The Definitive Guide To Restaurant Inventory Management

By Stewart Maranello|Dec 12, 2023|2:02 pm GMT

Few things are more important to the success of a restaurant than inventory management. Restaurant owners who rigorously keep track of inventory levels and costs can make better business decisions when it comes to menu planning, ordering, and cost management. However, managing inventory in a restaurant is not an easy task. It requires organisation, attention to detail, and constant monitoring.

In this guide, we will explore the best practices for restaurant inventory management and how they can benefit your business.

What is restaurant inventory management?

Restaurant inventory management is the process of managing and tracking all the food, beverages, supplies, and equipment that are used in a restaurant. It involves monitoring the levels of inventory, ordering new items when necessary, and keeping track of all incoming and outgoing stock.

Restaurant inventory management is an essential part of running a restaurant, as it helps restaurant operators monitor on-hand supplies and food stock and act accordingly to avoid spoilage, shortages, or overstocking.

When a restaurant operator has a firm grasp on inventory management, they can tell you:

• How much of a given product is in stock
• What inventory items they’ve purchased and in what quantities
• How much inventory is left over at the end of the day
• How much inventory needs to be ordered
• When it’s time to reorder specific items

Why is restaurant inventory management so important?

Restaurant inventory tracking is crucial for a number of reasons:

Reduce prime costs

Prime costs are the expenses directly related to the materials and labour used in production. In simple restaurant terms, it’s the cost of food and people. These two expenses can make up 60-70% of a restaurant’s total revenue. Implementing an effective inventory management system can help reduce both these costs.

By having accurate inventory data, you can make informed decisions when it comes to purchasing food and supplies. This can lead to lower cost of goods sold and overall prime costs. Additionally, by having a streamlined inventory process, you can reduce the amount of time your staff spends on manual tasks, freeing them up for other important tasks such as customer service.

Save time

Managing inventory is time-consuming, to say the least. You’re dealing with multiple vendors, complex orders, and fluctuating prices. The right restaurant inventory management system can help you save a significant amount of time. You can centralise your supply chain, optimise procurement, and streamline your inventory lifecycle, all from a single platform.

Reduce food waste

Every year, a whopping 199,000 tonnes of food is wasted by restaurants, with a significant amount wasted before it reaches the customer. And the reality is that restaurant food waste doesn’t happen in a vacuum. Every pound wasted represents additional costs and lost profits for restaurants.

Common causes of food waste include:

• Spoilage
• Over ordering
• Overproduction
• Staff errors
• Ineffective portion control

One of the main reasons for implementing proper food inventory management is to keep track of food stock levels. Properly managing inventory allows restaurant operators to order only what is needed, reducing the chances of spoilage and waste.

If you’re concerned about how much food your restaurant is wasting, consider performing a food waste audit. Doing this will help you identify where and why food is being wasted. From there you can take steps to address the problems.

Increase profits

Inventory is one of the primary costs involved in running a restaurant and directly impacts net profits. With the food costing on average around – 30% of food sales, restaurant operators have a lot to gain by effectively managing their inventory.

Proper restaurant inventory management helps to reduce food waste and ensure that you don’t order too much stock. This, in turn, reduces overall inventory costs and leads to increased profits.

Inventory management also helps you to pinpoint exactly where inventory is being lost or wasted, whether it’s through spoilage, theft, or inaccurate order quantities. By identifying and addressing these issues, you can further increase profits for your restaurant.

Better relationships with vendors

Managing inventory effectively also means maintaining good relationships with your vendors. By having accurate and timely information about your stock levels, you can work closely with your suppliers to ensure that you are ordering the right quantities at the right time. This reduces the likelihood of over-ordering and waste, while also improving trust between you and your vendors.

Maintain positive cash flow

Having too much cash tied up in inventory can result in poor or even negative cash flow. By properly managing your restaurant inventory, you better ensure that you’re only ordering what is needed and avoiding excess stock. This frees up cash to be used for other important aspects of your business, such as marketing or staff training.

Meet customer demand

Having too much inventory is a problem, but so is having too little. If you don’t have enough supplies on hand, you can’t meet customer demand. This, in turn, can create a negative customer experience. Restaurant inventory management enables you to always ensure that you have the right items in stock to create the dishes that your customers want the most.

It also allows you to look closely at your menu to determine if any dishes are not selling well. Once you identify underperforming menu items, you can reduce the number of ingredients ordered for those dishes, freeing up valuable space in your inventory and reducing waste.

Improve productivity

There are numerous tasks involved in inventory management, and staying on top of all these tasks presents a significant challenge for managers. A restaurant inventory management system enables you to implement digital checklists and optimized workflows that reinforce Standard Operating Procedures (SOPs). This, in turn, makes it easier for managers to monitor task efficiency across all operations.

