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Optimizing Food Inventory Management
Food Inventory Management: What It Is and How to Do It Well
Effective food inventory management is essential for running a profitable restaurant.
For a restaurant owner or manager, there’s nothing better than hearing customers “Mmm!” and “Ahh!” over your savory food and refreshing drinks.
And there’s nothing worse than going out of stock or serving a spoiled dish to your loyal patrons.
So what makes the difference between a high-quality restaurant serving mouth-watering cuisine and a low-quality restaurant serving rotten grub?
Food inventory management.
If you get it right, your restaurant will grow its profits.
If you get it wrong, you could lose your restaurant – 17% of full-service restaurants fail in their first year.
If you want to learn how to do food inventory management effectively, we’ll give you a few tips to get started on the right foot.
Before we do that, let’s define food inventory management.
What is Food Inventory Management
Food inventory management is your system for tracking what stock comes into your restaurant, what inventory leaves your restaurant, and what’s leftover.
A good food inventory management system is also the most useful tool for gaining insight into the ways you may be losing money.
You might have a few thieves on your payroll, or your chefs, bartenders, or servers are wasting inventory. You might also have a quality control problem, and too many people are sending back poorly prepared dishes – costing you hundreds of dollars a week in discounts.
With granular insights into how you’re losing money, you can start implementing strategies and policies for saving money and increasing your revenue – which is the ultimate goal in restaurant inventory management.
To help you achieve this goal, here are a few ways to optimize your food inventory management process for maximum effectiveness.
Tips for Effective Restaurant Food Inventory Management
Sell your staff on the benefits of food inventory management
You’re going to need the help of everyone on your staff to make food inventory management efficient and worthwhile.
Don’t just force a new system onto your staff.
Sell them on it first. Show them why it will make them more successful at their jobs, and make the restaurant more successful in the market, which equals more customers and more money in their pockets.
Remind them that a smart restaurant inventory management system is the spine of the restaurant – it supports everything they cook, create, and serve, and helps guarantee their jobs.
And for you as a business owner or manager, remember that it helps you reduce food waste, prevent under or over-ordering, identify theft, and keep track of the health of your business.
Without it, you’d be lost, and so would your employees.
Create a Team and Train Them Well
After you sell your employees on the idea of a food inventory management process, it’s time to train a select team for carrying it out.
Identify hardworking people who are trustworthy, detail-oriented, and aren’t afraid of a little number-crunching.
Train them in your process – whether it’s an Excel inventory management system or a cloud-based inventory management system – and make sure they understand your inventory categories, purchase units, etc.
But food inventory management doesn’t have to be the sole task of your inventory team.
Your cooks can identify and report waste and spillage when it happens, along with your bartenders and servers.
Get everyone involved in looking for ways to streamline your processes and improve the flow of inventory into and out of your restaurant.
Keep Your Restaurant Clean and Organized
A good inventory flow is only possible with a well-organized and clean restaurant.
Your chefs should be cleaning the hoods, pots, pans, and other kitchen equipment every night.
Your stockroom should be neat, tidy, labeled, and cleaned regularly to avoid stickiness, smells, or mould growth.
Your liquor should be labeled, and organized by top selling and most used items to worst selling and least important items.
And your kitchen equipment should be logically organized for quick retrieval and return.
Perform Regular Stocktakes
Your stocktaking process is one of the most important parts of a workable food inventory management system.
Establish a stocktaking schedule and stick with it, whether it’s weekly, monthly, yearly, or daily.
The more often you take inventory, the better.
If you want to know how to make this process easier, then you need to know the difference between perpetual vs periodic inventory.
Calculate Your Reorder Point
A reliable reorder point formula will help you determine exactly when you need to reorder stock.
Your “par level” is the minimum amount of any item you can afford to have on hand to satisfy customer demand before ordering more.
Once you hit that level, it’s time to place a purchase order.
Knowing your reorder point or par level is essential for avoiding stockouts.
