Perishable Cash

Nov. 28, 2005

One employee steals $20 from the cash register.

Another wastes $20 in food.

The boss may view those events differently, but to the bottom line, it's all the same: a $20 loss.

Jim Laube, a veteran restaurant operator-turned-consultant, suspects that too few operators view a food loss in basic dollars-and-cents terms. To them, food is a product sold to customers, not cash sitting on the shelves. But that's exactly what it is.

"Inventory is cash, just in a different form," said Laube, founder and operator of, a foodservice training and education Web site. "And having too much

What's Important

Only a minority of operators practice good inventory procedures.

Regular, detailed inventories boost profits by reducing waste and theft.

Implementing a good system isn't difficult, but requires discipline and follow-through.

of it ties up valuable cash you could have in the bank."

The problem of excess inventory, Laube said, costs operators thousands of dollars annually in waste due to perishability, mishandling, slack portion controls or theft. On an average operator's profit-and-loss statement (P&L), that adds up to loss of at least 2 percent to 5 percent, he said.

And don't think bad inventory management is a sign of novices. Laube said experienced operators are often the worst inventory managers because they believe they know their business so well that they don't have to do a physical inventory. They then buy what they believe they need—and then add on a little extra as a safety factor. More often than not, that cushion winds up costing the restaurant money in waste.

"All of a sudden they have a lot more product than they need," Laube said about the safety factor. "I see a lot who don't even do a physical inventory—ever."

The good news, as Laube points out, is that reversing inventory-related losses isn't that difficult, but it does take the discipline to execute thorough inventories, totaling food cost regularly and purchasing wisely.

"So few realize they could make so much more money by doing simple things like that," he said.

Count it like cash

Luke Bailey, owner of the two-unit Pizza Company in Davison, Mich., is one of those who uses an inventory cushion.

"I'm a firm believer in never running out of stock; a lost sale is money out the window," said Bailey, who keeps 10 to 14 days' worth of inventory on hand. As far as scheduling a running inventory, "I usually try to do that sporadically."

Bailey calculates a monthly food cost based on a complete end-of-the-month inventory, which also is compared to the operation's P&L. "I know by second day of the following month what my key expenditures were. If I can keep 61 percent on food and payroll I'm OK."

Laube, however, believes operators like Bailey would do better than OK if they did the following:

* A weekly, thorough physical inventory

* Calculated food cost weekly

* A daily inventory of eight to 10 key food items (cheese, pepperoni, sausage)

* Keep no more than five to seven days' worth of food inventory on hand

The idea of being "so obsessive" about inventory controls bothers some operators, Laube said. But those who track the details run more profitable operations.

"I've found that larger companies, especially the chains, do a very good to great job of this," Laube said. "Those guys are serious about what they do, and they're very focused on profitability."

John Pronik, director of operations for Zabros Pizza Buffet in Mt. Pleasant, Mich., works somewhere in the middle of Bailey's and Laube's systems. He takes two running inventories a week to generate his food orders, and every two weeks he takes a complete inventory.

"(Food) is money sitting on the shelves that can be used in a lot of directions," said Pronik, who keeps five to seven days of supplies on hand. "I know that when my days of inventory increase, my food cost will increase."

To help his staff understand the need to keep inventory tight, he uses what he calls the toothpaste analogy: "When you get a full tube of toothpaste, you don't think about how much you put on the brush until you get down to a quarter of a tube. Then you're wondering how long you can make it last.

"With inventory, we want to have enough on hand that we don't have to step on the tube to get out that last bit of toothpaste. But we never want to have overstock on the shelf, either."

Laube agrees that the amount of inventory on hand influences strongly whether the staff wastes or treasures it. Even Laube admitted that, as a teen working in a fast-food restaurant, he and his coworkers wasted French fries—"We'd even have fry fights"—when the freezer was full of them. But on busy nights, when the manager would find only three cases left, "We treated them like gold. It's just human nature to attach more value to something if there's less of it around."

