Hacking inventory is a little like baseball’s OPS… stay with me and I’ll explain.
Any avid baseball fan will tell you how important the trendy new hitting statistic OPS (a combination of slugging and on-base percentages) is to gauge a player’s offensive success.
In the restaurant industry, there’s a similar combined statistic that gives you an immediate sense of the success of a restaurant… Prime Cost. The components of this powerful metric are Cost of Goods Sold (COGS) and Total Labor cost.
In the case of OPS, the higher the number the better the player. But in the case of Prime Cost, it’s the opposite. This stat is more defensive in nature… so you want to drive it down.
While labor is an equal contributor to Prime Cost, it’s harder to control based on business circumstances compared to COGS. That’s why this article is focusing on the best defensive weapon you have to keep COGS under control and lower Prime Cost… taking inventory.
Here are five tried-and-true hacks for taking an accurate inventory and getting COGS.
#1 – Spot Check 4 Inventory Items a Day
After you complete your main restaurant inventory each week, compare your results to the POS accounts item by item and choose 4 items you’ll count daily that week.
How to choose the 4 items? The rationale is simple: Pick items you’re experiencing shrinkage on the most.
Choose two food and two beverage items that have an issue and have reasonably significant velocity (rate of inventory use). Count these items daily.
Make sure your team doesn’t know which ones you’re counting. When you see an error, immediately research the cause. It may be due to over-use or over-ordering. Or it may be due to theft.
Whatever the case, present your results to the team members responsible. This holds them accountable and makes clear there are consequences for poor performance. Within a week or so, you should see inventory issues disappear.
By maintaining this layer of spot checking, you ensure your best employees remain so and your worst are held accountable for their impact on your business.
#2 – Lock Up Your Inventory
It’s often been said locks are made to keep honest people… honest!
If you have any experience in the industry you know what theft looks like. By securing as much of your inventory as possible, you accomplish many things in a single stroke.
And best of all, they all translate into bottom-line profit.
Even if you’re an inventory enthusiast, you still experience shrinkage. Locking up your most valuable inventory, at all times, is just smart business.
The locks convey the message that you’re serious about inventory. Equally important is that it stops theft before it happens.
You’ll need to re-think your processes a little. It can be impractical to go fishing for keys or chase down a manager when something is needed from inside the cage. Preparation and pre-shift checklists ensure this won’t cause you any frustration and it forces your team to be organized.
Locking up your inventory won’t eliminate your shrinkage, but it will at least set an atmosphere where security matters.
You WILL see decreased losses… and you’ll sleep better at night.
#3 – Limit Your Total Inventory to 1.5X Your Weekly COGS
The industry is cash-strapped. Every penny is accounted for and you often feel limited in what you can do by the amount of cash you have… or don’t have.
Since this is an industry truth… why is it you’re keeping way too much inventory on hand? This is cash that’s literally trapped until you turn it into sales.
Here’s the math. If you do $25,000/week in sales with a gross COGS of 25%, you’re using $6,250 in product weekly.
When you take inventory, how much is the total value of product you have on-hand?
If it’s more than $10,000… then you’re holding that cash hostage.
To solve this, you must have a solid handle on ordering and inventory depletion. The upsides include freeing that inventory to improve your cash flow.
You have less to count while doing inventory, which boosts performance because there’s less product to manage.
#4 – Eliminate Old Inventory & Turn It Into Cash
How long have you been counting that bottle of Chartreuse on your back bar that you’ve never opened?
If you’re an exemplary operator you’ll follow Hack #3 and keep approximately 1.5X your inventory in stock to run your operations. With food, that number should be even less.
That means dead inventory is taking up valuable cash flow dollars.
By liquidating dead inventory, you can free up cash and reduce the number of items you have to inventory. Get rid of these items quickly and easily at a garage sale or use the items as swag for contests.
Face it… items sitting on your shelf are a waste of money, space and labor.
#5 – Identify 1 Person to Be Your Receiver
If you do any volume, then you’re bringing in a lot of product each week. This is a necessary aspect of managing your business and it also represents a real cost.
That cost can be measured in your time and any errors that are made with managing these orders.
By identifying a team member to be your receiver, you can dramatically reduce that cost, increase efficiency, and even lower your COGS.
It’s also a developmental opportunity. Not only should you train this person on how to effectively receive the products you order, you can also teach them administrative jobs like:
- How to code invoices (or use technology like the Orderly App)
- How to mark missing items
- How to redirect ordering when there are errors
These are baseline management tasks that can be delegated to a receiver and therefore improve that team member’s readiness for the next level of employment.
Best of all, you get consistency in the handling of the product. It also gives you just one person to hold accountable to the method of stocking and the cleanup.
It ultimately saves you money!
Bonus! #6 – Use Technology To Make Inventory Faster & Easier
It’s the end of the line for the clunky, expensive inventory hardware and software of the ’90s. Smartphones and apps have changed our personal lives… and now they can change your business, too.
Mobile technology is helping the industry with everything from operations, to customer service, to training… and even restaurant inventory.
These apps make the once-dreaded and painful task of inventory management so much quicker and easier.
They’re a no-brainer.
HACK YOUR WAY TO BETTER INVENTORY
And any successful operator who ignores the importance of inventory performance does so at his or her own peril.
These costs, when unchecked, can crush profit quickly and cripple your business by tying up money through theft, shrinkage and bad processes.
These hacks complement any solid inventory discipline that includes weekly inventory, conscientious administration, and constant results communication to your staff.
Andrew Jaffee is the CEO and founder of The Rail Media. He’s an accomplished and respected restaurant industry professional with over 26 years of experience focusing on many aspects of small business management ranging from human resources to marketing – operations to accounting. At Orderly, we’re big fans of Mr. Jaffee… you can find Andrew & his company at therail.media.