Cross-Utilize Your Inventory
It’s more efficient to use one product for multiple dishes and drinks than using one product for one menu item.
For example, ordering mangoes for only one dish can become expensive if that dish isn’t a top seller.
Instead, you could use mangoes to make a sauce, to garnish a dessert, and flavour a cocktail.
Safety Stock Inventory
Even with the best food inventory management system, you can still experience unexpected shortages.
A snowstorm might halt your incoming shipment of goods, or you might get an unprecedented dinner rush where everyone seems to be ordering the same dish – and you might find yourself out of stock of a critical item.
This is where safety stock inventory comes in handy.
Safety stock is a “just in case” batch of extra inventory you store away for emergencies.
For some businesses – like those that run on a just-in-time (JIT) inventory management system – safety stock doesn’t make sense.
And safety stock doesn’t always make sense for food products that spoil easily.
But for frozen meats, desserts, liquor, and the like, safety stock can be invaluable when you find yourself quickly running out of an item while waiting for the next shipment.
Use Food Inventory Management Software
Instead of calculating everything by hand, you should invest in a food inventory management software that tracks it for you automatically.
Good software can automate purchase orders when you reach your reorder point for easy inventory receiving, can implement batch tracking to reduce spoilage, and can optimize your working capital for the long-term growth of your restaurant.
A well-designed inventory management software can also help your restaurant meet its inventory KPIs, reduce your lead time, and allow you to run the front-end of your restaurant without worrying so much about the back-end.
Today’s Planning Posts chat is with long-time veteran in the inventory optimization world, Tracy Coon, along with Planning Posts evangelist Dan Craddock, on the topic of Optimizing New Item inventory.
Summary: New item forecasting is a troubling area because of its tremendous profit impact. If a company has $50M in inventory, New Items could be $5M or more of that investment. Yet, as Tracy explains, so few demand forecasting teams make optimizing new items a key focus. Download now to learn some strategies for putting a sense of urgency behind improving the performance of your new items across the portfolio.
Todd Intro: I am here with two people who consider themselves lifelong inventory optimization professionals. They love the profession and their careers have been built on educating inventory analysts and inspiring inventory planning and demand forecasting excellence.
Welcome, Tracy Coon and Dan Craddock! It’s great to have you both on the show and I know you want to dig into this topic in a big way. You were both replenishment analysts for wholesale companies prior to becoming education consultants.
Dan & Tracy: brief introductions
Todd: Despite this passion for the profession, you both say that you continue to be frustrated by the lack of success in one key aspect of a company’s inventory:
Optimizing New Items
New items? Really? I would think that inventory planning teams spoil and pamper their new items like they do their children? I would think that their shelves are stocked high with new items and that they are proud to show them and their results.
Is it really true that there is that much room for improvement here???
Dan: Todd, as I have watched our inventory community over many years, New Items is THE most common under-performing sector we experience in the retail and wholesale distribution world.
It always surprises me. It is amazing how new item poor performance is common – and also how it is tolerated.
Tracy: I agree… and I see it across industries and companies. Some do it well, but most really struggle for consistency.
Todd: Why is that? What is at the heart of the matter?
Dan: Todd, we will get into the details of the issue, and several suggested moves, but the most surprising thing to me, is that poor performance on new items is tolerated!
I can say that as a former replenishment analyst, I rarely got into trouble when I was out of stock on new items. I simply had to remind my bosses that the item was ‘new’ and there was a collective shrug and acknowledgement, and like magic, I was off the hook.
MANY INVENTORY TEAMS FEEL THEY HAVE A ‘GET-OUT-OF-JAIL-FREE’ CARD ON NEW ITEMS. THIS HAS TO CHANGE.
Tracy: That’s right, and it should be just the opposite. These items are the future of the company and the need a strong, solid start. There should be even more emphasis on forecasting these items than the day-to-day items.
I don’t believe most companies really take new items seriously enough. We rarely hear presidents and leaders requesting to see weekly or monthly reports on new item success.
