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Reduce costs, boost profit.

Controlling food cost starts in the inventory

The third chapter of our controlling and reducing food cost series. After calculating food costs and sale prices, it's time to discover how you can monitor and lower food costs with inventory management.

Wednesday, October 26, 2022

An inventory management system is a central hub for all food cost management procedures. Managing food costs is a challenge and only worsens with regular price fluctuations. According to toast, "the CPI's food index is up 9.4 per cent from April 2021 to April 2022 — the largest year-over-year increase since the April 1980 - 81." Inventory management provides automation, organisation and accountability to relieve the challenge and moderate the changes.

It won't only tell you your current stock levels, it'll inform you on how much stock to order and when to order it. Balancing the fine line between insufficient stock to meet demand and having a surplus. Not enough inventory turns customers and revenue away, and too much takes up storage space, increasing refrigeration costs and the risk of creating spoilage waste.

Even with software to help record data and gain valuable insights, inventory control procedures must be regular and consistent. Keeping on top of inventory changes and analysing forecasts can add up to ten per cent to a business's gross profit.

Even minor errors in controlling stock can result in inefficient stock quantities and increased waste that has knock-on effects on forecasting. These directly impact the operating food costs and a business's bottom line. 


What is food inventory management?

Inventory management is understanding what items and how many items your business currently holds in stock and their value. Inventory control then uses this information to optimise how much stock to buy. Considering the demand and assessing how long you keep stock, all whilst tracking the percentage that turns into waste.

All this effort aims to reduce food costs and maximise profitability.

What should you know?

  • What inventory items you've purchased, in what quantities and at what price
  • Which inventory items are used each day, calculating the amounts and value
  • The number of inventory items remaining at the end of each day


Inventory management cost benefits

Inventory management software will ultimately decrease food waste and improve purchasing performance. An inventory system's information will indicate the business's overall health and allow data-informed decisions when controlling costs. 

Below are the main benefits kitchens experience when using an inventory management system.

Reduced food waste 

Almost half a kilo is wasted for every meal eaten at a restaurant in the UK. According to WRAP, the restaurant's waste value totals around £682m in the UK. Apart from the financial cost, the waste has a drastic environmental impact. 

Food waste is a broad term. Unfortunately, it can occur in various ways, and here are some of the most common causes.

Overproduction

Not understanding menu demand and its fluctuations can easily result in overproduction. A common waste cause, as some believe that running out of food and turning away customers is even worse. Often referred to as eighty-six in the industry. Inventory management will help refine batching levels by identifying which items need to sell more quickly, repeatedly underperform or fluctuate too often to allow for consistency. 

Over-ordering 

Whilst over-ordering can occur for several reasons, the primary cause is a lack of or improperly managed inventory systems. Forecasting volumes and understanding shelf life are crucial to preventing waste and increasing food costs.

Spoilage

Easily done when every ingredient has a different use-by-date. Whilst inventory management systems will help prevent this with efficient purchasing quantities. You can put measures in place to help prevent ingredients from becoming unusable. 

Firstly, always inspect items on arrival, and only accept or pay for ingredients already turning bad.

Secondly, use the first-in, first-out (FIFO) storage method. Creating a system of storage that means the ingredients used are always the oldest as they are at the front.

Staff mistakes 

Mistakes can happen for any number of reasons.

  • Waiting staff not recording customer requests to add or remove ingredients
  • Kitchen staff misreading written orders

Whatever the reason, they create waste, and that affects profit margins. Whilst proper training and continual improvement from management will help reduce these errors, using software and digitising the ordering method is the best solution to prevent mistakes.

Digital menus will always display correct allergen information for the customer to read or filter. Taking orders digitally means simply unticking ingredients at the order stage so the chef can easily see what to avoid when preparing the dish. The information will also be easy-to-read and in an unmistakable format. 

