Inventory

Buyers Guide to Purchasing Terms

Capital: The amount invested in hospitality operation by its owners (CASH)

Theft: The act of unlawfully taking another’s property.

Pilferage: The act of stealing small quantities over a relatively long period of time.

Stock Out: The condition that arises when a product is no longer available in inventory.

Storage of food items to control costs FIFO: method of storage to prevent

spoilage. Older stock is stacked on top so it will be used before previously delivered foods.

LIFO: Last in first out, goods that require absolute freshness will be used.

Proper temps in store rooms.

Limit access for employees; use a key system or only allow 1 person to access per shift.

Improper Product Quantities Create Problems

Do they have enough room?

Improper Product Quantities Create Problems

Excessive Quantities: Problems can arise when an excessive qty. is purchased.

Ties up capital that could be used for another purpose. Affects cash flow. Products in inventory must be paid before

they are used, the money can be used for another purpose. More space must be available to store products. There is an increased risk of product damage or destruction. Increased risk of pilferage & theft. Handling costs increase. Ex: Additional time is required to

conduct inventories and to perform storeroom cleaning duties.

Quality deterioration may occur with perishable products.

Inadequate Quantities

Inadequate purchase quantities can create stock outs with the following problems:

Inability to meet production

requirements Need to revise production plans

to compensate for stock outs. Possibility of disappointed customers

who may visit a property to enjoy

a favorite item that is available.

Safety LevelsConsider safety Levels: the amount of stock to be available on-

site inventory at all times. To ensure that products are available if supplier delivery

schedules are not maintained. To guard against production forecasting errors when

production volumes might be greater than planned. To allow for planning errors. To replace products that may be found to be unusable. To compensate for product theft or pilferage

All purchasers should attempt to attain the goal of having the right amount of inventory of each product available and the balance b/w too little and too much is an ongoing challenge.

Avoiding Loss

Managers can minimize inventory losses by:Installing proper locks.Prohibiting employee loitering near receiving

and storage areas.Ensuring that accounts are credited

properly.Clearly marking paid invoices as “PAID”.Comparing invoices with purchase orders.

Minimum Inventory to Keep on Hand

Guidelines to keep in mind:

Rule 1: The value of your food inventory should not exceed one week’s food cost.

Rule 2: Your inventory (food, beverage alcohol, and non-food supplies) should not exceed 1% of your annual sales revenue.

Rule 3: The food inventory should not exceed 1/3 of the monthly food cost.

Inventory ControlSales Revenue:Beverage/Alcohol: $500,000Revenue+ Food Revenue $1,500,000Annual Sales Revenue: $ 2,000,000

Determine the weekly FC : 24%(.24)= $ 360,000 (1,500,000x.24)

Rule #1: Should not exceed 1 wk Food Cost.

Determine 1 wk of food cost. Food inventory should not exceed ? $ 6,923. (wk avg. FC= $360,000/52 wks)

Rule #2: Inventory should not exceed 1% of annual revenue.Total inventory of all goods in your property should not exceed ? $ 20,000 (2,000,000x.01)

Rule #3: The food inventory should not exceed 1/3 of monthly food cost.Your food inventory should be no more than? $ 10,000 ($360,000/ 12 months x 1/3 (.33)

Most chefs prefer #1. When you run a tight inventory, the food turns faster, there is less spoilage and less waste.

Quantities for Immediate UsePerishable food products:

fresh produce, bakery and dairy items must be purchased in small qty.

Less perishable products: frozen foods, dry storage, packaging supplies can be stored for

a longer time.

Example: Assume the purchaser determines that 8 cases of butter is needed (36 ea.) = 288lb will be needed during the 3 days for which an order is being placed & there are 1.5 cases available in storage. How much do we need to order?

8 cases - 1.5 cases = 6.5 casesQty Needed Qty On Hand Qty to Purchase

Ordering Terminology Approved Supplier List: Is a list of companies

eligible to receive payment from your restaurant/establishment, pertains only to vendors.

Order Record: save copies of ordering documents either printed or digital.

Kickback: is an illegal rebate. It is an illegal gift given by a vendor to someone if he or she is will help defraud the restaurant. Ex: most typical is where a buyer agrees

to pay an as purchased price for a product, but agrees to select a lower quality and pay the same price.