You need to have some urgency and feel some pressure.
Todd: It sounds like the overall approach is wrong. What should the demand forecasting strategy be for New Items? What tone should be set from the top down?
Tracy: New items should be treated like new team members. There should be special attention and a realization that they need a strong orientation and ongoing mentoring and guidance. There should be extra investment of time paid to them so that they will pay dividends later.
Dan: Todd we want to start and share a new overall method or strategy on New Items. We call it the 3X Strategy.
The ‘3X Strategy’ means that if 5% of your items are new in recent weeks or months, that they should receive 15% of the time spent on replenishment optimization tasks. Possibly even 4X.
Once you set that level of expectation, everything changes. You start to realize that if you spend the same amount of time on new items as other items, that they will never be successful.
Tracy: Another part of the strategy is simply a focused area of accountability. This means that there is a separate program, with separate and focused reports and very unique goals. This puts the proper attention on new items as their own inventory sector to manage and monitor.
Todd: It sounds like a special program for new items makes perfect sense. I have to believe for a category like new items, much of the success relies on collaboration, doesn’t it?
Tracy: Great point. New items are probably the #1 inventory group of items where communication and collaboration are as important as the process and tools.
Todd: So does collaboration play a large role in new items today?
Tracy: Some companies do well here, but most companies could do much better. You just can’t expect success by using only system tools. You need to load your item components with as much great knowledge as possible.
Dan: That’s right. And that knowledge is normally spread across several parties.
I am the Inventory Replenishment Planner, and I am handed a new item from my Category Manager. I am looking for an idea of the initial forecast and sales pattern from her.
She was given the item from the supplier rep who should have access to the initial plan behind the item and perhaps some early sales numbers.
That rep probably needs to turn to a product manager expert for that data. The knowledge and data needs to travel through several channels and can easily get lost in translation.
Tracy: The best companies which I experience have a roadmap or flow chart for this information. They work with each supplier to understand how to get to this information and to demand that it is part of the process to add new items.
Once you see success with the best, proactive suppliers, you have a blueprint for success to take to others.
Todd: So you have to start by making New Item Success a priority. Recognize if it is a weakness and decide to get better. After coming up with a plan to talk, share and collaborate, what comes next?
Todd: What is an ideal situation for New Items? Is there an ideal situation on introducing a New Item?
Tracy: Yes! The item is typically going to replace an existing item – or sell in a very similar pattern to an existing item. You have years of great data and you don’t want that to go to waste.
This really requires an advanced inventory planning solution beyond just basic ERP or a buying report. A sophisticated inventory tool will step you through this process and connect, or transfer or share the key components of old or existing items with the new items.
In fact, if it is a pure replacement, it will completely manage the transition so that the stock status and on-hand values are combined with the new items. This avoids overstock and ensures service.
Dan: Yes, these features work great, but they really benefit from your suppliers sharing what they expect, what they have planned and what they are seeing in the market. They might see when patterns are moving differently than expected before a single company does.
Todd: So beyond the ideal option of a ‘replacement function,’ what are the key steps to setting up a New Item? What is getting missed today?
Dan: Todd, let us take you through the 4 main components and tell what really needs to happen.
Optimizing Fresh Produce Inventory Management
Everyone puts a starting forecast in. We talked about the need to reach upstream for better information. But you need to go beyond that!
Forecasting Frequency – Some companies who are forecasting 4-Weekly set their New items up to initially update weekly. This provides early reaction to sales changes as well as exposure during exception time. The nice part is, you can normally try this with a handful of items.
Dan: Tracy what about a Seasonal Forecast Profile?
Tracy: Yes, will it sell in a seasonal pattern? If so, then assign/borrow the profile from an existing item or category. Don’t wait for it to have years of perfect history. If the item sells in a seasonal pattern, it won’t perform correctly without a profile. A group profile or shared profile is going to be better than no profile!
Many star players keep a strong list of seasonal profiles that best fit each category to use as a starting point.
