Your Complete Guide To Restaurant Inventory Management: How To Control Costs, Reduce Waste, & More

As a restaurant owner—especially in 2021—you need to be keenly aware of your food expenses and inventory. We’ve already talked about food costs in general — knowing how much you are spending on food vs how much you are making, and food budgeting. But you also need to manage large stores of goods and develop processes to track waste so that your inventory and food costs are accurate. What’s more, COVID-19 has thrown a wrench in almost every restaurant’s operations, forcing them to re-learn how much to order. With COVID, tracking inventory and being able to adapt on the fly has become that much more crucial.

Whether you are new to running a restaurant or have reached a point where any inventory processes you have are not working, this article is a great starting point to help you develop or improve your restaurant inventory management.  

Why Does Restaurant Inventory Management Matter, Anyway?

Why is a good restaurant food inventory process so important? Money is wasted when ingredients run out because they aren’t tracked, drinks are prepared inefficiently, or food spoils and has to be chucked out. Spoilage, inefficiency, and even theft can be expensive problems in terms of inventory for a restaurant, especially when your margins are tight to begin with.

It’s estimated that 4-10% of restaurant food is wasted before it is even served. If you can reduce that waste, that’s basically money in your pocket.

In addition to saving money from food loss, an efficient restaurant inventory system also saves time. With automated inventory management, you’ll save countless man-hours that would otherwise be spent performing manual inventory counts, troubleshooting errors, and soothing cranky patrons.

10 Food Inventory Terms To Know

Here are some basic food inventory terms you should know if you want to revamp your restaurant inventory practices.

• COGS (Cost Of Goods Sold): The cost of all ingredients used in a given time period (a shift, a month, a year, etc.). Find your COGS for a particular time period using this equation: Beginning Inventory + Purchased Inventory – Ending Inventory. Generally, your COGS should not be more than 20-30% of your sales.
• Unit Of Measurement: A unit of measurement is the way that you measure the inventory of a particular item. This can be a dollar amount or a physical amount, but it’s important to use a consistent unit of measurement.
• Sitting Inventory: The amount of inventory you have in-house at any given time. The unit of measurement for sitting inventory can be a dollar amount or physical amount (e.g., pounds).
• Depletion: The amount of product used during a set period of time (day, week, or month). The unit of measurement for depletion can be a dollar amount or physical amount.
• Usage: How much inventory you have, measured as a unit of time. Calculate sitting inventory/depletion to get your usage. For example, if you have 10 pounds of butter (sitting inventory) and you use two pounds per week (depletion), you have five weeks of usage. Usage can be further categorized into estimated or theoretical usage, and actual usage.
• Variance: This is your theoretical usage – actual usage. For example, say in one week you sold 50 dishes whose recipes included one egg each. Your theoretical egg usage for the week was 50, but in actuality, 55 eggs were used. Your variance is 55.
• Shrinkage: This term is used interchangeably with “variance,” and is used to describe food or liquor lost to waste, spillage, theft, or other reasons.
• Areas of Loss: These are the reasons behind your variance/shrinkage. Some common areas of loss are employee mistakes, inefficient food prep practices, accommodating customer requests, comped meals, employee theft, spills, and spoilage.
• Par Level: This is the minimum amount of a particular item you need to keep on-hand. This amount should reflect customer demand as well as a safety cushion for unanticipated demand. When inventory levels fall below par level, it’s time to restock.
• FIFO: First-in, first-out is the inventory valuation method used by most restaurants. Using this method, restaurants use up the oldest items/ingredients in their inventory first, and the newest ingredients last. The remaining inventory value is based on the cost of goods when they were purchased.

How To Do Inventory In A Restaurant: 5 Steps For Success

Okay, you’ve got an inventory process, but it’s out of control. Or maybe you don’t have one at all. Let’s start from scratch and outline the best practices for how to do inventory in a restaurant.

1. Choose A Restaurant POS With Inventory Management

Choosing a cloud-based POS with inventory management is the first step to controlling your food and drink inventories. Yes, your POS is important for your restaurant’s credit card processing, but most modern POS systems also collect inventory data automatically and simplify inventory management tasks, such as tracking raw ingredient levels and alerting you when it’s time to reorder.

POS systems can provide inventory management in-house or through software integrations. Your restaurant POS system may have an optional inventory management module available for an added fee each month, and/or the POS might integrate with third-party inventory management software. For example:

• Toast POS integrates with Bevager beverage management software.
• Upserve POS integrates with food inventory management software Orderly.
• Revel Systems has advanced in-house raw ingredient management.
• Clover integrates with brewery inventory software DigitalPour.

2. Choose & Train Your Inventory Team

It’s important to have specific team members responsible for taking inventory and to make sure these employees are thoroughly trained on your inventory-taking methods as well as your restaurant POS. Some restaurants may decide to train their entire staff on inventory, and then rotate the inventory manager each week. This way, everyone on the team learns your best practices for inventory. Or, a small restaurant may just have one dedicated person who takes inventory.

However you decide to choose your inventory team, just make sure there is accountability and consistency so that if a mistake occurs, you know who was responsible and can provide them guidance on how to do it correctly next time.