Make better decisions

Inventory management software centralises reporting and creates transparency across multiple locations. This gives managers a bird’s eye view of all sales and inventory data, making it easier to analyse trends and make informed decisions. It also allows for real-time tracking of stock levels, enabling managers to quickly react to changes in demand or unexpected events, such as supplier shortages.

Key restaurant inventory terms

Now let’s look at some key restaurant inventory terms.

Cost of goods sold (COGS)

Cost of Goods Sold (COGS) represents the cost of the ingredients that go into making menu items. This metric gives you insight into how much you are spending on food in your restaurant, including how much food you waste.
To calculate COGS, use the following formula:

Beginning inventory + Purchased inventory – Ending inventory = Cost of goods sold

How can you calculate COGS as a percentage of sales? Take your COGS for a specific time period, divide that by your sales over the same period, and then multiply by 100.

(Cost of goods sold / Total sales) x 100 = COGS sales percentage

Food cost percentage

Food cost percentage tells you how much you’re spending on food as a percentage of sales. All things equal, a lower food cost is better because it means higher profits. To calculate food cost percentage, use the following formula:

Food cost / Food sales = Food cost percentage

So, for example, if you sell £1,000 worth of food and your costs are £2,500, your food cost percentage is 25%.

Par levels

Par levels are the minimum quantity of ingredients that you need to have on hand at all times. These levels are typically determined by how much inventory you use in a given week or month.

For example, if your restaurant uses 50 kilos of flour each week to make bread, your par level for flour might be set at 100 kilos. When you only have 100 kilos of flour left, you know that it’s time for you to order more.

Par levels are important because they help you avoid running out of essential ingredients during peak hours, which can lead to longer wait times for customers and potentially lost sales. They also prevent over-ordering and reduce the risk of food spoilage.

Units of measurement

This represents how a particular amount of inventory is measured, such as in ounces, pounds, kilograms, etc. Consistency is key when it comes to UOM. Make sure all of your inventory is measured in the same unit to avoid confusion and miscalculations.

Unit conversion

There will be times when you need to convert one unit of measurement to another. For example, you may buy an item by the pound but sell it by the ounce. To ensure your recipes are accurate and costs are reasonable, you’ll need to convert from pounds to ounces and calculate your cost per ounce.

Count sheet

A count sheet (or inventory sheet) is a restaurant inventory control tool that’s used to determine how much inventory is on hand. In many instances, the count sheet is simply a spreadsheet with columns for item names, quantities, descriptions, costs, quantities, etc.
While a manual count sheet can be an effective way to manage inventory, there are also automated restaurant inventory management software programs available that can make the process less time-consuming and more accurate.

Shelf to sheet

Shelf-to-sheet is a way of taking inventory that involves counting the supplies you have on shelves and in storage and comparing those numbers to what’s in your restaurant inventory management system. This method helps identify any discrepancies between the physical inventory and what’s recorded in the system, allowing for better accuracy in managing inventory levels.

Sitting inventory

Sitting inventory, also called “on-hand” inventory, represents the amount of inventory currently available in your kitchen and in storage. It can be calculated either in dollar amounts or by the physical amount available. This is an important metric to track, as it can help you identify any inconsistencies or issues with your inventory management.

Depletion

Depletion represents the amount of inventory you’ve used for a given period. This can be calculated by taking the total amount of inventory you’ve sold or used and subtracting it from your sitting inventory. Alternatively, you can get this information from your restaurant inventory management system.

It’s important to track depletion in order to better understand your usage patterns and make more accurate projections for future inventory needs.

Usage

Usage is the amount of inventory that you plan on using over a specific time period. It is calculated by dividing the current amount of sitting inventory by the average depletion rate. For example, if you have 100 kilos of flour and your average depletion rate is 10 kilos per day, you have 10 days of usage of flour. This metric is useful for determining how much inventory you need to order and when in order to avoid running out of essential ingredients.

Actual vs. theoretical inventory

The actual inventory levels represent the accurate stock levels, accounting for various factors such as food waste, theft, spillage, and miscalculated portions. Theoretical inventory is how much inventory you should have remaining based on how much you’ve sold. It’s important to understand both how much inventory you should have in stock versus how much you have in stock so that you can make informed ordering decisions and identify areas of waste, loss, etc.

Variance

Variance is the difference between theoretical and actual inventory. It can be expressed in dollar amounts, percentages, or physical quantities. For example, if you’ve sold £100 worth of products but your inventory is down by £150, your variance is -£50. Variance reports should be reviewed on a regular basis so that any discrepancies can be identified and addressed promptly. This will ensure that your inventory levels remain accurate and prevent any potential losses or errors in ordering.