Count the costliest items often

A successful dinner house chain Laube once worked with kept a keen eye on its most expensive food items.

Inventory Tips

Make inventory sheets that reflect the "walking order" of your coolers storage areas.

Do a daily inventory of eight to 10 key products.

Where possible, keep no more than five days of food on hand.

Do a thorough weekly physical inventory.

Calculate food cost at least weekly based on sales and weekly inventory. It allows you to pinpoint problems as they occur.

Use employee incentives, such as tying raises to food cost goals.

Use a POS system to compare sales against inventory.

For example, it counted its steaks two to three times a day and compared its findings with register tapes. If a variance emerged, managers investigated it immediately to see if someone had stolen the difference or perhaps overcooked an order.

Spot inventory checks were done in full view of employees as well, which kept the staff mindful that a theft would be hard to pull off.

Bailey's a believer in such spot checks, too, but he's also tried to apply some reverse psychology to reduce theft.

"I'm more into building a deterrent factor than trying to catch them with something in their pockets. So we have an employee purchase policy and an employee charge program," he said. He also installed video surveillance cameras a few years ago. "I like to keep a close eye on things like the ribs we sell, and things like that case of cheese that can be sold to a rival pizza company."

Pronik goes a step further with the incentive strategy by tying raises and performance bonuses to food cost goals. Not only does that keep employees accountable to each other for how food is handled, it builds a healthy rivalry between the three stores he oversees; out of pride, he said, all want to have the lowest food cost.

Laube recommended operators focus on the eight to 10 most expensive items in inventory for frequent spot checks. Those should be checked at different times during the day, he said, and at irregular intervals.

Train others to do it

Once the operator has developed an inventory system, he or she should train managers or other trusted employees to do it. Finding that person isn't always easy; Laube admits it's "a gut feeling" more often than not. However, good employees typically find new challenges and responsibilities interesting.

"By following up with them and making sure it's done right, I think you can have any good employee do that and do it effectively," Laube said.

But even with the most thorough follow-up, it still might not be perfect, which is something operators need to expect, said Michelle Burt, president of one-unit Spanky's Pizza in Fremont, Mich. Burt has three long-term managers who do a great job helping her with inventory.

"There's a lot of trust there, but you always have your questions," she said. "If they're taking a pizza here and there ... I can't perfectly make sure that won't happen. But at some point you've got to let it go."

Ideally, Laube said, regular spot and weekly inventories will be compared with a P&L to render a weekly food cost—52 times a year, rather than 12. Calculating a weekly food cost allows an operator to spot problems—such as waste or theft—sooner than if they waited until the end of the month.

"When you do food cost 12 times a year, it's a nebulous concept to employees," Laube said. "But when you're doing it 52 times a year, it moves it front and center in everybody's brain. Then if food cost is four points higher this week than last week, you can ask right then, 'What happened this week? Did we have to throw out a bunch of product?' So come next week, people are a lot more attuned and focused."

Make time to take time to count

Laube said he understands operators' claims that they lack time to do inventory as thoroughly as he recommends. But he said he sometimes has to resist the urge to laugh at some of their complaints, chiefly a lack of time.

"I know what they're thinking and what they're going through, but I used to do it with plain green-bar paper and pencil; nothing fancy," Laube said.

What amazes him most, he said, is operators who spend hours toiling to boost sales a percent or two, when they could boost profits a few percentage points by doing basic inventory management.

Burt, who learned the pizza business while working her way through college to become a teacher, wishes she knew then what she does now about inventory management. She's certain she'd have made a lot more money and avoided a lot of headaches.

"As much as it seems like a pain, it's worth it," said Burt, who believes better inventory management boosted her profits by 2 percent. She now uses a POS system to help track sales for comparison with inventory sheets her husband, an accountant, created in Excel. "I knew how to make pizzas and make customers happy back then, but I needed to know how to make more money on the bottom line. No question this helps."

Topics: Independent Operation , Operations Management

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