Food costs of a restaurant tend to be around 40% of revenues. It is one of the largest expenses a restaurant incurs, and it is therefore critically important that a restaurant effectively manages its inventory.
Restaurant owners must balance two competing forces when managing inventory:
- keeping enough inventory on hand to meet customer demands and
- keeping inventory levels low enough so less cash is tied up in inventories
Lower inventory levels have the following advantages:
- they require less effort to monitor since fewer items need to be counted and tracked
- they can help reduce theft—it is easier to notice one bottle of scotch missing when you had three in inventory rather than twenty in inventory
- they reduce spoilage
- they reduce waste—high inventory levels may cause employees to over-portion
Setting a Par Level of Inventory
The par level of inventory is the amount of inventory needed to meet customer demand and provide a cushion in case of an unexpected spike in demand or a delay in delivery. This cushion is referred to as safety stock.
Setting the par level requires:
- forecasting customer demand
- estimating delivery schedules
- considering perishability
- periodically reviewing current par levels to determine their adequacy
Inventories must be divided into high-turnover inventory and low-turnover inventory. High-turnover inventory such as meat, seafood, and produce, must be ordered frequently to maintain freshness. Low-turnover inventory includes spices and dry goods. Low-turnover inventory tends to be less expensive and isn’t as critical as high-turnover inventory.
As a formula:
Par Level = (Weekly Inventory Use + Safety Stock) DIVIDED BY Deliveries per Week
Example: A restaurant uses chicken in five menu items. It uses 10 cases of chicken per week and wants to maintain a safety stock of 20% (2 extra cases). The supplier delivers on Monday, Wednesday, and Friday. Based on these figures, the par level of chicken is 4 cases—
Weekly Inventory Use (10 cases) + Safety Stock (2 cases) DIVIDED BY Deliveries per Week (3)
As a general rule, the higher the turnover, the higher the safety stock requirement. Generally, the safety stock should be around 20% to 30% of the weekly inventory use.
You must also be guided by your experience—the formula is an estimate of the par level inventory.
When Inventory Levels Can Exceed Par
There are a few situations when a restaurant should maintain inventory in excess of the par level. These situations include:
- Minimum Order Quantity—when the order to replenish inventory to par level is less than the supplier’s minimum order quantity the restaurant must order inventory in excess of par
- Special Price Opportunities—if the restaurant owner can get a good discount on a higher quantity order or if prices will rise in the near future it may be beneficial to purchase extra inventory
- Delivery Interruptions—holiday, weekends, bad weather may cause delivery delays
- Special Occasions—Mother’s Day, Valentine’s Day, and other special events will require extra inventory
The regular counting of inventory sends a clear message to employees that inventories are being closely monitored. This can help reduce theft as well as reduce over-portioning. It will also help the restaurant owner properly rotate inventory so older inventories are used first.
Generally, it is best to count food and supplies monthly and to count liquor weekly.
Counting inventory can be a bit tedious, but the following steps may make it less painful:
- Organize the storage area
- A neat and orderly storage area adds greatly to the efficiency of an inventory count. Items should be maintained in the same location and similar items should be located near each other. When a carton has been opened, the contents should be removed and stacked. This makes it easier to count the open items.
- Use preprinted inventory count sheets
- Items should be listed on the sheets in the same general order that they are located in the storage room. Preprinted count sheets may point out inventory that should be in the storage room, but for some reason is out of stock. It may also point out inventory in the storage room that was never officially ordered.
- Use two people to perform the count
- Focus on key items on monthly counts, and count all inventory items annually
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