Restaurants have two main variable costs- cost of goods sold, and cost of labor. These directly scale up and down based on sales. In order to effectively manage a restaurant, Cost of Goods Sold (COGS) must be carefully managed. This white paper will delve into the tools and methodology a restaurant owner or manager can use to effectively manage their cost of goods by the use of data analytics.
What Does “Data Driven” mean?
A data driven approach is one that starts from data and derives a conclusion, rather than starting from a conclusion and trying to make the data fit a predetermined outcome. Sometimes the conclusions from the data will match a manager’s instinct, sometimes it may differ. To commit to a data driven approach is to always follow the conclusions derived from data and eliminate personal bias from the equation.
To effectively utilize a data-driven approach to manage a restaurant, a manager must know what data they are looking for, how to get the data from their POS system, and how to interpret what it is telling them.
Data and Metrics
This white paper will focus on the following key Concepts:
- Cost of Goods Sold
- Inventory Usage
- Inventory Efficiency
- Inventory Shrink
- Cycle Counts
- Sales Forecast
Cost of Goods Sold
A raw cost of goods sold calculation is typically generated using the following formula:
Cost of Goods Sold = Beginning Inventory Value + Purchased Inventory – Ending Inventory.
If you were calculating your COGS on a monthly basis, your cost of goods calculation may look something like the following:
$10,000 (Beginning Inventory) + $54,000 (Purchased Inventory) – $9,500 (Ending Inventory) = $54,500.
Although important, a simple COGS report alone is of limited value; Because it focuses on how money is being spent instead of accounting for how the inventory is being used by itself will provide few – if any – deep insights into potential operational issues. It only tells you where you are, not where you should be, so does not indicate or warn of potential issues.
An inventory usage report that gives a store manager the theoretical inventory usage based on actual sales data. This is a theoretical model of what your cost of goods sold would be in a perfect world. Because this report ideally has to take into account modifiers and build items, you will need a point-of-sale system that can track and generate this data from sales history, or you will need to manually construct it from receipts.
For example, in a given month, the POS system may report a total inventory usage of $48,000, taking in to account base product build items, modifiers added or removed, and other time-of-sale-factors.
If your inventory efficiency was 100%, the inventory usage and COGS report would be identical. Real world usage, however, will see variances due to shrink, inventory turn / expiration, and oversized/undersized portions.
The inventory efficiency value is a comparison of the raw COGS and the Inventory usage report and understanding inventory efficiency is one of the keys to good store management.
Inventory efficiency can be calculated using the following formula:
Inventory Efficiency = Inventory Usage / Cost of Goods Sold
Or using the example data from inventory usage and cost of goods sold above,
$48,000 (Inventory Usage) / $54,500 (COGS) = 88% (Inventory Efficiency)
A store can dramatically increase its margin by careful and diligent management of the inventory efficiency number. The example above shows a daily loss of over $200 per day due to inventory problems.
Inventory shrink is a measure of inventory items that that cannot be accounted for through usage or normal inventory expiration. Shrink can be caused by theft, breakage, spoilage and/or improper storage, paperwork errors, over/under provisioning / pouring, and other similar factors.
Note that shrinkage should not factor in yield- this should be part of your inventory utilization report because the waste from the product is calculated into goods sold.
For example: A 12-ounce steak may require your kitchen to cut an average 1.5 ounces of fat and gristle off of a 13.5-ounce product to yield a 12-ounce edible portion. This gives you a yield of about 88%, but from an inventory usage standpoint the 1.5 ounces of “lost” raw product are accounted for, and thus are not shrinkage.
Understanding how yield can impact restaurant operations, and how to evaluate product yields for comparison shopping between fresh product vendors is outside the scope of this document and will be covered in a subsequent white paper.
A cycle count is a limited count of inventory items based on various criteria versus a full count of every item. This allows the restaurant to minimize the daily time spent counting inventory, which is not a value-add to the end product. The goal of inventory counting is to help managers pinpoint inventory inefficiencies.
In its most simplistic form, a cycle count can be created by dividing all of the inventory items over a period of time- such as a month- and assigning items to different days of the month. For example, buns are counted on the 1st of the month, jars of pickles on the 2nd day of the month, etc. However, if items are only counted once per month, then it will be difficult to narrow down the specific cause of the shrink.
One method A manager can utilize is to set different schedules for different items based on item shrink or inventory efficiency. For example, if an item is routinely showing 20% shrink on a monthly basis, the manager may opt to count the item daily, or possibly even once per shift until the cause of the loss is found and corrected.
To help know when to increase the count frequency for an item, a manager can prioritize the items with the highest shrink percentage (e.g., lowest inventory efficiency), or they may opt to utilize a shrink dollars per item per item report to focus on the highest dollar loss items. When available, a shrink dollars per item report is preferable since it factors in how much money is being lost regardless of the shrink percentage. Tracking down the cause of a 5% shrink on an expensive wine may be far more important and cost effective than a 20% shrink on condiments.
Some items may simply not be worth counting, or only worth counting at the bulk level; Loose packets of condiments, individual napkins, plastic cutlery packages, and similar low-cost items are often best counted at the box level.
Managing Inventory Effectively