Did you know that U.S. restaurants waste approximately $162 billion in food every year due to inefficient inventory management?
The figure is huge, and it stresses the importance of mastering inventory practices to not only reduce waste but also to improve profit margins without sacrificing customer satisfaction. However, restaurant inventory management is not a cakewalk. Implementing a robust restaurant inventory management system is crucial for proper inventory management. Effective food inventory management ensures accurate restaurant inventory and helps in calculating the average inventory turnover ratio. Managing sitting inventory and utilizing insights from food inventory data can significantly enhance overall performance.
You need to understand and use the inventory turnover ratio to your advantage like a pro. When you master this ratio, you bypass common pitfalls such as spoilage and lost sales, directly impacting a restaurant’s bottom line.
In this article, we’ll learn how much inventory a restaurant should carry to balance overstocking and understocking the kitchen. We will also explore different strategies to optimize inventory turnover for a more efficient and profitable operation. Before diving deeper, let’s start with the basics.
The Cost of Confusion
Inventory management is not rocket science. But if you can’t figure it out soon, either your kitchen might hold excess items that block your space and capital, or you might run out of ingredients to meet your customers’ special orders. Effective restaurant inventory management software helps in streamlining the entire inventory management process, ensuring that food and beverage operations run smoothly. Proper management of food cost is crucial to avoid a low inventory turnover ratio. Regularly counting inventory and adjusting accordingly can prevent issues related to excess stock and food and beverage shortages.
Let’s understand the possibility of such scenarios in detail.
1. Overstocking:
When your kitchen store holds excess inventory, it ties up your capital, which could have been used elsewhere in the restaurant business. Excess inventory calls for additional storage, and there is a chance of spoilage, especially for perishable items. Understanding the restaurant industry average for inventory counts and inventory values can help prevent having too much food on hand. Properly managing inventory process and knowing how much food inventory is needed are crucial to avoid unnecessary costs and inefficiencies.
For instance, imagine you’re overstocked on perishable fruits for tarts, but there is a low demand in the market this week. Now, they are tying up capital and risking spoilage. If it happens with regard to all items in the kitchen, you might face low cash reserves and even be unable to respond to unexpected needs and opportunities. You can easily avoid such situations with calculated inventory management.
2. Understocking
On the other hand, when you run out of items in your kitchen to meet customer demand, you might face customer dissatisfaction. Imagine a customer who has decided to dine at your restaurant with family, and they’re all excited to try your famous seafood pasta. However, soon, they get disappointed to find out you ran out of fresh seafood due to understocking. You just lost potential repeat customers who might leave negative reviews online to vent their frustration.
This necessitates restaurants managing their inventory with a balance between supply and demand to prevent shortages or wastages. That’s where it becomes necessary to learn inventory ratio to make data-driven decisions about purchasing and pricing strategies.
The Inventory Balancing Act
In simple terms, the inventory turnover ratio shows how many times a restaurant refreshes its inventory during a certain period of time. It’s typically calculated over a year, quarterly, monthly, and even weekly.
What does it measure?
It shows how quickly a restaurant cycles up its inventory.
How to calculate?
Inventory turnover ratio = Cost of goods sold (COGS) / Average inventory
Here is how to calculate the average inventory for some time (annual, monthly, or weekly)
Average inventory = (begining inventory + ending inventory) / 2
FYI,
Beginning inventory = the inventory value at the start of the period
Ending inventory = the inventory value at the end of the period
For instance, your restaurant had a beginning inventory of $2,000 at the start of the month and an ending inventory of $1,500 at the month’s end. The monthly COGS turned out to be $8,750.
Average inventory = ($2000 + $1500)/2 = $1,750
Inventory turnover ratio = $8,750/$1,750 = 5
That means you sold out your entire food or beverage inventory five times in the last month. Simply put, you stock six days of inventory on average (5 to 6 days of products on hand). Typically, five is the industry average when it comes to inventory turnover.
Why does the score matter?
If your restaurant turnover is near to or just more than the average, you are efficiently using your inventory. You might rarely face the risk of spoilage and overstocking.
A too-low score may indicate any of the following scenarios:
Stockouts
Menu restrictions
Operational inefficiency
High delivery or purchasing costs
A too-high score may indicate any of the following scenarios:
Food waste
Storage issue
Inaccurate demand forecasting
To control the inventory turnover ratio, you need to control the factors that influence it in the first place.
Finding Your Ideal Inventory Levels
Inventory levels might fluctuate and it’s a function of a lot of factors. Let’s take a look at three major factors that affect the most.
1. Sales volume
Your average sales volume over a week or month decides how much inventory you need for the next period. More sales means more inventory- simple math. If sales go down than the expected figure, restaurants may end up with too much inventory – extra storage costs and a high risk of waste.
That’s where demand forecasting comes into the picture. It requires analysing past sales data, factoring in seasonal variations, trends, and promotional offers that are going to take place in the near future.
On special occasions or holidays, sales volume might go up than normal. Restaurants need to plan for such events in advance with special menu items to attract more footfall. This means developing flexibility to manage inventory to meet seasonal fluctuations.
That’s why restaurants maintain a good relationship with suppliers to place emergency orders to meet unexpected sales on special occasions. It is also important to have more than one supplier for high-turnover items to prevent stockouts when one of the suppliers defaults.
2. Menu Complexity
If your restaurant menu spans seven pages with a wide variety of items to attract customers of different appetites, you need a robust inventory management system to avoid custom dissatisfaction due to stockout items.
The more items you have on the menu, the harder it becomes to track the inventory.
