Whether you operate a takeout delicatessen or a
full-service restaurant, the amount of money you make depends to a sizable
degree on how well you manage your food inventory. Food cost is often a
restaurant's largest single expense, and is second only to hourly labor in the
overall cost of running a restaurant.
It?easy and, unfortunately, common for restaurants to lose money through
poor inventory management. Startup restaurants are particularly vulnerable to
this cash drain, since they often do not have their financial control systems
nailed down. But even the most well-managed, established restaurants have
ongoing challenges in this area.
As a restaurateur, you share the same challenges as any business with a
valuable inventory. Inventory is nothing more than a cost until it is sold. The
larger your inventory, the less money you have available for marketing, for new
equipment, or simply drawing interest in a bank account. Major manufacturers and
retailers work very hard to keep inventory levels low and constantly moving.
Now consider the challenges of dealing with food. First, your inventory is
not like nuts and bolts at the hardware store. Most of it is highly perishable.
Your ingredients have a limited shelf life, much of it less than a week, some as
short as just a day or two. Fail to use a product within this short time frame
and off to the garbage it goes, along with some of your hard-earned profit.
Second, you have a lot of people who handle your food inventory. From the time
your products are ordered, received, stored, prepared and ultimately served to
your customers, even a small restaurant can have more than 20 employees involved
in the food production process.
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The more people involved in taking inventory and converting it to the
delivered product, the more difficult it is to control loss, waste and misuse of
inventory. Waste and theft become hidden problems, gradually nipping away at
your gross margins like termites. And on the subject of theft, even a small
eatery has dozens if not hundreds of raw and partially prepared food products in
storage. You'e stocking lots of desirable products to which many people have
access. Depending on your concept and recipes there?a good chance that you£l
have between 300 and 800 different raw food products in your storage rooms that
are of value to everyone. The more products you have, the more challenging it is
to control their use. The more of anything you have, the less likely one or two
items will be immediately missed.
Combine these factors and a dose of human nature and you end up with
potential losses manifesting in a variety of forms. Spoilage, theft,
overportioning, improper rotation, waste, breakage, kickbacks, cooking errors,
short weights, unrecorded sales and employee nibbling are just a few of the ways
restaurants can lose money working with food. With food cost being such a large
expense, losing or squandering even just a small portion of your total food
dollar can represent a lot of money.
With termite infestation and inventory control, ignorance is only bliss until
the house starts crumbling. The biggest problem facing many restaurant operators
and managers is a lack of know-how regarding sound food cost controls. As a
corollary to this problem, managers and staff often aren?aware of the true
financial effect of poor food cost control on their overall profitability. If
we'e successful, this article will at least help you think about these matters.
If we'e really successful, you might walk away with some ideas to cut food costs
immediately. Regardless of the type of restaurant you operate, or whether you'e
in the startup phase or have been operating for 30 years, adopting the following
practices will in all likelihood result in lower food cost and a more profitable
restaurant.
A Penny Here, A Penny There
In a prior issue of RS&G, author Banger Smith pointed out that the
restaurant business is measured in pennies (See ?a
href="http://www.restaurantowner.com/members/330.cfm">Menu Engineering
Basics: How to Make Your Menu Your Top Salesperson,?. As Banger reminds us,
you gain profitability through increased sales and decreased costs. On either
side of the equation, a penny, nickel or dime here and there add up to big
gains, and conversely big losses, depending on whether they go in your till or
down the drain.
There are very few absolutes in the restaurant business, but I will share one
with you now. (Forgive me as I climb onto my soapbox.) æœeducing inventory levels
means lower food cost.?To which you might say, æure, if I reduce my inventory to
zero, I won?have any food costs, or menu items, customers, or business.?That?
oversimplifying the issue.
Again, remember that inventory is the food you³e purchased and placed in
storage. Whether the value of that food in inventory is $500 or $50,000, until
it is sold to a customer it isn?doing anything for your business, other than
taking up space, tying up money, and in some cases, spoiling. In an ideal world,
you would maintain an inventory level only large enough to allow you to serve
your customers without running out of an item. In an ideal world, you would run
out of an item at the same time as the next delivery of that item pulls up to
the back door. In manufacturing parlance, that is called „ust in time? inventory
management, and not something you should expect to accomplish. But hopefully it
will give you an idea of the direction you would like to travel.
Every time I³e seen operators reduce their inventory levels, thereby
increasing inventory turnover, their food cost goes down. Obviously there?a
limit to how far you can reduce food inventory, but just consider for a moment
the psychology of purchasing in a typical restaurant. When ordering, most
restaurant managers?primary objective is to buy enough food so they don?‘un out.?I recall my days as a manager. The last thing I wanted to be doing at 6:30
on a busy night, or anytime for that matter, was having to scramble for a key
product I didn?have. So when ordering, IŽ figure out the quantity of any given
product I actually needed and then added a ’afety factor?just in case.
At some point those ’afety factors?become excessive, and it is very easy to
end up with a large amount of excess inventory. Having more food on your shelves
than you really need is one of the most expensive things you can do in this
business. It?also a very common condition, one with which even sophisticated,
systems-driven chain restaurants struggle.
Problems with Carrying Too Much Food
Carrying excess food products ties up your valuable cash and leads to
excessive food waste and spoilage. It results in overportioning and misuse of
your valuable food products because employees become careless when there?always
an overabundant supply of food. Employees don?have to be all that concerned
about using products sparingly because there?little risk of ‘unning out?when
there?always more in the storage room or walk-in.
If you don?believe this, I£l try to prove it to you. This gets a little
personal, but all of us purchase and use toothpaste. Think about what happens
when you open up a brand-new tube of toothpaste. How big of a portion do you put
on your toothbrush when your tube is full and brand-new? Do you use any more
toothpaste than you did a few days ago when the last tube of toothpaste was
getting a little low? If you'e like most people, you do. This is especially true
when the old tube was the only toothpaste left in the house. And we do the same
thing with shampoo, shaving cream and about every other product we use.
