If you’ve been in the restaurant industry long enough, you’ll know restaurant inventory management is a crucial element to ensure decent profits. While many dread the process calling it complicated, the advancement in technology has brought forward many superior solutions that not just simplify inventory management but also save time.

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Since inventory is one of the most significant investments in a restaurant business, failing to keep a count of it or mismanaging it can lead to huge losses. Having a good grasp of the inventory is essential to control food costs. It also helps in understanding your high contribution margin menu items and highlights the non-performing ones.

In this blog we’ll cover:

  • What is inventory management?
  • Why is restaurant inventory management important?
  • Key restaurant inventory management terms you should know
  • Different ways of taking inventory in restaurant
  • Best tips & tricks to effectively manage inventory

What is inventory management?

food inventory
Food inventory

The process of tracking raw materials as well as processed food in a restaurant is called inventory management. It also involves ordering raw materials/supplies, transferring them from the central kitchen to all the outlets, tracking leftover quantities, keeping a thorough account of the prices, as well as ensuring proper storage of everything.

Syncing your restaurant inventory management system with an accounting software helps in keeping track of the expenses and makes invoicing accurate. Having all the data in one place also allows you to quickly access it from anywhere in real-time. This makes restaurant management effortless and saves restaurant owners a lot of time.

Why is restaurant inventory management important?

To say in the simplest words, it is impossible for a restaurant to make any profit without maintaining inventory. Imagine not knowing what’s coming in, and what going out. Or not knowing how much a raw material costs and how a price rise has affected the final cost of a menu item. Nothing can lead your restaurant business to a downfall quicker than lack of inventory management.

Following are some of the major benefits of restaurant inventory management:

1. Get your orders in order:

The biggest benefit of managing restaurant inventory is that it allows you to order more efficiently. Knowing your existing stocks can make it easy to decide what needs to be ordered based on the expected consumption. 

2. Increased profits:

When you fail to manage inventory, it can lead to excessive ordering or not ordering enough. Both these instances can cause financial losses and reduce your profits. Effective inventory management can help prevent all kinds of wastage which will directly contribute to your profits.

3. Create a high-performing menu:

When you have a good hold on your food inventory and know the ins and outs of everything, you can price your menu items more sensibly. It also allows you to design your menu in a way that encourages the customer to order your high contribution margin menu items. 

4. Identify instances of theft and pilferage:

Most restaurants see instances of pilferage and are never able to control it because there is no solid account of inventory. With inventory management practices in place, you have accurate numbers to identify if theft has occurred in your restaurant kitchen.

Key restaurant inventory management terms:

Inventory management terms
Inventory management terms

Here is a list of inventory management terms every restaurant owner must know:

  • Opening inventory:

Starting with the most basic term, opening inventory is the total value of the inventory a restaurant has at the start of a given period of time. This can be at the start of the day if you’re counting inventory daily, or at the start of the accounting period. 

  • Closing inventory:

Anything and everything that is left at the end of the day, or at the end of the accounting period is termed as the closing inventory. The closing inventory then goes on to become the opening inventory for the next cycle.

  • SKU:

Short for Stock Keeping Unit, SKUs are the most commonly used term in the restaurant industry. It is a unique code used internally to track the inventory count of a particular ingredient. A storage space without SKUs will find it very difficult to keep track of the inflow and outflow of items.

The difference between the expected outcome and the actual outcome is termed variance. In the context of restaurants, a negative variance means your actual food costs were higher than your theoretical food costs. You’ll notice a positive variance when the actual food costs are less than what you expected them to be. 

Cost of goods sold, or COGS, is the total amount a restaurant spends in creating the food and beverages sold by the restaurant. It is directly proportional to a restaurant’s sales. Your restaurant COGS is a key element in deriving the price of a menu item.

  • Food cost percentage:

Apart from COGS, food cost percentage is also required to price menu items. The formula for deriving food cost percentage is:

(Opening inventory+purchases – closing inventory) / sales

  • Yield:

When you use a vegetable or a raw material for cooking, it may not always be entirely used. In culinary terms, yield is the amount of usable product. For example, only 45% of a cauliflower is edible. So that usable amount of cauliflower is its yield.

