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EBOOK / 8 Ways to Improve Inventory and Manage Food Costs.

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8 Ways to Improve Inventory and Manage Food Costs

Contents

3 Introduction: Why Are My Food Costs so High

4 How to Improve Inventory Management

5 The Importance of Scales

7 How to Accept Inventory Orders

8 Why Use Custom Inventory Count Sheets

9 How to Reduce the Inventory you Keep on Hand

11 How to Calculate Food Costs

13 Recap: Improving Inventory Speed and Accuracy

14 Conclusion




Introduction: Why Are My Food Costs so High? Restaurant owners, managers and chefs all stress over food costs. They are never low enough. With good reason, in the tight-margined world of food service, a few percentage points can be the difference between a very profitable restaurant and one that isn’t around in a year.

In this ebook, we will cover some of the most common reasons that food costs might be too high at a restaurant and solutions to bring them under control. Most often, the issue relates back to improper inventory management. It could be that inventory isn’t recorded properly, the scales used to weigh it are inaccurate, or inventory results aren’t being properly utilized to control food costs more closely.

High food costs can also be caused by waste; which comes in many forms: food is spoiling because too much is being ordered, staff are taking items home, or there is inconsistency in the size of portions being served.

We will also discuss how to reduce food costs by ensuring they are calculated correctly; making the ordering, accepting and tracking inventory faster and more accurate; uncovering theft and waste; and optimizing the amount of inventory you have to carry.




How to Improve Inventory Management Taking inventory is an unpopular task at most restaurants, but one that is critical to controlling food costs and improving profitability. Yet, when we speak with restaurant owners, many admit that they either do a poor job, or do it infrequently. In most cases, the underlying issue is a lack of structure around the inventory process.

When we dig in further, we find a lot of their food cost challenges relate back to problems with inventory tracking. The most common issue is that inventory (starting, ending or both) was taken inaccurately.

Here are nine quick tips to help improve inventory accuracy at your restaurant, some of which we will dig into further, later in the ebook.

Best Practices for Taking Inventory 1. Take inventory frequently. For the most expensive and fast-to-spoil items it

should be done daily, for others weekly. At a minimum it needs to be completed before placing orders.

2. Be Consistent. Take inventory after the restaurant has closed, or before it opens. You cannot take accurate inventory while goods are being sold. Whatever time you pick, stick with it. If you always take inventory on Tuesdays, but sometimes you do it at night and sometimes in the morning, there will be fluctuations in week to week results.

3. Take inventory before a new shipment arrives and then add the new stock to your counts. Do not attempt to take inventory while deliveries are being made. Items will end up being double-counted.

4. Inventory Count Sheets. Have one for daily, one for weekly and one for monthly counts (or whatever periods you use) and standardize the items included and the unit (pounds, number of items, boxes etc) each item is tracked in. Changes in what items are tracked can cause large fluctuations in recorded inventory. See the Chapter “Why Use Custom Inventory Count Sheets” for more detail on this.




5. When taking inventory, make part of the practice ensuring that items are being used on a First In, First Out (FIFO) basis. Older goods should be rotated to the front of shelves so they are used first. Additionally, try to keep the amount of items you have on hand as low as possible to reduce theft and spoilage.

6. Always use two people to take inventory. They should count items separately and then compare results for anomalies. Pairing reduces errors and the temptation to manipulate results or steal items.

7. Make it someone’s job to take inventory. Having the same people taking inventory means they will not only get faster at it, but they will tend to be more consistent.

8. If you use scales to weigh inventory and measure portions, calibrate them regularly. See the Chapter “The Importance of Scales” for tips on this.

9. Standardize what your unit cost is. The price of many items (like ground beef) changes week to week. Use the latest price paid as the standard. It is the easiest to find and remember.

The most critical piece of the inventory puzzle is consistency. Using the same staff, taking inventory at the same time and counting the same items are some of the easiest ways to improve your accuracy.

The Importance of ScalesKeeping food costs contained is a science and one that requires careful measurement. One key to inventory management is ensuring that your scales are accurate. Most restaurants use a scale to check inventory, by weighing and recording how much of certain items are on hand, for example open bottles of liquor, open packages of dry goods or even portions of meat. They also use a scale to portion-out food. For example, if your location makes hamburgers from scratch, you might weigh out 1/4 lb ground beef portions. Other products that come in loose form, like shaved steak or diced chicken, need to be portioned out before they are served as well.

Certain types of restaurants have more complex needs. In the case of frozen yogurt franchises, like AngelBerry or Joybee, scales determine how much the customer is

$




charged. As each customer prepares to check out, they put their dish of yogurt and toppings on a scale and are billed accordingly. For these businesses, scales are not only tracking inventory, they are also determining the price and revenue.

How do you check scale accuracy?