If you still harbor doubt about the effectiveness of reducing inventory,
consider the following. If you³e ever served fries, you³e probably made the
horrifying discovery that there is only one box left in the freezer and four
hours left in the shift. So the manager tells everyone to be real careful with
fries because there is only a box left, and guess what happens? Fries are
immediately perceived as a valuable commodity. Somehow the staff manages to
scrape by with the last box. Everyone?handling them with kid gloves because
they'e scarce. They'e valuable. When there are 20 boxes in the walk-in who cares
about fries? Nobody. That?when you see them flying around the kitchen and 2
inches deep all over the floor.
Why? It?basically human nature to attach less value to anything of which we
have an abundant, seemingly endless supply.
That same psychology enters the kitchen with your employees who prep and
handle your food. They are often the lowest-paid people in the restaurant, and
they don?pay for any of those products they use. So if the storage rooms are
always jampacked with food, and those employees never have to be concerned with
running low on anything, do you think they will tend to use more food? Do you
think they£l be less careful with how they handle those products? You know the
answers.
Also, when products are always in abundant supply, theft tends to be more of
a problem. Imagine an employee in your walk-in looking down at 15 boxes of pork
tenderloin, knowing that there?enough pork tenderloin sitting there for the
next two weeks. Do you think it might make any difference, in the employee?
decision to steal or not to steal, if there were only, say, three boxes, just
enough to make it until the next delivery? Fewer products on the shelf mean a
greater chance that they£l be missed.
Determine Your Inventory Level in
Two Steps
An easy way to get an instant gauge on whether you'e carrying an appropriate
amount of inventory is to calculate your ‰umber of days of inventory on hand.?
It tells you how many days your existing inventory will last (assuming you'e
carrying the right mix of products) based on how much food you'e using in an
average day, which translates to your average daily food cost. Calculating your
‰umber of days of inventory?on hand is a two-step process:
STEP 1:
Calculate Average Daily Food
Cost:
Average Daily Food Cost = Food Cost /
Number of Days in Period
STEP 2:
Calculate Days Sales In
Inventory:
Days Sales in Inventory = Ending Food
Inventory / Average Daily Food Cost
Here?an example: You need the following information to calculate the
number of Days Sales in Inventory. You should be able to get these numbers right
off your financial statements:
Number of days in the period = 30
Food cost for the period (from the profit
and loss statement) = $30,000
Ending food inventory (on the balance
sheet) = $10,000
STEP 1:
Calculate Average Daily Food
Cost:
$30,000 / 30 days = $1,000
STEP 2:
Calculate Days Sales In
Inventory:
$10,000 / $1,000 = 10 days?worth of food on
hand
This tells you that at the end of last month there was about 10 days?worth of
food on hand. For most restaurants that?too much excess inventory. In full-menu
restaurants, most operators optimize food inventory at about six to seven days
of food on hand. Ideally, they have less than a week of produce and fresh
products and more than a week in the freezer and dry storage areas; however, on
the average of all products it?six to seven days. This means the entire
inventory turns over every week or so. There may be extenuating factors that
might drive inventory requirements higher such as infrequent deliveries, a high
number of raw ingredients (making everything from scratch) or having to
stockpile one or more products because of availability concerns. But generally
six to seven days is a pretty good rule of thumb. For operators in limited-menu,
quick-service restaurants, three to five days of food on hand is usually
considered adequate but not excessive.
In the above example, having 10 days?worth of inventory would probably
indicate that there?too much food on the shelves. If operationally feasible,
lowering inventory levels to six or seven days of sales would cause food cost to
drop immediately, everything else being equal.
What a Difference a Few Days Can Make
I³e seen many cases when reducing inventory levels by two or three days
results in food cost reductions of 2-3 percentage points and sometimes even
more. Why? Because there?less spoilage, less waste, better portioning, less
theft, essentially much more overall care in handling of your valuable inventory
when there is less of it around.
Just to clarify, I?not advocating reducing inventory levels to the point
that you risk constantly running out of products. What we'e talking about is
reducing or eliminating the amount of æºxcess?inventory that 98 percent to 100
percent of the time you don?need and won?use before the next delivery shows
up.
Lowering your food inventory and maintaining a low yet adequate amount is a
genuine double win, too. Your food cost will be lower and (the best reason of
all) your customers will get better food. When inventory levels are reduced,
inventory turns over quicker, food spends less time on the shelf and your guests
get higher-quality, fresher products.
But If You Really Want to Do it
Well, Do It Once a Week
If you want to run with the big dogs, you need to step up the pace. Most
independent restaurants calculate their food cost once a month. Virtually all
the major chain restaurants calculate their food cost each week. According to
industry averages, chain restaurants (before corporate expenses) are two to
three times as profitable as independent restaurants. While weekly food costing
isn?the entire the reason, it?part of it.
Here?the problem with knowing your food cost only once a month. If your
monthly P&L indicates that your food cost is 4 percentage points higher than
normal, there is not much you can do about it; it?probably been a few weeks, at
least, since the month ended so you'e already halfway through the next month.
The most profitable restaurants in our industry know what their food cost is
every week ?52 times a year ?so if there?a problem, they know about it quickly
and can respond accordingly.
Here?an easy way to arrive at your food cost every week that won?take much
time. Refer to the Sample Invoice Log, above. It?just a form to record and keep
track of daily purchases. Many restaurants, regardless of whether they calculate
their weekly food cost, keep a record of their purchases each day. So, if you'e
already doing this, it will be easy to separate the food purchases on each
invoice.
