Article
Protect Profit with Inventory & Food Cost Technology
Leading up to COVID, restaurateurs often focused their efforts around generating revenue (sales) to increase profitability. Raising the number of covers, leveraging a loyalty program, emphasizing online ordering, and other initiatives were all designed to increase frequency and drive the check average up.
When COVID struck, this became even more important as channels, such as dine-in, effectively disappeared and operators were forced to create new channels or rely more heavily upon existing ones merely to survive. Many stories exist about how third-party delivery, pick-up, drive-thru, or other methods of service were hastily put together to allow the restaurant to get through one of the most challenging periods in the history of the food service industry.
The most successful operators always manage costs carefully. Even in the best of times, the restaurant business has tight margins. Now operators are forced to control costs, not just to squeeze a few extra points of profit, but to keep their lights on. Fortunately, there is technology to the rescue.
While COVID has a long tail, consumers are returning to some semblance of pre-COVID normalcy, including returning to on-premises dining. Industry data indicates that, while on premises dining is increasing steadily, there has not been an offsetting drop in off- premises sales.
As an operator, you are likely relieved to see this pattern. Unfortunately, supply chain challenges are casting a pall on the upside of this rebound. You are also likely to be experiencing unprecedented costs in ingredients and supplies, if you can even purchase them in the first place.
If there is any good news, it's the availability of technology that can assist you in cost control.
Inventory Management Systems
Although these systems have been commercially available for ages, few independent operators make use of them and, truth be told, many of those who actually do use them rarely use them effectively enough to see all the potential value. The systems are designed to use external data from the foodservice suppliers as well as POS data to provide accurate line-of-sight into the restaurant's inventory.
A good inventory system will provide tight integration and hooks into the systems mentioned above and will deliver to the operator a wealth of useful information around PAR levels (see below), food cost, inventory variance, and even clarity around menu design and engineering. Let's take a look at these key benefits.
PAR Levels
As most restauranteurs are acutely aware, the day-to-day success of the restaurant is determined by ensuring that there is enough of the key menu ingredients on hand to allow for sales to be transacted without interruption. We have all been to a restaurant where our favorite item isn't available or one where they always seem to run out of a popular entrée.
This is not only bad business but can lead to customer dissatisfaction and ultimately failure of the business to retain repeat guests who are the lifeblood of any concept. Most operators do a capable job of maintaining inventory levels sufficient to keep their business rolling along, but how much is enough, and how much is too much?
After all, many of our ingredients have a limited shelf life, so while ordering not enough creates customer issues, ordering too much can lead to spoilage and waste that also negatively impacts the bottom-line, so how do we strike the perfect balance?
PAR is shorthand for "periodic automatic replenishment", the minimum and maximum quantity limits that you set for items in your inventory. PAR level denotes the ideal quantity of an item as determined by usage, yield, re-order cadence, and a number of other factors. It is the attempt to minimize inventory cost and waste without any negative impact on sales.
It is a theoretical figure, and as one might imagine, it is impacted by countless tangible and intangible conditions that cause it to fluctuate over time. Some of these include weather, time of year, other menu choices, price, customer sentiments, local events and activities, in-restaurant promotions, and even staffing considerations. Suffice it to say that the number of issues that impact a true PAR calculation is innumerable!
Veteran restaurant owners will often say that they manage PAR based on tribal knowledge, and that they are the best guide for knowing how much of an item to keep on hand. While a confident claim, it is rarely true.
As previously noted, there are too many factors that go into a proper calculation of PAR levels, and human nature tends to make us cautious and risk-averse when looking at these determinations. Nobody ever wants to run out of items and cause customer-service issues, or be criticized by the owner or manager, so we err on the side of being too high.
High PAR calculations mean more product is ordered than consumed and, as previously stated can lead to either bloated on-hand inventory costs at best or spoiled product and higher food costs at worst. Often the person ordering does not have a view to the result of their ordering behavior and as a result they continue to order at the same levels, which drives the same outcome. Ordering becomes muscle memory and before long the process is so automated that any course corrections as a result of changing market and business conditions go out the window.
Any good inventory system will have a number of options to break this cycle; Many allow the user to enter a PAR level that is locked, and the system will then compare levels on order or in-house to that number. This is called a static PAR and is ok, but not ideal. As described above, it suffers from the same challenges as a manual PAR level in that it is set by a user who does not have access to all the variables that can positively or negatively influence the number.
The second option, and the one favored over a static PAR is a dynamic PAR. In this scenario, the system dictates the ideal PAR level taking into account past purchase history, on-hand balances, ordering levels and order frequency, and often a number of other factors. The most advanced of these calculations will allow the user to enter events in the area (road closure, college graduation, football game, etc.) and indicate what impact (positive, negative) it is expected to have on business. Additionally, these systems can even look at previous events to see what impact they had then and apply those learnings now – good stuff!
The predictive PAR systems will help to avoid excessive inventory and reduce spoilage, but they require human assistance to make sure they are accurate. Menus need to be accurately created in the system so that ingredients are properly decremented when a product is sold in the POS.
Regular inventories need to be taken so that an actual versus theoretical usage (AvT) can be calculated and the difference accounted for. Other calculations may be required to determine the yield of a product ordered (think about effective yield of a piece of meat slow-cooked for a day for instance) and those calculations need to be established in the system in order to get close-to-accurate results. Finally, the staff has to have confidence in the calculation. Don't simply dismiss a suggested PAR if it doesn't look right; you should investigate. Often the findings can lead to improved learnings or a discovery that can save the restaurant a lot of money.