Yield

Yield is the amount of usable product that is obtained from a raw ingredient or product after processing. By accurately tracking yield, you can identify areas where waste may be occurring and make adjustments to reduce it, ultimately increasing your profit margins. This can also help with menu planning and determining appropriate portion sizes.

Fixed costs

Fixed costs are costs that remain relatively the same and aren’t impacted by sales. These include things like rent, utilities, and insurance.

Understanding your fixed costs is crucial for creating a budget and determining your break-even point. It’s important to factor these costs into your pricing decisions to ensure profitability.

Variable costs

Variable costs are expenses that fluctuate based on sales or production levels. These can include ingredients, labour, and packaging materials.

Monitoring variable costs is important for identifying areas where you can potentially cut costs and increase efficiency. By tracking these costs, you can also determine the most profitable menu items and adjust your menu prices accordingly.

Shrinkage

Shrinkage refers to the loss of inventory due to theft, spoilage, or other causes. It’s important to keep track of shrinkage in order to identify any patterns or trends and take necessary measures to prevent it. Some ways to reduce shrinkage include implementing security measures, properly storing and rotating inventory, and closely monitoring expiration dates.

13 restaurant inventory management best practices

Now let’s look at some best practices for restaurant inventory management.

1. Utilise restaurant inventory software

First and foremost, utilise restaurant inventory management software, like that offered by Fourth. It enables you to centralise your supply chain, optimise procurement, and streamline your inventory lifecycle from a single platform.

Specific benefits of restaurant inventory management software include:

• Easily engage with suppliers through a single platform
• Utilise predictive ordering to reduce waste and manage inventory levels
• Streamline the purchasing process
• Engineer your menu for maximum profitability per dish
• Use demand forecasting to manage dish preparation and track waste
• Perform recipe costing in real-time
• Track inventory from order and delivery through production and accounts payable

Is it possible to manage inventory manually? In theory, it is. But as your operations become increasingly complex, manual inventory management becomes increasingly inefficient and error-prone. Dealing with multiple suppliers manually can be difficult, to say the least. With restaurant inventory software, this is simplified since you have a single platform to deal with.

2. Take inventory on a regular basis

It’s absolutely essential to take inventory on a regular basis. You’re dealing with perishable food items on a daily basis, many of which are expensive. In fact, up to 40% of a restaurant’s revenue can be spent on ingredients.

Performing inventory counts on a regular, consistent basis ensures that you’re not losing food to spoilage. As a rule of thumb, take inventory either after you close or before you open. Consistency is the key. Although it may not always be possible to take inventory in this way, doing so will result in the most accurate inventory numbers. If possible, have the same staff take inventory on a regular basis. This will both speed up the inventory process and make it easier to spot issues before they arise.

3. Keep stock levels relatively low

This is a tricky line to walk and is yet another reason to utilise technology to help you with the inventory management process. Your goal is to keep inventory levels high enough so that you can meet customer demand but low enough so that you don’t waste food. Restaurant inventory management software can help you achieve this balance by providing real-time data on purchasing, sales, and usage. It can also help identify patterns and trends in your purchasing and usage habits, allowing you to adjust your ordering accordingly.

4. Establish clear PAR levels

Having clear PAR levels can help prevent overstocking or understocking of items, which in turn can lead to wasted food and money. PAR numbers are typically based on historical data and can be adjusted as needed. By setting clear PAR levels and regularly reviewing them, you can better manage your inventory levels and reduce waste.

5. Keep track of food waste

We’ve touched on this already but it’s worth repeating. You need to track food waste to ensure that your actual inventory numbers and Cost of Goods Sold calculations are correct. By tracking food waste, you’ll be able to spot trends and areas where you can improve efficiency. Additionally, implementing strategies like portion control can help reduce food waste and save your restaurant money in the long run. This is one area where restaurant inventory management software can also come into play, helping you stay on top of food waste numbers and accurately account for everything that happens in your kitchen. If you do have a surplus of some food items that are in danger of spoiling, consider getting creative and adding them to recipes or to the menu in some other way. This can help reduce food waste and also provide your customers with unique and interesting dishes.

6. Use the first-in-first-out (FIFO) method

First in first out (FIFO) is an inventory model that ensures you use older inventory first before using new inventory. It can be as simple as placing new inventory behind older inventory or using labels with expiration dates.

This method is crucial for perishable items and will help you avoid wasting food by keeping track of expiration dates and using older inventory before it goes bad. When implemented correctly, FIFO can also help your kitchen run more smoothly, as chefs won’t have to search for specific ingredients and won’t accidentally use expired items.

