Drive Efficiency with Effective Inventory Control (Part 1 of 2)
Inventory cost control in foodservice has always been a focal point, but recently it has taken on an even more prominent role as escalating energy costs, manufacturing prices, and transportation and delivery bottlenecks have begun impacting restaurant operations. What is the best way to ensure an optimal mix of products in inventory without over-committing capital to storeroom items? Well, often it is moving from a par stock based inventory control system to a minimum-maximum algorithm accomplished through back office foodservice software.
Effective inventory control procedures can lower the cost of goods sold (COGS) while also enhancing
efficiencies in product receiving, tracking, replenishment, and auditing functions. Sound inventory policies help identify shrinkage, automate purchasing, retain historical data, and present automatic reordering of depleted products. Maintaining stable inventory prices assists management with determining feasible menu prices while generating effective item contribution margins. In addition, inventory reports can be customized to address many important operational concerns, including the optimization of stock on-hand inventory based on supplier lead and lag times.
Product tracking
Since restaurant ingredients tend to be purchased in case lots (purchase unit), stored in #10 cans (stock or issue unit), and applied in recipes by count or smaller measurements (recipe unit), product tracking from receipt to production to service can become quite complex. Unless foodservice software can discriminate between a case of canned corn, a #10 can of corn, and 8 ounces of corn, it is difficult to configure an effective inventory cost control system. The software must be capable of applying and relating different units for the same ingredient through the formulation of a convergence table. When recipes result in the consumption of six #10 cans, the software is aware that one case of the product will need to be replenished. Within the software, different unit sizes are defined and entered into an internal conversion table that the software applies multiple units of ingredients.
Reordering formats: par stock vs. mini-max
For quite some time the standard default reorder point for restaurant management software has been established using a par stock inventory system. In a par stock system, management determines a maximum number of storage units of a product that should not be exceeded in inventory. This number is normally determined based on speed of product usage as well as the product's average delivery time from the purveyor. This maximum number is termed the item's inventory par value. When a physical inventory is conducted the quantity of product needed to replenish depleted stock on hand is determined based on each ingredient's par value minus the remaining units in the storeroom (expressed in purchase units). For example, assume a par value of six cases for canned corn and a physical inventory (count) revealing there are four remaining cases in the storeroom. Now, then software will calculate the product's reorder quantity as the amount of the amount needed to restore the item to its par stock level; or in this case, two cases of canned corn. With a par stock system the reorder quantity fluctuates as it depends on the difference between the quantity on hand and the product's par stock level. A reorder amount that varies over time as product consumption varies.
A newer, more sophisticated inventory control technique is termed minimum-maximum, or mini-max, and involves pre-determining two levels of inventory for each product. The first level involves establishing a maximum value (maximum metric) of product to have in the storeroom, similar to a par stock value in that it reflects the quantity of inventory units that should not be exceeded. A second level (minimum metric) is determined based on the lead order time and lag delivery time of the purveyor. Using the canned corn example cited earlier, the maximum value is set at six cases. The minimum value is determined to be only two cases as the purveyor is able to deliver the product shortly after receiving a purchase order. Since the purveyor can deliver product in a relatively short timeframe, allowing the inventory to get down to two cases allows for efficient (termed just-in-time) restocking.
When a physical inventory reveals four cases of canned corn remaining in stock, restaurant management will not place a purchase order. In fact, no purchasing of canned corn will occur until the minimum quantity (two cases) is the quantity on hand. A major attraction of the mini-max system is that the identical quantity of the product is always ordered in the same quantity. This fixed size quantity enables management to negotiate a lower per purchase unit price as the order will always be for the same number of multiple cases; the order size will not fluctuate. In addition, management will benefit from having less of its capital tied up in inventory as purchases will occur less frequently and in relatively predictable patterns. Hence, in the canned corn example, management will not order replenishment until only two cases (minimum) remain on hand. Then, the quantity ordered will be four cases; the number needed to return the inventory level to its maximum level.
Part 2 of this series will expand upon the discussion of inventory control efficiencies to explore the roles of purchasing order links, top inventory control software functions, POS interfacing and more. Check back next Tuesday for more information.
Drive Efficiency with Effective Inventory Control (Part 2 of 2)
Michael L. Kasavana, Ph.D., is the NAMA Professor in Hospitality Business, The School of Hospitality Business at Michigan State University and holds CHTP (Certified Hospitality Technology Professional) and NCE (NAMA Certified Executive) certification. Dr. Kasavana is a recipient of the MSU Distinguished Faculty Award. In addition, he was inducted into the HFTP International Technology Hall of Fame and was presented the Distinguished Achievements Award from FS/TEC.
