you know what's in your inventory and how you should control it.

Each time you forecast your sales, you're referencing actual sales numbers from your past to accurately predict how much of what you'll sell and when. This helps keep your inventory stocked right where you need it—avoiding having to 86 an item or throwing away food that's gone bad.

Other Best Practices

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.

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.

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.

What Is the Best Restaurant Inventory Management Software?

Inventory and labor (otherwise known as Prime Costs) are the biggest expenses to control to run successful restaurant. Many companies have emerged with restaurant inventory software in the past few years built to put valuable inventory data to work for you.

The best inventory management software for your restaurant depends on your particular needs and situation. Popular software such as XtraChef by Toast, TouchBistro, and Upserve Inventory, 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 a few advantages of each:

  • XtraChef by Toast: Ease of use and easy integration with Toast POS
  • TouchBistro: Integration with the TouchBistro POS systems
  • Upserve Inventory: Now part of Lightspeed, Upserve inventory management easily integrates with Lightspeed and Upserve POS systems

7 Advantages of Using Inventory Management 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.

How to Choose The Right Inventory Management System For Your Restaurant

The power of restaurant inventory management comes from interactions with your point of sale system, and many of the advantages listed above are centered around how each integrates.

Understand your restaurant needs

By knowing what you're selling versus what you have, you can use software like the above-mentioned to make intelligent purchasing decisions, and automate ordering of common items.

You could use inventory management software without a POS integration, but the time and money savings won't come as seamlessly.

Ensure it integrates with your POS and other Tech

When you choose the right inventory management software, due the due diligence of ensuring that it integrates well with your point of sale (POS) system. If you're using software that's made by your POS supplier, you are most likely all set.

But if you're using a POS software provider that doesn't have their own inventory management software, make sure the product you choose works with what you're already using.

Other Helpful Tips for Managing Accurate Inventories

Review Cost of Goods Sold

Keeping on top of 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.

Beginning Inventory + Purchased Inventory - Ending Inventory = Cost of Goods Sold (COGs)

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.

Optimize Inventory Turnover Rate

Maintaining reliable inventory numbers means you will be able to uncover your Inventory Turnover Rate (ITR), that is, how long you 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.

Inventory Turnover = CoGs / ( (Beginning Inventory + Ending Inventory) / 2)

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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D. J. Costantino
D. J. Costantino

Hi! I'm D.J., 7shifts' resident Content Writer. I come from a family of chefs and a background in food journalism. I'm always looking for ways to help make the restaurant industry better!