Menu engineering is one of the best ways to deal with this challenge and reduce the variety of inventory. You can also design menus that feature items requiring similar ingredients. For instance, you can maximize your chicken menu to offer chicken 65, chicken BBQ, chicken fingers, chicken burger, and chicken salad without minimizing inventory variety.
3. Delivery Lead Times
We understand why a good supplier relationship is important. But what if your supplier delivers once every two weeks? You need to hold more inventory to avoid running out of key ingredients between deliveries. Imagine if your supplier further delays the supply of items that can not be sourced locally on short notice. You may find your entire operations at stake due to a stockout.
You might assume ordering in bulk could help in such situations. However, it’s not easy to maintain large buffer stocks to compensate for longer delivery lead times. The holding costs go up, and operations run smoothly until there is no supply chain disruption.
That’s why popular restaurants put so much effort into analyzing account delivery lead times to avoid such situations. They also consider common reasons for potential delays to make dynamic changes to their order to avoid running low on popular items.
Good Thumb of Rule for Inventory Turnovers
Let’s examine some general rules of thumb for inventory turnovers for various restaurant items.
1. Food items
Turnover rate: 4-6 times per month
Guideline: should keep about 5-7 days’ worth of product on hand
Rationale: periodically rate the freshness level of food items (especially perishable items) to avoid spoilage
2. Liquor
Turnover rate: once per month
Guideline: may vary based on the sales mix of a restaurant
Rationale: longer shelf life allows less frequent turnover without the risk of spoilage
3. Bottled beer
Turnover rate: 2-3 times per month
Guideline: may be adjusted based on popularity and variety
Rationale: longer shelf life, but restaurants should focus on managing only popular varieties with good turnover rates to ensure freshness and customer satisfaction
4. Draft beer
Turnover rate: 1-2 times per month
Guideline: could vary depending on the restaurant concept and the number of beers on tap
Rationale: requires careful handling to retain freshness
5. Wine
Turnover rate: approximately once per month
Guideline: varies based on the size and your sales mix
Rationale: could be stored for longer periods, but turnover should be managed to balance variety, space, and capital investment
Beyond the Kitchen: Bar Inventory Management
There are approximately 6,60,755 bars in the US, and the drinks market is projected to grow by 1.48% by 2029. These figures clearly state the importance of learning basic bar inventory management skills for restaurants to grow and thrive.
Basics of Managing Bar Inventory
Here are some essential tips for bespoke inventory management if your restaurant has a bar section.
Regular auditing
Regularly audit your bar to track what you have in stock versus what should be there based on your sales data. This basic check will help you keep discrepancies, theft, and over-pouring in check.
Accurate tracking
Take the help of good inventory management software to monitor the flow of alcoholic beverages in and out of the bar.
Par levels
Create par levels for each type of alcohol to ensure you have enough stock to meet demand without overstocking. Consider adjusting these levels based on seasonal changes, trends, and upcoming events.
First in, First out (FIFO)
Apply the FIFO method to manage inventory. FIFO stands for first in, first out. Use the older stock before the newer stock, especially for ingredients with an expiry date.
Active licensing
Make sure you have an active license to sell alcohol. The license should clearly mention what types of alcohol can be sold and when.
Taxation and Reporting
Run your business in line with the specific state and federal taxation laws regarding the sale of alcohol.
Tools for Success: Inventory Management Software
Inventory management software is of great help for easily managing restaurant and bar inventory. They provide a number of features to manage daily operations, automate tedious tasks, and provide sales analytics to achieve efficiency and mint more profits.
Benefits of Using Inventory Management Software
Let’s take a look at some of the significant benefits of using such software.
Keeps your process in check
Popular inventory management software like offers features to automate many of the routine tasks of managing stock. For instance, you can automatically track ingredient usage, update stock levels, and generate reports. Such a level of automation reduces human error and frees up staff time for more customer-focused activities.
Automates order placement
The software can predict when stock will run low and automatically place orders with suppliers. This is a huge relief from manually ensuring that you never run out of key ingredients for popular items in your restaurant.
Offers you valuable sales Insights
Good inventory management systems can track your sales to provide you with valuable insights on sales trends, product popularity, and inventory turnover rates. Such information is important for restaurant owners to make informed decisions regarding menu changes, promotional strategies, and pricing, all of which can significantly impact profitability.
Ideal Features to Look for Inventory Management Software
If you are considering leveraging inventory management software, make sure it has the following key features to help you experience a high ROI.
1. Recipe and ingredient control
An ideal inventory management software should aid your kitchen staff with recipe creation with precise ingredients. Advanced systems offer features to create or edit recipes of menu items with easy pre-defined forms. In this way, you can keep your operations in check and measure ingredient quantities to track food costs. This will also help you with managing recipe costing and variance tracking for bespoke inventory management.
2. Streamline supply chain
Make sure the software has the capacity to manage inventory, reduce waste, & improve your supply chain with advanced features. An inventory management system offers an indenting solution to help restaurants achieve:
Reduced labor costs
Minimize food waste
Transparent communication with suppliers
3. Base kitchen management
This feature is important if you have one base kitchen and multiple outlets. One of the best ways to reduce the cost price of items for such a restaurant chain is to manage central kitchen inventory with data-driven insights on a daily basis. An ideal software application would provide you with the necessary features to simplify central kitchen inventory and stock control without any data error.
4. Seamless integration
Your ideal inventory management software should seamlessly connect with leading financial tools such as Stripe, Talabat, Jahez, and Otter. It should also blend with popular ERP tools like Xero, Tally and Microsoft Dynamics to offer you error-free accounting and compliance. Big restaurants leverage this feature to make financial data management as easy as possible to focus more time on analysing purchasing trends for strategic business expansion.