Effective inventory control procedures can lower the cost of goods sold (COGS) while also enhancing
efficiencies in product receiving, tracking, replenishment, and auditing functions. Sound inventory policies help identify shrinkage, automate purchasing, retain historical data, and present automatic reordering of depleted products. Maintaining stable inventory prices assists management with determining feasible menu prices while generating effective item contribution margins. In addition, inventory reports can be customized to address many important operational concerns, including the optimization of stock on-hand inventory based on supplier lead and lag times. Product tracking
Since restaurant ingredients tend to be purchased in case lots (purchase unit), stored in #10 cans (stock or issue unit), and applied in recipes by count or smaller measurements (recipe unit), product tracking from receipt to production to service can become quite complex. Unless foodservice software can discriminate between a case of canned corn, a #10 can of corn, and 8 ounces of corn, it is difficult to configure an effective inventory cost control system. The software must be capable of applying and relating different units for the same ingredient through the formulation of a convergence table. When recipes result in the consumption of six #10 cans, the software is aware that one case of the product will need to be replenished. Within the software, different unit sizes are defined and entered into an internal conversion table that the software applies multiple units of ingredients.
Reordering formats: par stock vs. mini-max
For quite some time the standard default reorder point for restaurant management software has been established using a par stock inventory system. In a par stock system, management determines a maximum number of storage units of a product that should not be exceeded in inventory. This number is normally determined based on speed of product usage as well as the product's average delivery time from the purveyor. This maximum number is termed the item's inventory par value. When a physical inventory is conducted the quantity of product needed to replenish depleted stock on hand is determined based on each ingredient's par value minus the remaining units in the storeroom (expressed in purchase units). For example, assume a par value of six cases for canned corn and a physical inventory (count) revealing there are four remaining cases in the storeroom. Now, then software will calculate the product's reorder quantity as the amount of the amount needed to restore the item to its par stock level; or in this case, two cases of canned corn. With a par stock system the reorder quantity fluctuates as it depends on the difference between the quantity on hand and the product's par stock level. A reorder amount that varies over time as product consumption varies.
A newer, more sophisticated inventory control technique is termed minimum-maximum, or mini-max, and involves pre-determining two levels of inventory for each product. The first level involves establishing a maximum value (maximum metric) of product to have in the storeroom, similar to a par stock value in that it reflects the quantity of inventory units that should not be exceeded. A second level (minimum metric) is determined based on the lead order time and lag delivery time of the purveyor. Using the canned corn example cited earlier, the maximum value is set at six cases. The minimum value is determined to be only two cases as the purveyor is able to deliver the product shortly after receiving a purchase order. Since the purveyor can deliver product in a relatively short timeframe, allowing the inventory to get down to two cases allows for efficient (termed just-in-time) restocking.
When a physical inventory reveals four cases of canned corn remaining in stock, restaurant management will not place a purchase order. In fact, no purchasing of canned corn will occur until the minimum quantity (two cases) is the quantity on hand. A major attraction of the mini-max system is that the identical quantity of the product is always ordered in the same quantity. This fixed size quantity enables management to negotiate a lower per purchase unit price as the order will always be for the same number of multiple cases; the order size will not fluctuate. In addition, management will benefit from having less of its capital tied up in inventory as purchases will occur less frequently and in relatively predictable patterns. Hence, in the canned corn example, management will not order replenishment until only two cases (minimum) remain on hand. Then, the quantity ordered will be four cases; the number needed to return the inventory level to its maximum level.
Part 2 of this series will expand upon the discussion of inventory control efficiencies to explore the roles of purchasing order links, top inventory control software functions, POS interfacing and more. Check back next Tuesday for more information.
Drive Efficiency with Effective Inventory Control (Part 2 of 2)
Michael L. Kasavana, Ph.D., is the NAMA Professor in Hospitality Business, The School of Hospitality Business at Michigan State University and holds CHTP (Certified Hospitality Technology Professional) and NCE (NAMA Certified Executive) certification. Dr. Kasavana is a recipient of the MSU Distinguished Faculty Award. In addition, he was inducted into the HFTP International Technology Hall of Fame and was presented the Distinguished Achievements Award from FS/TEC.