Chapter 7 Inventory Control How Do I Keep Track of All This Stuff?

1. Chapter 7Inventory ControlHow Do I Keep Track of All This Stuff?

2. Chapter Outline Purchase Requisition Stock Requisition Specifications Standard Recipes Maximum Inventory to Keep on Hand Vendor Approval Order Record

3. Chapter Outline Kickbacks Steward Sales Receiving Procedures Storage Food Cost Analysis Employee Fraud Direct Control System

4. Learning Objectives • Set up an inventory control system. • Know how product specifications and standardized recipes contribute to inventory control systems. • Determine how much inventory an operation should keep on hand.

5. Learning Objectives • Explain the ethical and legal consequences of kickbacks and detect their presence. • Manage steward sales. • Navigate the vendor approval process. • Describe the receiving and storage process. • Perform food cost analyses.

6. Learning Objectives • Understand the difference between the standard cost of food sold and the actual cost of food sold. • Conduct a physical inventory. • Use inventory control procedures to keep theft, waste, and pilferage at acceptable levels.

7. Purchase Requisition • Normally found in large hotel food and beverage operations • Precedes the purchase order • Clarifies the need for the item and includes specifications • Good for tracking things outside normal inventory control system

8. Stock Requisition • Used in cases of a storage facility managed by a separate department head • Similar to purchase requisition • Usually a computerized process • Can provide up-to-date food and beverage cost information

9. Specifications • Control product quality and costs • Consistency = Predictability = Better Forecasting

10. Standard Recipes • Control product quality and costs • Absolutely necessary • Even one-time specials should have a standard recipe (with costs) • “Don’t pick up the knife until you have a plan.”

11. Maximum Inventory • Three “Rules” to Choose From: • Rule #1: Value of food inventory should not exceed a week’s food cost • Rule #2: Total inventory should not exceed 1 percent of annual sales revenue • Rule #3: Food inventory should not exceed 1/3 of the monthly food cost

12. Maximum Inventory Example: Total Annual Revenue: $2,000,000 ($500,000 beverage alcohol; $1,500,000 food) Food Costs: 24% or $360,000 ($1,500,000 × .24) Rule #1 Food inventory should not exceed $5,923 (360,000 ÷ 52 = $5,923)

13. Maximum Inventory Example: Total Annual Revenue: $2,000,000 ($500,000 beverage alcohol; $1,500,000 food) Food Costs: 24% or $360,000 ($1,500,000 × .24) Rule #2 Food inventory should not exceed $20,000 ($2,000,000 × .01)

14. Maximum Inventory Example: Total Annual Revenue: $2,000,000 ($500,000 beverage alcohol; $1,500,000 food) Food Costs: 24% or $360,000 ($1,500,000 × .24) Rule #3 Food inventory should not exceed $10,000 ($360,000 ÷ 12 months × 1/3)

15. Maximum Inventory • Most chefs prefer Rule #1 • Easier to meet food cost percentage goal • Less spoilage and waste • Not a lot of temptation for pilfering • May pass up good deals • Stockouts may increase

16. Maximum Inventory • Authors Prefer Rule #3 for Food • Cannot accept stockouts • Cannot pass up good deals

17. Maximum Inventory • Use Rule #2 if Responsible for Beverage Inventory and Operating Supplies • Gives a little leeway

18. Vendor Approval • Approved Supplier List • Vendor Approval Process • Use criteria noted in Chapter 3 • Add a vendor temporarily to test products/services • Approved-Payee List

19. Order Record • Absolutely Necessary • Doesn’t Have to be Formal

20. Kickbacks • Illegal gift by vendor to encourage defrauding of the restaurant • Avoid by Doing All Buying Yourself • Type of Fraud: Accepting lower-quality product while paying higher AP price

21. Steward Sales • Allowing employees to purchase items from the restaurant at restaurant prices • Employee perk • Most large companies don’t allow this • May increase stockouts and pilferage

22. Receiving Procedures • Control product quality and costs • Absolutely necessary • Even one-time specials should have a standard recipe (with costs) • “Don’t pick up the knife until you have a plan.”

23. Receiving Procedures • Introduction • Focus on the project at-hand • Trust process to an extremely knowledgeable employee or do it yourself

24. Receiving Procedures 1. Compare invoice to order record (these must match) 2. Check the product quality • Open packages to check for spoilage • Check temperatures of refrigerated/frozen foods • Note expiration dates 3. Check the quantity • Count and weigh items • Spot-check portion-cut items • Check and calibrate scale regularly

25. Receiving Procedures 4. Compare AP prices to quoted prices (spot-check should be okay) 5. Accept shipment/sign invoice 6. Rejecting all or part of a shipment – Ensure proper credit 7. Arrange to return unacceptable items

26. Receiving Procedures 8. Move accepted items into storage – Refrigerated/frozen product most important – Helps prevent pilferage – Some items may go straight to production 9. Complete necessary paperwork

27. Receiving Procedures 10. If on COD send driver to pick up check 11. If inventory is computerized, update inventory amounts, AP price changes and bar codes 12. Give driver items for backhaul (returns or recyclables) 13. Follow same procedures with route sales 14. Change process to accommodate FedEx, UPS, etc. orders

28. Storage Procedures 1. Limited access is primary defense against theft or pilferage –Lock up expensive items – Other ingredients in open storeroom 2. Use good locking system – Physical locks (Medeco) – Locking system (Marlok) – Alarms (can also warn of refrigeration issues)

29. Storage Procedures 3. Use web cam security 4. Rotate stock – Move older stock to the front of the shelf – Use FIFO method of inventory: first-in, first-out – Purchase a dot system (Daydots) 5. Maintain proper temperature, ventilation, humidity