  • Sitting inventory:

There are mainly 4 restaurant inventory categories – raw material, in-use raw materials, processed items, and excess inventory. The excess inventory that is just sitting there on the shelves waiting to be used is called sitting inventory. Having too much sitting inventory can block cash flow. 

  • FIFO:

A very common model of consumption, FIFO is First In First Out. It basically suggests using the first purchased ingredients/raw materials first. Even your inventory storage units should have the first bought products at the forefront to ensure they are consumed before the new ones.

  • PAR level:

Every restaurant has a way of calculating its expected consumption for a given month. Inventory PAR level denotes the most appropriate amount of inventory that your restaurant must have to fulfill that expected consumption and also include a buffer in case of increased unexpected demand.

What are the different ways of taking inventory in a restaurant?

restaurant inventory tips
Restaurant inventory tips

Each restaurant has its own different procedure for taking inventory count. For bigger chains, it is important to have a strict format for inventory management in order to avoid confusion. On the other hand, small restaurants often do away with spontaneous inventory taking occasionally as there is only a small number of staff members in the team.

Manual inventory management involves making lists of all available items and all incoming items and logging them in a sheet. This involves keeping an account of their quantity, price, expiry dates, etc. It is very important to keep an accurate account of the price as it affects the final price of a menu item. To make the process more convenient, similar items are grouped.

To summarize, inventory-taking involves:

  • Creating a list of items
  • Grouping similar items together
  • Documenting every small detail of a raw material
  • Recording price per unit

This process is done at the beginning and end of a fixed period to determine the COGS for that duration. Since manual inventory recording is prone to errors, restaurants now use inventory management software. It is far more convenient than the old-school pen & paper way of documentation. An inventory management software automates the process and highlights inconsistencies through reports.

Is it worth investing in an inventory management software?

Many restaurants still don’t invest in a software for managing their inventory. The reasons are varied ranging from not having the time to learn how to use the software to finding the process complicated. It’s easy to manage inventory manually when your restaurant business is small but as it scales, it can get very challenging.

You’d feel you can rely on your memory but once the business expands and staff grows, it becomes almost impossible to have control over every single thing happening in the restaurant. Moreover, maintaining physical documents of inventory exposes you to the risk of losing them at any point. In such situations, software is always a reliable solution.

Some of the advantages of investing in an inventory management software include:

  • Automates manual tasks and saves labor 
  • Quick and reliable documentation of data
  • Access inventory data in real-time from anywhere
  • Save time spent on inventory taking
  • Prevent critical lack of supplies
  • Keep an eye on changing prices and monthly expenses
  • Get notifications about ingredients getting out of stock

Considering the plethora of benefits a restaurant inventory management software offers, we definitely recommend investing in one. EagleOwl is one of the best restaurant software solutions available today with a strong focus on inventory and back office.

Best tips & tricks to effectively manage inventory

Use the following restaurant inventory tips to streamline your operations and increase overall restaurant efficiency:

1. Create easy templates:

Your staff will always show resistance to the inventory-taking process because it is mundane and time-consuming. To make it less tedious and efficient, create detailed templates that allow easy insertion of details. 

Most inventory management software come with pre-installed templates to enter details. This not only streamlines the process but also saves time spent on inventory taking. Moreover, having templates for recording inventory ensures your staff doesn’t forget any of the ingredients.

Here’s an example of how you can quickly record opening and closing stock for the day with EagleOwl:

Taking stock manually with EagleOwl

2. Choose the right team members:

Pick your most efficient staff members and get them to do inventory taking every time. This way, they will become more proficient and will be able to complete the process faster. When you choose different people every time for stock taking, it often leads to errors due to confusion. 

Train your most trustworthy staff members for inventory taking so you minimize the chances of theft. Basically, less is more when it comes to inventory management. At the same time, don’t rely only on 1-2 members for this process. Train a small group so even if some are absent or unavailable the others can carry out this responsibility.

3. Have fixed schedules:

Taking inventory regularly is not just helpful for maintaining count but also to understand how a product contributes to the overall pricing of a menu item. So create organized schedules for different types of SKUs based on their freshness validity.

For instance, you can do a daily stock take by recording opening and closing inventory for each day. This will help you record the perishable ingredients being used on an everyday level. Secondly, you can schedule weekly stock-taking for other times that come with longer expiry timelines. 

