Inventory Variance in Restaurants: Why It Matters and How to Overcome It

Inventory Variance for Restaurants | SynergySuite

For restaurants, where precise inventory management is essential for controlling costs and ensuring a seamless supply chain, understanding inventory variance is a critical aspect that can significantly influence the financial health and operational efficiency of an establishment. This introduction sets the stage for a deeper exploration into the intricacies of inventory management in restaurants, delving into the reasons behind variances and how a nuanced understanding of these discrepancies can empower restaurant owners and managers to optimize resources, reduce waste, and enhance overall profitability.

As a restaurant owner or manager, perhaps you’ve noticed that, at times, actual inventory and recorded inventory have a discrepancy. Fixing such discrepancies is a must because precise inventory management controls costs and ensures a seamless restaurant supply chain.

This is incredibly important for two reasons:

  1. Increased costs eat into profit margins. This table of profit margins by industry shows that restaurants average a roughly 40% gross profit margin but only take home about a 5% net profit margin. While restaurants aren’t alone (and some industries have higher gross and lower net margins), it’s important to be aware of this.
  2. Seamless operations = higher customer satisfaction. If you ever run into supply chain issues, like when you run out of a particular ingredient, this means your customers could be unable to order their favorite dish. While occasionally this can and does happen, it’s important to try to prevent such issues because it does still hurt your business. Dialing in your inventory tracking strategy can help you mitigate these issues.

Understanding inventory variance is a critical aspect that can significantly influence the financial health and operational efficiency of an establishment. This introduction sets the stage for a deeper exploration into the intricacies of inventory management in restaurants, delving into the reasons behind variances and how a nuanced understanding of these discrepancies can empower restaurant owners and managers to optimize resources, reduce waste, and enhance overall profitability.

What Is Inventory Variance?

Inventory variance is the difference between the expected quantity of inventory and the actual quantity on hand. In other words, it’s the gap between what you think you have and what you actually have in your restaurant’s storage areas. Also known as stock or inventory shrinkage, inventory variance is a common challenge faced by restaurant owners and managers.

Inventory variance serves as a critical performance indicator that reflects the accuracy and efficiency of a restaurant’s supply chain and inventory management processes. Managing inventory variance is crucial for the overall success and profitability of your restaurant.

Left unresolved, this issue can cause tremendous problems for your restaurant. When handled correctly, however, your restaurant will unlock several great benefits

How Inventory Variance Impacts Restaurants

Understanding and addressing inventory variances are essential for controlling costs, minimizing waste, and optimizing resource utilization. Let’s explore the significance of inventory variance in more detail.

Impact on Cost Management and Profit Margins

Inventory represents a significant portion of a restaurant’s assets and a vital part of your business because, without all those ingredients in inventory, your restaurant can’t serve your customers. This will then have a direct impact on your bottom line.

When inventory variance occurs, it can lead to increased costs due to over- or under-ordering supplies.

In the short-term, this can cause temporary stocking problems that may either necessitate ordering ingredients that are low in stock at unfavorable prices, or throwing away ingredients that have spoiled because your restaurant can’t use them fast enough. Long-term, it can and probably will erode your profits due to increased costs.

Influence on Menu Planning

Inventory variance can also affect your menu planning. You might have planned out a specific menu with a certain quantity of each dish to be provided to customers. Without variances, you should be able to carry this out without hiccups. If you consistently have variances in key ingredients, however, it can disrupt your ability to offer certain dishes to customers.

To combat this, as mentioned above, you may need to procure those key ingredients quickly, but at a higher cost—if you can procure them at all. That said, your customers could still be impacted as it likely takes time to receive the ordered ingredients.

In the meantime, you’ll have to divert customers to dishes other than the desired (potentially favorite) dish(es), which can lead to customer dissatisfaction and a loss of repeat business.

By closely monitoring the variance between expected and actual inventory levels, restaurant owners and managers can identify discrepancies, potential theft, or issues with ordering and storage. This knowledge empowers them to make informed decisions to enhance operational efficiency, maintain consistent stock levels, and ultimately maximize profitability.

How to Calculate Inventory Variance

Calculating inventory variance is a fairly simple process, but one that should be repeated on a regular basis. Here’s a step-by-step guide to calculate inventory variance:

  1. Conduct Regular Inventories: Begin by taking a physical inventory of all your items. This should be done regularly (weekly or monthly) for accuracy.
  2. Record Usage: Track the usage of each item during the period between inventories. This includes all items used in the restaurant, whether for cooking, serving, or other purposes.
  3. Calculate Expected Inventory: Use your sales data and recipe information to calculate the expected usage of each item. For example, if you sold 100 dishes that use two tomatoes each, you would expect to have used 200 tomatoes.
  4. Determine Actual Inventory: At the end of your inventory period, conduct another physical count of your stock.
  5. Calculate Variance: To actually calculate variance, you’ll need a few things:
  • Beginning inventory (stock at the start of the period)
  • Purchases (additional stock bought during the period)
  • Ending inventory (stock at the end of the period)
  • Usage (expected usage based on sales and recipes)

The formula for the inventory variance over a specific time period is:

Inventory Variance = ( Beginning Inventory + Purchases ) − ( Ending Inventory + Usage )

  1. Analyze the Results: Now it’s time to go over the results of your formula. Having some variance is normal, but any variance shouldn’t exceed a percentage or two in either direction, positive or negative.
  • A positive variance indicates you have less stock than expected, suggesting issues like waste or theft.
  • A negative variance means you have more stock than expected, which could indicate over-purchasing or errors in tracking.