30. Storage Procedures 6. Clean and sanitize storage area 7. Arrange inventory conveniently on shelves

31. Food Cost Analysis:Actual Cost Calculated at Month End

32. Food Cost Analysis:Actual Cost Calculated at Month End

33. Food Cost Analysis:Standard Cost Calculated at Month End • Also known as expected or theoretical food cost • Provides something to compare to the actual cost of food sold • Difference between “actual” and “standard” cost of food sold is the variance or costvariance

34. Food Cost Analysis:Standard Cost Calculated at Month End • Need to know the following: • Number of each menu item sold (from POS system) • Standard recipe cost of each item • Multiple these two figures and then add all together for total standard cost of food sold • Dividing the total standard cost by the total sales revenue gives standard cost of food sold percentage

35. Food Cost Analysis:Standard Cost Calculated at Month End • Calculate the difference between the actual and standard cost percentages to determine the variance • If the variance is too high, the cause(s) must be found and eliminate • Often standard costs are estimates at best

36. Food Cost Analysis:Shift-End Inventory of Expensive Items • A legal pad will do the trick • Five columns • Typical items (fish, meat, etc.) • How many at start of shift • How many issued during shift • How many left at end of shift • How many used during shift • Separate sheet for each shift

37. Food Cost Analysis:Practice Problem Data Roast for pork cutlets – 25 lbs with loss of 5.5 pounds AP price for pork roasts – $4.50 per pound Standard Portion – 9 ounces Opening inventory – 115 pounds (AP) Issued during period – 235 pounds (AP) Ending inventory – 110 pounds (AP) Sold – 300 cutlet entrees at price of $15.95

38. Food Cost Analysis:Practice Problem – Usage Variance • 115 lb. + 235 lb. – 110 lb. = 240 lb. actual usage • 300 sold × 9 ounces = 2,700 ounces (EP) • or 169 lb. (EP) • Calculate yield percentage: (25 lb. – 5.5 lb) ÷ 25 lb. = 0.78 or 78% • 169 ÷ .78 = 217 lb. • Should have used 217 lb. (AP) for 300 cutlets • Variance = 240 lb. (AP) – 217 lb. (AP) = • 23 lb. Usage Variance

39. Food Cost Analysis:Practice Problem – Cost/Sales Revenue Variance • 23 lb. (AP) × $4.50 per lb. = • $103.50 Cost Variance • 23 lb. (AP) × .78 = 18 lb. (EP) • 18 lb. × 16 ounces per lb. = 288 ounces • 288 ounces ÷ 9 = 32 portions • 32 portions × $15.95 = • $510.40 Sales Revenue Variance

40. Food Cost Analysis:Practice Problem – Data Chicken breast for fajitas AP price for chicken breasts – $3.19 per pound 1 pound (AP) yields 3 servings Opening Inventory – 75 pounds (AP) Purchased during period – 90 pounds (AP) Ending inventory – 25 pounds (AP) Sold – 350 orders of chicken fajitas for $8.95

41. Food Cost Analysis:Practice Problem 75 lb. + 90 lb. – 25 lb. = 140 actual usage (1 lb. ÷ 3 servings) = (X lb. ÷ 3 servings) × 350 X lb. = (1 lb. ÷ 3 servings) × 350 servings = 117 140 lb. – 117 lb. = 23 lb. Usage Variance 23 lb. × $3.19 per pound = $73.37 Cost Variance 23 lb. × 3 servings × $8.95 = $617.55 Sales Revenue Variance

42. Food Cost Analysis:Practice Problem -- Data Coffee Service AP price for coffee – $3.25 per pound 1 pound (AP) yields 58 cups Opening Inventory – 50 pounds (AP) Purchased during period – 75 pounds (AP) Ending inventory – 42 pounds (AP) 2,585 guests expected to drink 1 ½ cups each

43. Food Cost Analysis:Practice Problem 50 lb. + 75 lb. – 42 lb. = 84 lb. actual usage 2,585 customers × 1.5 cups each = 3,878 cups 3,878 cups ÷ 58 cups per pound = 67 lb. (AP) expected use − 83 lb. actual use = 16 lb. Usage Variance 16 lb. × $3.25 per pound = $52 Cost Variance (approximately)

44. Food Cost Analysis:Practice Problem -- Data Bar Operation AP price for Seagram’s Gin – $14.50 per liter Drink size – 1.5 oz. Opening Inventory – 5 liters (AP) Ending inventory – 2.5 liters (AP) 75 drinks @ $6 per drink

45. Food Cost Analysis:Practice Problem 2.5 liters = actual usage 2.5 × 33.8 oz. = 84.5 oz. actual usage 75 × 1.5 oz. = 112.5 ounces expected usage 112.5 − 84.5 = 28 Ounces or 8/10 Liter Usage Variance 14.50 × .80 = $11.50 Cost Variance (approximately)Note: Actual is LESS than Expected

46. Food Cost Analysis:Biweekly Physical Inventory – Beverage Alcohol • Consider outsourcing to inventory-taking service • Count everything • Calculate actual cost of beverage used • Calculate actual cost of beverage sold • Suggest order size • Calculate sales revenue you should have collected

47. Food Cost Analysis:How Much Variance is Too Much? • The answer varies • If it varies too much: • Your calculations may be wrong • You received a shipment of off-spec products • There is extra production waste • Portion sizes are too small (or too big) • Someone is ripping you off

48. Employee Fraud • Labor Cost Control • Labor needs fluctuate with the number of guests to a certain point – if a line cook can produce 40 meals, adding another 10 doesn’t add the need for another cook; if the number of meals drop to 30, you will still need the cook (it’s hard to hire ¾ of a cook no matter how hard you try)

49. Direct Control System • You are the direct control system • Walk around • Be visible • Don’t sit in your chair (if you have a chair)