Dan: Let’s hit an area that is normally not considered…
Based on the level of movement, does the demand deviation (here’s a handy video on the demand deviation metric) need to be adjusted to have a better starting point? It will drive down your safety stock, so take the time to get it close. Use your analytics. What is the typical/average demand deviation for that forecast range?
Just a reminder that you want to work hard to find any knowledge that your suppliers have for help in the starting Forecast and Season. They see their products everywhere.
Tracy: I’d add Lead Time. Just a quick note about Lead Time… Anything beyond normal for this item? If the category has delivery issues, reflect that now in the Lead Time settings or you will be buying too late. For more on Lead Time, read: Long Lead Times Bring the Heat.
Next, let’s talk Buying Cycles. Obviously, the item will live within the order cycle of its line, but you still have two critical decisions to make: (1) Buying Multiple and (2) Convenience Pack.
A smart Buying Multiple will avoid potential overstock if the item does not sell. This is a value that will need to be revisited in some weeks or months, depending on how sales develop. Too often companies set this and forget it.
Dan: Tracy, the answer is similar on the last component of Service Level Goal.
Service Level is something I believe most people hit well initially. However, you have to follow up in case the items begin to sell much more or much less than expected. When it falls into its normal pattern, what is the strategy for ensuring that it gets to its proper spot?
Have your reporting set to alert you and guide you.
Todd: So those suggestions set the teams up for success. How do they monitor and ensure success?
Dan: Great question, and this is where the 3X rule really kicks in.
Let’s break down our reply into Daily Alerts as well as Period End and Ongoing Report Analysis.
There should be a whole briefcase full or special tools and reports that focus solely on New Items. This direction reflects the serious commitment to New item success!
Daily Alerts – Asking the team to dig in and remember to pay special attention to new items is not the answer.
Strong analytical reports are available today that will highlight when new items are over or under achieving during the period. PTD verses the forecast, as well as early buy warnings should be created, and should have plenty of intelligent filters to allow inventory professionals to focus on higher forecast new items, high-dollar items or other special categories.
You don’t have to wait until the end of the period to be surprised. You don’t yet have faith in your forecast, so have your demand forecasting solution provide smart exposure and alerts each day. It can be a very short part of the day, but very critical.
Tracy: From there, you have a chance to do some great reporting.
There are two methods we suggest:
- Ensure that every report, and especially every period-end report have a special filter or method to highlight only New Items. I can think of a report where I don’t need special focus on New items. This includes Overstock, Missed Service, Inventory Levels, and more
- Have a dashboard or set of reports that only focuses on New Items and paints a picture.
EVERY INVENTORY ANALYST SHOULD ALWAYS BE ABLE TO ANSWER THIS QUESTION:
WHAT % OF YOUR ITEMS ARE NEW RIGHT NOW???
Dan: Todd, I’m going to end with this vision… To Tracy’s point, every inventory professional should have a dashboard that tells them the following story. Here is an example:
Todd, we pass each other in the hall, and you ask me for a quick update on my New Item Portfolio. And it is a portfolio.
I glance at my one-page report and share this:
Of my 12,000 SKUs + $10,000,000 in total inventory,
6% of my SKUs are New Items in the past 6 months.
They make up 11% of my inventory investment.
They are driving 4% of my sales.
My service attained is 97.5% — in line with my goals.
I need to respond to under-performers to avoid overstock.
I am working returns on some items.
I am in collaboration with the suppliers on sales programs;
I know my business!
Tracy: That is our vision. You have to know your numbers and know where the attention is needed. Just deciding to get better at this key inventory sector is a huge step in the right direction!
Todd: So this is a worthwhile conversation. If a company has $50M in inventory, it sounds like New Items could be $5M or more of that investment. If I am one of the stakeholders, I would want to think my team is set up for great success!
US(CA): Orange inventory strong, growing interest in all varieties
“The orange supply is very strong,” said Abe Lopez of 1st Quality Produce in Fresno, California.