Food Cost Management
Our current economic challenges are impacting not only our personal lives but our businesses as well. The scarcity of items has led restaurants to limiting their menu and taking price increases to offset the re- cent inflationary climate. Knowing how much to take for a price increase is easy for large chains that have a data analytics team, but for individual restaurants that want to cover increasing costs without alienating loyal customers, the delicate dance can be very challenging. Technology can help with this.
A good inventory system will allow the user to maintain a copy of the product ordered from its main suppliers in the system in the form of an automated buying guide. The buying guide is normally downloaded from the major suppliers and maintains the name of the item, the pack size, and the current price. As we'll discuss later, the pack size is an important piece of information since often inventory variance can be attributed to a carton or case changing the quantity of the item within and the ordering restaurant failing to catch this change.
For the purposes of this area, however, let's focus on the pricing. As any well-run restaurant will tell you, the two major cost control areas are labor cost and food cost, yet many restaurants really don't have a good handle on how to manage or even track food cost. It starts with managing the pricing in your system and knowing where that product is used, in what quantity, and identifying any variance from actual purchase to actual usage to see where if any there may be shrinkage issues going on. Sadly, our industry is not immune to theft, and a good inventory system will allow you to zero in on all the normal conditions that could cause product shortage so that the last resort of looking at theft is not an accusation proposed casually.
Using an automated inventory system, it is ideal to order through major distributors online using the system. In cases where your broadline distributor requires that the order is processed through their system, inquire as to whether they are capable of electronically sending you a copy of the order so that it can be updated in your system.
This allows a great "checks and balance" function. When the order is received, it allows you to easily verify that what you ordered you received in the amount specified. The other reason why ideally the order would be generated from the restaurant inventory system is to ensure that the pricing per item is accurate.
Unfortunately, prices are changing all-too-frequently at the moment and it can be difficult to track the pricing of an item if the only record of the order comes in the form of the invoice being handed over by the driver at the time of delivery. Is it possible that the price of an item that was ordered is actually incorrect on the invoice?
As many can attest, pricing discrepancies are more common than you might believe, and in today's dynamic pricing environment, it is even more common. Best practices would suggest that an order is received by comparing the internally-generated order with the products received and the invoice presented so that product, quantity, and pricing discrepancies can be quickly identified.
Good inventory systems will even allow the user to make notes around acceptable product substitutions if the supplier is out of a certain item and attempts to use a different product on the order in its place. If the substitute has not been identified as an acceptable substitute, the system will alert the receiver of this.
Once items are ordered and received, the product is tracked in inventory at the price paid. Most systems will allow the user to track how product is decremented (LIFO, FIFO, etc.)but the important thing is that the cost of items is tracked and pricing variances are appropriately noted. Many systems will provide important alerts or reporting capabilities that can highlight items where prices have increased or decreased outside of a "normal" range in order to evaluate its impact on profitability.
Veteran restaurant owners will often say that they manage PAR based on tribal knowledge, and that they are the best guide for knowing how much of an item to keep on hand. While a confident claim, it is rarely true.
Furthermore, the system can help to identify all the menu items that use that ingredient in order to make it easier to see the business impact the cost changes could have on the bottom-line. If the price of a brick of cheddar cheese increased seven percent, and this ingredient is used in 20 menu items that account for 26% of your business, you can take steps to either increase your prices on these items to offset the additional cost or even modify the menus to reduce or eliminate the ingredient to manage the increase. The ability to dynamically identify pricing changes and apply a cost to a menu item (as a percentage of the selling price) is a powerful tool we'll at right under menu design and engineering.
Having an electronic journal in your inventory system of the total cost of every item, the date it was ordered, and ultimately how it was decremented through use, waste, or shrinkage provides the savvy restaurant operator tremendous control over a major cost component for the operation.
Inventory Variance
Even the most diligent business operators will often be faced with inventory variance issues: a case where the system indicates what the amount of a certain item should be but the actual count varies. There are many perfectly reasonable explanations for this.
There are other reasons why inventory variances can occur, especially when considering items that are hard to properly allocate (straws, ketchup packets) or measure (flour, cooking oil). That said, if after some investigation has been done and a significant variance still exists, it is worth considering that there may be a human element such as theft involved. Installing cameras, rotating the staff that performs inventory counts, and impromptu visits to the restaurant can often help dissuade from this type of behavior.
Menu Design & Engineering
Inventory systems are a fantastic source of actionable data as it relates to designing a menu and even determining the physical makeup of how items appear in print or electronically on the menu. Menu design is an art form and it often goes unnoticed by operators; where an item appears on a menu can have major impact on how often it is ordered simply based on its placement.
By knowing the profit margin on a menu item and what "real estate" on the menu (or online) drives the most business, a successful restaurant owner can actually influence the behavior of the customer and subconsciously drive them to the higher-margin items. Like anything though, these margins are dynamic since costs (and sometimes menu ingredients) change regularly, so don't create your menu with the expectation the value will remain high. Like many things in the restaurant business, it is up to you to keep up with tracking not only the profit margin of a menu item, but also the frequency in which it is ordered. Some will even go so far as to account for the complexity of the menu item (time to prepare, number of complaints, other service issues) as a driver as well.
Menu Engineering is the art of using data to course correct and navigate the menu creation and maintenance process. Like many things, it can be data-driven and benefit from imaginative ideas to drive customers to high-margin low complexity menu items that will mean less complaints and higher profits.
The Long Haul
The challenges in supply chain will be with us for at least another year, according to most experts, and should the world be complicated with continued challenges over health or food safety, it could be with us even longer than that. As a restaurant owner looking to preserve profitability and perhaps even find the next gear, an automated inventory system can be the solution you are looking for if you are willing to dedicate the time and commitment to put it through its paces and reap the benefits.