Step 1: Purchase a set of calibration weights. Do not try to use something you “know” weighs a certain amount. For example, do not try to judge the accuracy of your scales by weighing what is purportedly one ounce of chocolate.

Step 2: Now that you have your standardized weight, turn on your scale and give it some time to warm up. Place the standardized weight in the center of the scale. If it matches the exact amount, move onto Step 3. If it does not, skip to Step 4.

Step 3: Without moving the weight you have placed in the center, use the “Zero” function on your scale. Your reading should now be zero. Add a second weight as close to the center as possible. If it is exact – move to Step 5. If not, continue to Step 4. The zero function is important because many items you weigh regularly will be in a container.

Step 4: Calibrate your scale. For this step, you should consult the instructions that came with the scale. Almost every scale permits manual calibration – manufacturers know that scales drift and have a way to compensate for this.

Step 5: Train your staff to repeat this process every week before taking inventory. Scales often become inaccurate over time. What was accurate today may not be in a few weeks. By ensuring staff take 5 minutes each week to do this, you will have more confidence that your inventory is accurate.

Now that your scale is working properly - to keep it that way. Instruct staff not to pick the scale up by its plate and to keep it in a place where it will not be dropped.

When was the last time you verified the accuracy of your scales? We recently spoke with a Subway™ franchise owner who, after noticing some discrepancies in inventory, checked and found that a scale at one of their locations was off by 20%. Calibrating the scale immediately reduced their food cost by 1.5%.




How to Accept Inventory Orders Accepting inventory deliveries is a daily occurrence at many restaurants. There may be large orders once or twice a week, plus milk, bread, soda and seafood showing up throughout each day. Most restaurants have an informal system for accepting deliveries (Steve’s in the back, I’ll get him – he signs for these). Standardizing that process can not only save time, but also reduce errors and lead to lower food costs. In the end, it is all about increasing accountability for the thousands of dollars of items that are coming through your back door each week.

Tips for Accepting Inventory Orders

1. Label shelves so that items are put consistently in the same place and staff can easily find them. This makes unpacking an order faster, but also reduces the number of items that are mistakenly ordered when staff believe they’ve run out. In the long run, it saves time for everyone - staff are able to find items more quickly when they are in a hurry.

2. Clean shelves and organize stock areas before orders arrive. Make this part of someone’s weekly (even daily) routine. This will increase the space available to store your new stock and also makes putting new deliveries behind or beneath older inventory easier.

3. Use digital ordering and manifests to accept orders more quickly. Doing this ensures your staff are aware of what has been short-shipped and time isn’t wasted looking for items that were not on the truck. Using digital manifests can also automatically add the items you “check-off” to your inventory counts, saving time. More on this in the section “6 Benefits of Custom Count Sheets”.

Be Consistent When Accepting Deliveries

Food cost is one of the largest variable, controllable costs a restaurant has. A small amount of effort each week can have a big impact on the bottom line. Like most of the easy ways to reduce food costs we’ve discussed, the key to success is having a process and following consistently. Much like every menu item should look the same when it crosses the line, every delivery should be handled the same way when it is received.




Why Use Custom Inventory Count SheetsTaking inventory can be a painstaking and sometimes thankless job. Standing in (literally) freezing cold walk-ins, dimly lit creepy basements, reaching into bins to determine what vegetable some mystery goop used to be. To make it worse, employees often have to use old Count Sheets that have been photocopied so many times they are almost illegible and no longer reflect what is actually kept in stock.

If your restaurant has an inventory management program, that probably doesn’t have to be the case. Modern solutions like LiveInventory give restaurants the ability to create custom sheets for taking inventory. Doing so is a quick, one time exercise for each sheet.

6 Benefits of Custom Count Sheets:

1. The ability to create separate sheets for particular time periods or locations. For example, have different count sheets for Daily, Weekly, Monthly counts, and counts by location (walk in, fridge, basement etc)

2. The ability to create separate sheets specifically for recording waste

3. Touch screen friendly software means inventory can be taken on a tablet, instead of using printed pages. Tablets are relatively cheap and pay for themselves quickly in terms of saved labor and more accurate counts. Note: They can also be used for employee communications and motivation with a product like LiveScore.

4. Electronic Data Interchange (EDI) integration with your food suppliers, means Count Sheets can be updated automatically, so they are always up to date for staff.

5. Flexible units of measure allow staff to track counts in units that are reflective of how the product is packaged. For example, they might count hamburger by the pound and ketchup by the can and flat.

6. For Digital Count Sheets, access permissions mean management can limit any updates that staff make after inventory counts have been submitted. This can be important in helping track theft.


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How to Reduce the Inventory you Keep on HandManaging inventory (and therefore food costs) means balancing the security of knowing you have enough quality ingredients on hand, with the knowledge that reducing inventory and therefore, Cost Of Goods Sold (COGS) is important.