4. Keep your storage space organized:

Inventory taking is tedious as it is, why make it worse by keeping the space disorganized? A storage space with supplies dispersed across the room will increase the time spent on inventory taking and can also lead to some items going unnoticed in the back. 

Have designated shelves for different kinds of supplies so your staff can quickly find what they’re looking for and return the items where they belong once they are no longer in use. Label the shelves based on the category and list all the types of items available in it to save time and effort.

5. Stay away from overstocking:

Restaurants often order inventory based on their previous consumption patterns. Since those are just theoretical numbers, there’s always a possibility of it leading to shortage or wastage. A major part of effective inventory management is avoiding overstocking.

If your central kitchen and storage are overflowing with ingredients, it gives your kitchen staff a free hand to use them liberally. This can lead to an imbalance and show negative food cost variance. 

Having limited quantity ensures you always use fresh ingredients and reduces the effort of maintaining the freshness of perishable items. Another benefit is that it ensures your storage space always looks neat. 

6. Keep track of wastage:

One of the biggest benefits of inventory management is that it helps in reducing food waste. Food waste can account for up to 5-10% which can heavily affect a restaurant’s earnings. Having a separate template for wasted or expired food items can help in understanding wrong purchase patterns.

Since restaurants prefer fresh items to maintain food quality, it is important to use them before their expiry dates. A great way to do this is to place the perishable items accordingly in your storage unit so that you first use the items that have the nearest expiry date. This will reduce wastage and prevent any mistakes where staff members accidentally use expired ingredients. 

7. Integrate your restaurant inventory management software with POS:

No matter what software you use to automate restaurant operations, live inventory count has to be recorded manually by your staff. But integrating your inventory software with a POS can prove to be a huge help.

A cloud-based POS system helps in understanding customer ordering patterns as well as the most and least ordered menu items. When you integrate it into your inventory software, you can make better decisions regarding your inventory purchase and increase your profit margins.

8. Document recipes:

Restaurants with multiple outlets often find it challenging to maintain the same food quality and taste. Even though the central kitchen is the same, different outlets of the same restaurant are not able to offer customers the same taste.

We recommend documenting recipes along with every little detail to ensure consistency of food quality and taste. This way, when the chefs and line cooks request supplies from the central kitchen, the central kitchen staff can send the exact quantity to the outlet. This prevents food wastage as the quantities required for a particular recipe have been well-documented.

9. Have strict protocols:

Just like any other business managing their inventory, restaurants too can fall prey to loss of inventory due to mishandling of ingredients and supplies. To prevent this, instate strict rules for ordering food from the central kitchen.

At the same time, share the protocol for handling all kinds of supplies with your kitchen staff and transportation staff so as to reduce any chances of spoilage. Ask your storage room operators to document every inventory item request so you can monitor how kitchen staff is utilizing them. 

If the food wastage percentage is very high in your restaurant, this will also make it easy to spot where mistakes are happening. Knowing that every inventory item request is being tracked will also ensure your staff is always careful and doesn’t order excessively. 

10. Utilize inventory reports data:

The best part about managing inventory is the world of information you get in return. You get detailed insights through inventory reports that highlight inconsistencies and mistakes. These insights assist in planning your inventory budget more smartly.

For example, you buy saffron every month expecting it to be consumed by the end of the month. But when you compare inventory reports of 3 consecutive months and notice there is negligible consumption of an expensive spice like saffron, you can make changes to the forthcoming purchase lists.

Let’s take another example. You notice major variance for a menu item that has a very low contribution margin. Since it’s not adding much to your profits, based on variance reports you can discontinue the menu item and save wastage of associated ingredients.

Conclusion:

If you research the top reasons for restaurant failure, one of the major reasons is poor management. Another one would be a lack of understanding of food costs. Both of these can be tackled using the above-mentioned restaurant inventory management tips.

With diligent and regular inventory management practices, you can optimize your operations and offer a superior dining experience to your customers.

Learn how to grow with EagleOwl. Our restaurant management system can help optimize your finances and increase your restaurant’s net profit by at least 25%. Contact us now to schedule a free demo!

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