7. Organize your storage space

When it comes to taking inventory, organization is key. Make sure that you clearly date and label all food in containers. This will make it easier to rotate food and use up older inventory before it goes bad. Additionally, keeping a clean and organised storage space can help prevent cross-contamination and ensure that all food is stored at the proper temperature. This may require investing in shelving units or other storage solutions, but the benefits of having an organized storage space far outweigh the costs.

8. Thoroughly train your staff to take inventory

While it’s ideal to have the same employees doing inventory every time, this isn’t always possible. Hence, the need to thoroughly train your staff to take inventory. Managers and shift leaders in particular need to be able to deliver detailed inventory reports and make decisions based on the numbers.

This includes knowing how to properly calculate food cost percentages, how to track inventory in real-time, and how to identify discrepancies or issues with inventory numbers. Line cooks and back-of-the-house staff need to be able to identify spillage, errors, rotten food, etc. Regular training sessions should be scheduled to ensure that all staff members are up-to-date with inventory procedures and best practices. This will not only help your restaurant run more smoothly but also contribute to overall cost savings.

9. Track sell-through rate

Sell-through rate represents how much you sell of a particular item over a given period of time. For example, if you order 100 kilos of potatoes per week and sell 75 kilos, your sell-through rate is 75%. Monitor the sell-through rate of key items, as well as key groups of items, such as bread, meat, etc.

This will help you identify which items are selling well and which ones may need to be adjusted or removed from the menu. It can also help with forecasting future inventory needs and preventing overstocking. It will also help you identify any potential issues with theft or waste. If your sell-through rate is significantly higher or lower than expected, it may be a red flag.

10. Forecast demand in advance

Use restaurant inventory management software that allows you to forecast customer demand in advance. For example, MacromatiX, by Fourth, enables you to prepare for upcoming demand by providing you with an accurate demand forecast.

With MacromatiX you can:

• Create smarter production schedules based on predicted demand
• Use pre-loaded recipe builds within your production schedule to automatically deplete raw materials
• Automatically print preparation labels, cutting labour time at the start of the day

With accurate forecasting, you can also avoid running out of key items during peak hours, which can result in unhappy customers and lost revenue.

11. Utilise menu engineering

Menu engineering is the process of evaluating each item on the menu, determining which are the most popular, and determining the cost of producing each item. Armed with this data, you can make informed decisions about pricing, menu placement, and which items may need to be removed or replaced.

Some key factors to consider when utilising menu engineering include:

• Popularity: Analyse sales data to determine which items are the most popular with customers. This information can also help you determine which items should be promoted or featured on your menu.
• Food Cost: Calculate the cost of each item’s ingredients and compare it to the price you are charging. This can help identify which items are more profitable and which may need to be adjusted or removed.
• Menu Placement: The placement and design of your menu can also impact sales. Use data to determine the most effective spots on your menu for high-profit or popular items.
• Seasonality: Keep track of seasonal trends in customer preferences and adjust your menu accordingly. This can help prevent overstocking of ingredients that may not be in high demand during certain times of the year.

By using data-driven menu engineering techniques, you can make strategic decisions to optimise your menu and increase profitability.

12. Perform recipe costing

Recipe costing is the process of determining the exact cost of every recipe, based on the cost and amount of each ingredient. This information can help you determine the overall cost of each menu item and ensure accurate pricing. Additionally, recipe costing can help identify any potential cost-saving opportunities. Some key steps to follow when performing recipe costing include:

• List all ingredients: Create a detailed list of every ingredient used in the recipe, including any garnishes or sauces.
• Determine unit costs: Calculate the cost of each ingredient per unit, such as per ounce or pound.
• Measure quantities: Measure the amount of each ingredient used in the recipe and convert it to the same unit used for the cost calculation.
• Calculate total cost: Multiply the unit cost by the quantity used for each ingredient and add them together to determine the total cost of the recipe.

13. Track sales on a daily basis

Daily sales directly impact the amount of inventory you have on hand and the amount you need to order. To ensure that you stay on top of your inventory amounts, it’s best to review sales numbers on a daily basis. Utilise data from your POS system (Point of Sale) and inventory management systems to stay abreast of what is happening in your restaurant and make changes when issues arise.

Conclusion

As a restaurant owner or manager, understanding and implementing effective inventory management techniques is crucial to the success and profitability of your business. From utilising data-driven menu engineering techniques to performing recipe costing and tracking sales on a daily basis, there are various strategies that can help you optimise your inventory and increase profits. By staying organised, utilising technology, and regularly reviewing and adjusting your inventory processes, you can ensure that your restaurant runs smoothly and efficiently. This will not only benefit your bottom line but also improve the overall customer experience.