One of simplest ways to reduce food cost, is to improve how food is ordered at your restaurant. Placing food orders is tough and the task is often left in the hands of busy employees who don’t always understand that while it is great to have enough items on hand, when too much is ordered it spoils. Ordering items in bulk, to save money, is great, but should be weighed against being able to store it and the carrying costs.

Generally, a restaurant owner wants to have the minimum amount of inventory on hand that will allow them to fulfill all patrons’ orders, without running out of items. Keeping minimal inventory means less spoilage, lower carrying costs, less inventory to track and less space required to store the food. In today’s global food marketplace, this has become easier, because owners tend not to have to “bank” goods. If you are ordering lemons, you don’t need to stock three weeks worth because you are concerned they won’t be available again. The cost and quality may vary, but most foods are available year round.

The biggest challenge in reducing food cost through inventory management is being able to predict how busy a restaurant will be over the next seven days or order period. Every restaurant has a steady flow of traffic it can count on, but large daily variances can be caused by things like weather and major events. The daily pressures of a busy restaurant can mean that staff are often unable to give the thought to predicting next week’s traffic, and calculating what is needed to provide for it, the time it deserves. Research suggests that people will most often over, rather than under, order to prevent running out of something. While this may not make or break a restaurant in the span of a week, it adds up quickly over time, as inventory ties up cash flow and begins to expire – you are throwing away money.

To help solve this problem, consider a predictive ordering solution. Almost any Point of Sale (POS) can provide a trailing sales report, but it isn’t useful without being connected to a system that calculates the ingredients used for each item sold. A solution like LiveInventory analyzes each transaction, breaks down the ingredients, then removes them from a digital inventory record as




they are consumed. Later, on order day, the inventory system analyzes the previous month(s) consumption of goods, plus what is remaining on hand and automatically populates an order. Staff review the order, add any untracked consumables (paper towel or baking soda for example) and submit it electronically with the push of a button.

Five benefits of using a predictive ordering system

1. It decreases the natural inclination to order more items than necessary, to prevent shortages. Reducing the order size lowers cash tied up in inventory.

2. Orders are based on history, rather than memory, which has a tendency to overemphasis recent and negative events.

3. Less frequently ordered items aren’t forgotten, reducing the need to pay more at a grocery store when ingredients run out part way through the week.

4. The time taken to place orders is reduced, freeing up management to focus on other food cost cutting measures like decreasing spoilage and increasing efficiency.

5. If the system has EDI capabilities, orders can be transmitted digitally, reducing errors and saving time.

What to look for in a predictive ordering inventory system• Full integration with your POS, with transaction level analysis. If this doesn’t

exist, no system can efficiently predict what needs to be ordered.

• Ability to adjust the period being referenced for historical data – allowing you to omit times that were anomalies (for example Christmas or Spring Break).

• EDI integration with food service suppliers like Gordon Food Service (GFS), reducing ordering time and increasing accuracy.

• Measurement in “Units Sold”, not dollars. When predicting what inventory to order, you need to know that 150 hamburger patties were sold last week, not $500 worth of double cheeseburgers.

Remember, overstocking is an unnecessary, but very real cost. No one wants to run out of food, but every item sitting on a store room shelf is idle money. Money that expires and needs to be thrown out. Alongside keeping accurate inventory, using Predictive Ordering technology is one of the easiest ways to reduce this practice and other common causes of increasing food costs.




How to Calculate Food CostsUp to this point we’ve discussed many ways to reduce food costs through better inventory management. But what if you don’t know how to accurately calculate food cost?

One reason food costs increase is because the cost of what you are selling is out of line with what you are charging. Most often, this is because prices on the menu have not been updated to reflect increasing food costs. For example, during the winter, the price of tomatoes or lettuce may increase substantially, but that is not taken into account in the prices customers are charged for a BLT. If you were able to accurately track and forecast your food cost, you would be able to use a blended method of determining prices; that means making more margin on each BLT in the summer (when the most are sold) than in the winter (when people opt for heartier fare).

How to Calculate Actual Food Cost

When you ask (or are asked) what your food costs are, Actual Food Cost is probably what is being referred to. Actual Food Cost is a straight-forward calculation, but it relies on taking careful and regular, reliable inventory counts. The formula for Actual Food Cost is:

If you use an inventory platform like LiveInventory to place your food orders and track what you have on hand, this is calculated automatically in a exportable report.