California’s Central Valley is in peak season for Navels and Cara Caras, and some Blood Oranges remain readily available, too.
How to Optimize Food Cost Percentage at All Your Restaurant Locations
By Gabe Flores - Restaurant365 January 21, 2021
Your restaurant group is looking to the new year and making plans. Because your food costs are one of your largest expenses, creating a focused food cost strategy can have an enormous impact on your business.
Your food cost percentage is key to optimizing your profit levels. Not only can your food cost help you better understand your restaurant group’s budget, but it can also drive your menu pricing and inventory control at all your locations. It helps you make data-driven decisions about your menu, and ensure you are taking every opportunity to maximize your profits.
You may already have systems in place for calculating your food cost percentage on an individual dish level, as well as a percentage of your business overall. But as you enter a new year, it’s the perfect time to review your systems and see if there is room for improvement.
How to calculate food cost percentage
Your restaurant food cost is also known as your Cost of Goods Sold (CoGS), the total cost of all the ingredients you use to prepare the menu items that you sell during a given period. Your food cost percentage is this food cost number as a percentage of sales.
Basically, your food cost percentage shows the relationship between how much it costs you to make a dish and how much profit you make from that dish. You can calculate your food cost percentage on the store level at each of your locations, comparing your overall inventory CoGS to your sales, or on an individual dish level.
Food costing is a powerfully simple tool, but it requires robust restaurant management systems to generate accurate numbers.
Consistent, accurate recipe costing is key. Recipe costing breaks down menu items to the correct cost for the portion size and individual ingredients. With up-to-date information about vendor pricing, combined with standardized recipes from your kitchen, your food cost percentage numbers are calculated based on the exact food cost of a dish.
In order to generate accurate data, consider using inventory management software that is integrated with your accounting and Point of Sale (POS) system to map inventory against sales. While it is possible to calculate food cost percentage manually, it is incredibly time consuming and can be difficult to maintain consistency.
If you don’t have automated tools for inventory control and recipe costing, use this formula to calculate your food cost percentage at the store level:
(beginning inventory + purchases) – ending inventory ÷ total food sales = food cost percentage
Calculate your ideal food cost percentage
You don’t want to just calculate where your food cost is, without understanding where it should be (or vice versa). You want to make sure you know where your food cost percentage should ideally be, given your ingredient costs and standardized recipes, while also knowing what number your kitchens are actually hitting every day.
One of the most powerful tools for food cost percentage is to compare your actual vs. theoretical (AvT) food cost percentage. Understanding the variance between your actual and theoretical numbers shows you where you can add efficiencies back into your CoGS.
To calculate your ideal food cost percentage, leverage your theoretical food cost, the cost of making all menu items over a given period time assuming perfect portion sizes, no waste, no mistakes, and no theft. Your theoretical food cost number as a percentage of sales is your ideal food cost percentage.
Then, you can compare your theoretical to your actual food cost, which is the food cost given your real-time sales and inventory levels. The variance between these two numbers is food waste, breakage and theft.
Any variance represents a leak in your profit margin that is worth examining with your restaurant operations reporting software. You won’t always hit your ideal food cost but knowing where to look to gain efficiencies is the first step toward closing the gap.
Price your menu with food cost percentage in mind
When you understand your food cost, you can make better-informed decisions about your menu. You likely already have a profit margin goal for your restaurant. However, it’s easy to forget that your target profit margin is only possible if you are hitting your target food cost.
In the restaurant industry, a general rule of thumb is to keep food cost percentages around 28-32%. However, this is more of a guideline and less of a universal rule for every restaurant. Average food cost percentage differs between quick service restaurant concepts and fine dining as well as different cities. It may even differ within the same restaurant, changing with the menu for each day part.
No matter what food cost percentage your restaurant has, keeping this number in mind while pricing out your menu can help you ensure each menu item contributes to your profit margin. Your food cost percentage may not be the same with every dish. However, overall, you want to be able to hit your goal food cost percentage.