Portion control

Eliminating left-over food is nearly impossible, as everyone's appetite is different, but you can reduce it dramatically. The leading indicator is how much, on average, a plate returns with food still on the plate and what element of the dish regularly goes to waste. 

For example, you might cut costs by identifying that the fries or garnish elements consistently return and end up in the bin.

It's in your interest to provide a portion that customers believe is value for money but not so large they don't look at the dessert menu.

Unidentified future waste

One of the most significant inventory features is being notified when products or ingredients are close to going out of date. The chef can then plan additional menu items or special items to prevent waste and use pricing strategies to help increase sales volumes and avoid spoilage costs.

Painless Purchasing

Purchasing is the first step to improving inventory management performance. If you order too much or too little, no amount of standard operating procedures will help boost profit margins. 

Inventory systems will provide data to inform decisions, and intuitive software will make suggestions or automate ordering against parameters you set, such as minimum stock quantities. 

Automate purchasing activities 

By integrating with your supplier's database and setting up minimum stock quantities, inventory management systems can automatically place orders to ensure sufficient ingredient supply without storing bulk orders or manually monitoring stock and raising purchase orders.

Purchasing suggestions

Food inventory management systems will track and report how long inventory items remain in stock, waste volumes and demand quantities. You can use this information to refine and improve purchasing consistently.


Prevent recording errors

Individual user settings for traceability

Many inventory management tasks can be automated, but there will always be an element of withdrawing and depositing stock. Inventory systems mean you can assign roles and tasks to staff which can be viewed on change history audits and activity logs in the event of a discrepancy. 

Visibility over staff shifts and change history will also help identify and reduce theft, a considerable cost many business owners still endure. According to a study conducted in 2019, more than half of all restaurant servers have stolen something.

Unified system for transparency 

Inventory management systems allow businesses and their staff to use one data source to improve accuracy. Eliminating the confusion often caused by multiple spreadsheets, filed on different dates and in varied locations, often subject to technological and human error.

No unusual data regardless of usage 

As ingredients are uploaded to an inventory, they are assigned a unit of measure and price value. With an integrated recipe database, you can use all or part of an ingredient, and the system will automatically calculate the cost in use.

For example, if you buy flour in 1kg bags for 2.20 and the recipe requires 500 grams, the formula will automatically determine the cost in use is 1.10 and return the remaining 500g to stock.


Inventory control formulas

Inventory turnover ratio (ITR)

An equation to identify how quickly an entire inventory sells within a specific timeframe. It will indicate how efficiently a business turns its assets into sales and profits.

You only need three numbers, and two of these can be found on a company's balance sheet:

  • A timeframe to measure (For example, a week, month or quarter)
  • The average inventory for the period above, calculated by averaging the beginning and ending inventory costs
  • Cost of goods sold (CoGS)

Divide the cost of goods sold by the average inventory cost to get your ITR value and compare it to direct competitors. The higher the number, the longer it has taken to turn over the stock.

Days' sales in inventory (DSI)

An equation to identify how many days your inventory stays in storage before being used. A high number indicates overstocking; generally, the fewer days, the better the performance. 

The formula uses the same values as the ITR calculation, except for a few order changes and multiplying the total by 365 days in a year.


Final Thoughts

Inventory management is crucial to minimising a food cost variance and boosting profits. It is also the most complex and time-consuming activity.

To reduce the time it takes to monitor, manage and analyse an inventory, it's worth investigating a purpose-built inventory management software. You can go a step further and integrate the system with a digital ordering solution or find a POS (point-of-sale) partner to move data between the front and back of house.

As we've discussed throughout this article, inventory management systems are designed to improve purchasing performance, reduce waste and provide insights to help improve overall business performance and boost profit margins. What your business will benefit from the most and help transform how you operate is access to real-time data and instant alerts so your business can become proactive rather than reactive to your stock situation.

Want to learn more about how a purpose-built, highly automated inventory system can help your business become more efficient and improve cost controls? Talk to one of our industry experts and get a live demo!

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