Beginning Inventory +

New Inventory Purchased

Ending Inventory +

Recorded SpoilageActual Cost of Goods Sold = MINUS }{}{

Actual Cost of Goods Sold / Food Sales 100Actual Food Cost (as %) = MULTIPLY

BY }{}{

2 87

4

5

0

(all units in dollars)




How to Calculate Theoretical Food Cost

Theoretical Food Cost is what, in an ideal world, your food cost should be. To calculate it, you need a very accurate tally of what and how much of each ingredient goes into a menu item. For example, a bacon cheeseburger might include four ounces of ground beef, one bun, three strips of bacon, two slices of cheese, one ounce each of ketchup, relish, mustard, and so on. You should also include the “paper costs” like one napkin, one wrapper and one bag. Additionally, you need to export information on how many of each item you have sold and total dollars in sales made.

Because each restaurant has so many items sold and so many ingredients for each item, it’s a very difficult calculation to do manually. If your Sales data is synced with your Inventory system, this is likely a report that can be run automatically. Ideally, it is run every time you calculate your Actual Food Cost, so a comparison can be made and any major discrepancies are highlighted and can be investigated.

Once you’ve calculated your Actual and Theoretical Food Cost, take time to analyze the results. If they differ widely, it may be a sign that food is being wasted. This may be the result of inefficient portioning, spoilage, employee theft or error. Now you know the variance is between Actual and Theoretical and the items most affected, you can use that knowledge to pinpoint the areas of concern and work on solving them.

Remember, Theoretical and Actual Food Costs will never match, what you are looking for are trends where the divergence is increasing or there are sudden changes.

(Item A Food Cost x Units of A sold) + (Item B Food Cost x Units of B sold) +

(and so on)

Theoretical Cost of Goods Sold = }{

Theoretical Cost of Goods Sold / Food Sales

Theoretical Food Cost (as %) = }{

(all units in dollars)




Recap: Improving Inventory Speed and AccuracyAs a perishable asset, it’s good business to stay on top of what you have in inventory. A good operator will streamline the process and minimize the amount of cash sitting on shelves. However, to do it effectively, they must have access to accurate and relevant data. So how is this done?

Predictable (Make it someone’s job) – even better, make it two people’s responsibility. This has lots of benefits, not the least of which include accountability, and efficiency. Having two people responsible for inventory means they can check each other’s work, which improves accuracy and greatly reduces the likelihood of theft. Adding predictability also reduces the need to “order extra”, which increases spoilage, drives up food costs, and unnecessarily tightens cash flow – if they know they will be ordering again next week, employees are less likely to over order. Also, repetition adds efficiency to the process.

Plan – Counting inventory should be part of every day, every week and every month. We recommend an end of day count for the five most expensive inventory items. For example: cheese, chicken, and/or beef. For improved accuracy and reduced theft, we suggest a weekly count for the most frequently used items and a monthly count and reconciliation of all inventory items. For consistency, inventory should be done on the same day, at roughly the same time, each week. It should never happen during a delivery.

Prepare – Clean and organize the storage areas. The team responsible for inventory should also be responsible for ensuring the area is clean before accepting a delivery. Train them to throw out expired/spoiled items, stack boxes, with the oldest inventory on the top (to be used first). Have them consolidate broken packages and combine them in easy to access areas. Well-organized and clean storage areas will improve the accuracy of your inventory counts, reduce order costs and improve the efficiency of your kitchen.




Process – Make inventory counting and ordering a regimented procedure at your restaurant. There are many ways to do this:

• Introduce count sheets. Prior to starting the counts, ensure all inventory is documented either on a printed sheet or electronically, including the pack and/or portion size. Where applicable, include the price per unit. An organized list will improve the accuracy of the counts and make it easier to calculate food cost.

• Consistent sizing. To improve the accuracy of your food cost, determine how your items will be counted and the cost applied. For example: A box of chicken with 24 breasts is $72. Are you recording per box pricing ($72) or per unit ($3)?

• Record spoilage. As mentioned above, teach staff to check first; but train them to throw-out and properly record inventory that has spoiled. By collecting data on spoilage, it will help accurately track food costs and improve the ordering process.

Progress – A number of technologies have been introduced that track inventory and ensure the process is more efficient and accurate. Some restaurants have started using tablets and spreadsheets to improve the accuracy. However, that is only the beginning of how technology improves the process. More advanced systems, calculate real-time food costs, based on units sold; predict inventory requirements based on sales data; alert operators when food will be spoiling; and allow easy inventory transfer between restaurants.

ConclusionYou need to maintain or lower food cost if your business is to be a success. Doing so isn’t easy, but much of the hard work is the upfront implementation of tools, like Inventory Management software and training staff to use processes that improve the tracking and management of inventory.

In short, you need to track more accurately, reduce how much inventory you keep on hand and find areas it is being wasted. We all know that isn’t easy, but it is possible with the right tools.

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Interested in knowing more about how Livelenz helps Restaurants reduce food costs? Speak with one of our experts today, or check us out online.



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