3. Use The FIFO Method

The first-in, first-out inventory method is generally considered the best inventory method for restaurants. This is because FIFO is considered the most accurate inventory method when dealing with quick-turnover or perishable items. FIFO helps restaurants use ingredients before they go bad, thus reducing spoilage and saving your restaurant money. Therefore, you should make sure your restaurant’s inventory management method follows FIFO best practices.

For example, one way to incorporate FIFO is to use date-labeled containers that make it easy to use the oldest ingredients first.

4. Be Consistent

Consistency is key when it comes to managing inventory and reducing shrinkage to control costs. This includes:

• Using a consistent unit of measure for ingredients
• Using the same restaurant inventory categories for consistency when counting
• Using a consistent system for restaurant inventory control (e.g., FIFO)
• Maintaining a consistent schedule for taking inventory
• Having the same team members take inventory (or be consistent in how you rotate them)

Only when you are consistent in all your inventory practices will you be able to generate accurate inventory reports that will help you identify problem areas.

5. Monitor Your Reports

Speaking of reports, let’s talk about some important inventory and POS reports to monitor. You should be able to see these reports in your POS reporting suite or your dedicated inventory software.

• Inventory Value Report: Helps you determine the exact value of your on-hand inventory.
• Variance Report: Allows you to compare your actual usage with your theoretical usage.
• COGS Report: See how much your raw ingredients are really costing you.
• Waste Tracking Reports: Various reports to help you reduce shrinkage through theft, over-portioning, over-buying, etc.).
• Comps & Voids Report: See how comps and voids are affecting your inventory and your bottom line.

Once you get a handle on these reports, you can start to make decisions based on the inventory data collected through your POS.

Can You Automate Your Restaurant Inventory Management?

Many restaurant inventory tasks can be automated with software. However, some work still has to be done manually.

Digital, cloud-based POS systems can help you enter inventory, specify how many units of an ingredient go into each recipe, and automatically subtract those goods from your inventory as meals or drinks are sold. Many systems will also alert you when it’s time to reorder, and some let you complete those purchase orders right from the app, or reorder ingredients automatically based on par levels. A modern restaurant ordering system can even send real-time inventory alerts to servers so they can let your patrons know if you’re out of the ingredients for a certain menu item.

Advanced inventory software may also have scanning capabilities that let you enter inventory by scanning or taking a picture of an invoice using a mobile app. There are also industry-specific food-and-drink inventory management software apps, such as beverage management software that ensures accurate pours.

Nevertheless, no matter how advanced your inventory tools are, it’s hard to automate your inventory system completely, since some shrinkage will always occur. Spoilage, spillage, and theft will create some discrepancies in your inventory counts. But if your POS has strong reporting functionality and you keep an eye on your variance report—the one that shows the difference between your theoretical inventory usage and your actual usage—you can identify and remedy problem areas causing the discrepancies.

5 Ways To Use Your Inventory Data To Improve Restaurant Operations

Effective data is key to improving your restaurant inventory processes.

Once you’ve got a handle on inventory and can generate actionable reports, how can you use the better data —and the extra time you’ve saved with your automated inventory tools—to make your restaurant run better? Here are some ideas.

• Recipe Costing: Determine the true cost of each meal or drink. Which recipes have the lowest and highest COGS? The lowest and highest profit margins? How do your labor costs factor in? Why are certain recipes costing you more than you thought? Once you know these things you can make better decisions to boost your restaurant’s profits.
• Menu Engineering: Using your POS data, you can modify your menu based on your recipe costing and item performance. For example, you might remove items with high COGS or slow-selling items whose ingredients often go bad before they are used. Or, you can add a menu item that can incorporate your surplus ingredients. Some software even automates this process for you by giving suggestions on how to change up your menu.
• Use Your Employee Management Data: You can use your employee reports to find out things like which servers are issuing the most comps, which servers sell the most specials, or which employees are responsible for the most inventory discrepancies. (This will require a POS with integrated employee management.)
• Lower Your COGS: Once you know your COGS, you can probably figure out how to lower some of them and thus increase your net profit. For example, could you decrease some of these costs by substituting different ingredients, or by buying certain ingredients in bulk? What about using a different supplier?
• Investigate Your Shrinkage: Bartenders drinking on the job. Servers who don’t enter orders properly in the POS. Spoiled ingredients. All of these things can account for loss and waste, a.k.a. shrinkage, that affects your bottom line. Your POS won’t necessarily serve you all this information on a platter, so you will have to notice and investigate the discrepancies in your inventory reports to figure out what’s going on.
• Purchasing Restaurant Payroll Software: Integrating your POS with a great restaurant payroll software, or choosing a POS like Square or Toast that offers payroll services, is a great way to add manage your restaurant payroll and operations.

Better Restaurant Inventory Control Leads To A Better Restaurant

Your restaurant food inventory management can affect your business’s profitability tremendously. Whether you realize your inventory is out of control, or your restaurant’s inventory management is going pretty well as far as you know, you can almost certainly benefit from better food inventory controls. Using software to reign in your inventory processes will not only help you save money, but also time and stress.

It’s important to note that your inventory system might not be the only aspect of your restaurant that needs modernizing. This might be a good time to take a close look at other aspects of your restaurant setup that could use a software or equipment update, like your kitchen printing setup.