Calculating Product UsageStep 1 – Calculate customer forecast

Customer count last period + (Customer count last period x % increase expected)

Customer count forecast for this period

Step 2 – Calculate popularity index of the items

Number of customers choosing a specific entrée

÷

Total entrées sold = Popularity index of specific entrée

Calculate Product Usage

Customer count forecast for period

x Popularity index for item

= Forecast product usage

5,200 x .20% = 5,304

5,304 customers x 0.41 = 2,175 people

Step 3 – Calculate supply needed

Ordering Procedures

Reciprocal buying: “I’ll buy from you if you buy from me.” The best you can do is break even.

Direct Bartering or Trade outs: see if they belong to a barter group. Ex: you can trade free meals for retail cost of goods.

Credit Terms: 30day, 60, 90 day or COD, Payment in advance.

Cost-plus buying: purchase price is equal to the purveyors co.st plus profit mark up

Maintaining Inventory: 2 Types Physical Inventory: Requires managers

for employees to count all the items by hand. (Daily, weekly or monthly)

Perpetual Inventory: Maintained through stock record cards that document deliveries and issues by date. Bin cards are often used to record name, type of item, deliver dates, and issues or computer UPC codes.

ABC Rule An establishment categorizes each food

item into 1 of 3 categories:

A Very important: must be counted on daily basis.

B Important: Counted on inventory day.

C Not important and cheap: eyeballed on inventory day.

Count: means how many are on the shelves. Eyeball: means look & estimate how much is left in the package. Note: Each ABC category will have its own inventory sheet and totals.

Inventory Control It is not critical that the line between A, B, and C products be

drawn at any given point. A common guideline is:

Category A, top 20% of items Category B, next 30% of items Category C, next 50% of items

% of items in category A is small, the % of total monthly product cost the items account for is large.

% of items in category C is large, the total dollar value of product cost the items account for is small.

The ABC inventory system attempts to direct management’s attention to the areas where it is most needed, especially of high cost.

Inventory Control

We can now determine both the food cost percentages by category and product usage ratios.

Category cost of Food SoldTotal Sales = Category Food Cost %

$77,520 0_ $228,000 = 34.0 %

First in First Out MethodThis method assumes that the first one in the storeroom is the

first one that goes out. Therefore at the end of the period, the last ones purchased are those that are left in inventory.

Determine each extension and total cost using this method.

By 4/31 the 10 gallons that are left cost how much?

Date Number of Cans

Price/Can Extension

4-29 6 $3.11 $ 18.66

4-22 4 $3.12 $ 12.48

Total 10 $ 31.14

Actual Method With this method, as the cans are delivered, someone wrote

the date on the can. Then, when the inventory was taken, the counter marked down the dates on the count sheet.

Using the information from the count sheet invoices, the cost of the of the inventory is figured out. In this example, suppose the counter found peaches with the following dates:

Dates on Can

Number of cans

Price/can Extension

4-1 3 $ 2.58 $ 7.74

4-8 6 $ 2.60 $ 15.60

4-29 1 $ 3.11 $ 3.11

Total 10 $ 26.45

Cost of Food Sold (COFS) Calculation

Method Sales Beginning Inventory

+ Purchases

Ending Inventory

COGS Profit

FIFO $ 450 0 $ 132.54 $31.14 $101.40 $348.60

Actual $ 450 0 $ 132.54 $26.45 $106.09 $343.91

The chart shows the effect of the ending inventory on the COFS and profit. From the chart, you can see the higher the ending inventory, the lower the COFS and the higher the profit.

Purchases –Ending Inventory= COFSSales – COFS = Profit

Managing the Food Production Area Managing the food production process

(“back of the house” managers) entails control of the following five areas:- Waste- Overcooking- Overserving- Improper carryover utilization- Inappropriate make or buy decisions

Managing Overcooking Increased cooking time or

temperature can cause product shrinkage that increases average portion cost.

To control loss due to overcooking, management must strictly enforce standardized recipe cooking times.

The difference between a portion cost of $4.00 and $4.71 may seem small, it is the control of this type of production issue that separates the good foodservice manager from the outstanding one.

Determining Actual and Attainable Product Costs Yield test: is a procedure used for

computing your actual costs on a product that will experience weight or volume loss in preparation.

Waste %: is the percentage of product lost due to cooking, trimming, portioning or cleaning.

Waste % = Product Loss AP Weight