Understanding your food cost will also help you make menu engineering decisions. Knowing your food cost percentage helps you see which menu items are not as profitable, so you can make changes such as raising prices or adjusting ingredients to hit a new food cost percentage. You can also see which menu items have a low food cost, and then promote or feature these items to encourage sales and maximize your profit margin.
Control inventory in your restaurants to reduce waste
As you start to examine your food cost, one of the most effective ways to immediately streamline your numbers is to examine your restaurant inventory management. Remember, your food cost percentage takes into account all of the inventory you use to produce menu items. If you have high levels of waste, your food cost percentage will be higher.
So to optimize your food cost, examine how you can reduce your waste throughout your inventory control system.
If you are evaluating your actual vs. theoretical food costs, start by examining where the variances are the widest in each of your locations. These gaps represent the low-hanging fruit that you can help fix. Start with the locations that have the widest variances, then drill into the food types that have high variances. Tools like waste logs can help your store-level managers keep track of what is happening day to day in the kitchens. By working with your managers and kitchen staff, you can begin to spot mistakes, spillage, and waste to address the underlying cause of the variances.
Also make sure that you are implementing a regular inventory process to prevent opportunities for food waste in the first place. Train your entire team on inventory control but designate a few key people who are in charge of making sure it gets done regularly. Make it easy for your team by choosing an inventory management platform with easy mobile or tablet access for tracking. And complete inventory regularly, around the same time and same day of each time period, to ensure consistent data.
Regular inventory management can help you spot common mistakes like ordering too much inventory, portioning incorrectly, or not rotating ingredients properly, ultimately cutting down on your food waste and inventory costs.
Forecast your inventory for uncertainty
Forecasting tools use historical sales to predict what you will need to purchase and prepare for the next comparable sales period. If you have an all-in-one, integrated inventory management solution, you can take advantage of your historical sales data from your restaurant accounting software combined with your inventory levels to project what inventory you’ll need for a given time period.
Over-ordering and over-prepping product can result in food waste that drives up food costs. However, if you are able to use smart forecasting tools, you can plan for what you expect, not just what you think will happen. You know that Mondays and Saturdays will likely have different sales levels, and you can account for this fluctuation.
When looking at your forecasting for the new year, try to use whatever historical sales data you can to create a baselin and better project needed inventory levels. At the same time, consider implementing practices that prepare your inventory for flexibility in the face of uncertainty. Your delivery, takeout, and curbside business may require a different kind of inventory.
You can try to run a streamlined inventory by strategically limiting menu items. Work with your vendors to see if you can order different levels of products. And to keep your menu flexible for particularly perishable items, you can also promote specials that can use up surplus ingredients.
As you plan for your next year of restaurant operations, you’re probably looking at all different areas of your business, from labor to equipment. However, because your food cost is such a large portion of your budget, spending some dedicated time examining your food cost percentage can pay dividends to your restaurant business. With these tips in hand, you’re better prepared to optimize and streamline your food costs this year and beyond.
If you’d like to equip your store-level managers with inventory management tools, recipe costing, and sales forecasting to help control food costs in your restaurants, consider an all-in-one restaurant management system, now with the new Smart Ops Release. Restaurant365 incorporates restaurant accounting software, restaurant operations software, inventory management software, payroll + HR software, and scheduling software into a cloud-based platform that’s fully integrated with your POS system, as well as to your food and beverage vendors, and bank.
“We are seeing increased usage in these lesser known varieties such as Cara Cara and Blood Oranges,” explained Lopez, who has also noticed an increased demand for oranges from the schools food service sectors and fresh cut processors.
As for orange pricing, it remains stable. “Orange prices are consistent and in line with past years,” said Lopez.
California weather is also cooperating, as it hasn’t been too wet or too cold, at least for now, according to Lopez.
“The only supply issues that could come about would be a strong freeze or intense rain for an extended period of time.”
For more information:
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+1 559 442 1932
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