  1. Implement Solutions: Based on your findings, take appropriate actions. This might involve tightening inventory controls, adjusting purchasing habits, or reevaluating portion sizes.

Remember, SynergySuite’s advanced inventory management tools can automate and simplify this process, providing real-time data and analytics to help you maintain optimal inventory levels, reduce waste, and improve profitability. By leveraging technology, you not only streamline the inventory process but also gain deeper insights into your operation, leading to more informed decision-making and operational efficiency.

Common Causes of Inventory Variance

Inventory variance can occur for a variety of reasons. Identifying these common causes is the first step toward effective inventory management. Let’s explore them:

  • Human Error in Tracking: Human error is one of the primary culprits behind inventory variance. Miscounts, incorrect data entry, and misunderstandings during the tracking process can lead to discrepancies in your inventory records. Over time, these errors can accumulate and significantly impact your restaurant’s bottom line.
  • Supplier Discrepancies: Suppliers play a vital role in your inventory management process. Discrepancies in the orders you receive from suppliers, such as missing or incorrect items, can lead to inventory variance. It’s essential to promptly address and rectify these discrepancies to maintain accurate inventory levels.
  • Theft and Loss: Unfortunately, theft and loss can be a part of the restaurant industry. Whether it’s employees, customers, or external factors such as break-ins, theft and loss can contribute to inventory variance. Implementing security measures and monitoring inventory storage areas can help mitigate these risks.
  • Portion Control Issues: Inconsistent portion control during food preparation can also lead to inventory variance. If your chefs and kitchen staff are not following standardized portion sizes, it can result in overuse of ingredients and increased food costs.
  • Preparation Waste: Similarly to portion control issues, if inventory is prepared in a way that results in more waste than necessary, that waste can add up over time and lead to increased loss and inventory variance. And to top it off, the extra inventory is being fed to the trash can, instead of your customers.
  • Accidents: While hopefully not a terribly common occurrence, accidents like spills or mismanagement of storage measures happen, and can contribute to inventory variance. When the spill is just a small container, the difference likely goes unnoticed. But if a large container is dropped, broken, or spilled, a significant amount of inventory can be lost.

Strategies to Reduce Inventory Variance

Reducing inventory variance is a crucial objective for restaurants seeking to enhance operational efficiency and control costs. Implementing strategic measures can significantly mitigate the discrepancies between expected and actual inventory levels. Now that we’ve identified the common causes of inventory variance, let’s explore strategies to minimize and manage it effectively in your restaurant:

  • Implement Effective Inventory Management Systems: Investing in a robust inventory management system can streamline the tracking process, reduce human error, and provide real-time insights into your inventory levels. These systems often come with features like automated reordering and barcode scanning to improve accuracy.
  • Perform Regular Inventory Audits: Performing regular physical inventory audits is essential. This involves physically counting and verifying the quantities of items in your storage areas against your recorded inventory levels. Regular audits help identify and rectify discrepancies promptly. For many businesses, this can be done once or twice a year, but for restaurants, it’s important to hold these regular audits more often (such as weekly or monthly.
  • Implement security policies and measures: This includes monitoring storage areas, securing valuable items, and conducting thorough background checks when hiring new employees. Additionally, establish clear policies and consequences for theft or mishandling of inventory, hoping that employees will always be honest but preparing for the worst, just in case.
  • Train Staff on Inventory Practices: Training your staff in proper inventory management techniques is crucial. Provide comprehensive training to your staff involved in inventory management. Ensure that everyone involved in handling inventory is aware of the importance of accuracy and follows standardized procedures for receiving, storing, and tracking items. Have someone more experienced available to answer questions or assist employees who are learning the process to increase accuracy.
  • Establish Strong Relationships with Suppliers: Maintaining good relationships with your suppliers is essential for reducing supplier-related inventory variance. Communicate regularly with them, verify orders upon delivery, and address any discrepancies promptly to maintain accurate inventory levels. Building strong relationships with suppliers can lead to quicker resolution of issues and reduced supplier-related variance. By building and maintaining strong relationships with your suppliers, you may also be able to also negotiate deals that reduce your costs over time.
  • Leverage Technology in Inventory Management: Advancements in technology have revolutionized inventory management in restaurants, reduce the likelihood of errors and improve overall accuracy, offer real-time tracking of inventory levels, and enable managers to make data-driven decisions and promptly address discrepancies. Integration with point-of-sale systems and supplier databases enhances efficiency by automating order processes and maintaining up-to-date product information.

Now that we’ve talked about a few top strategies for tackling inventory variance, let’s do a deep dive on technology by going over inventory management software.

Overview of Inventory Management Software

Inventory management software allows you to digitize your inventory tracking process. It offers features like real-time updates, reporting, and analytics, making it easier to identify and address variances  promptly. Integrating technology into your inventory management processes can provide several advantages, including:

  • Accuracy: Reduces the chance of human error thanks to automated systems.
  • Efficiency: Streamlines processes to save time and effort.
  • Real-time Data: Provides access to real-time inventory data, which helps you make informed decisions.
  • Cost Savings: Minimizes variances which reduces waste and lowers food costs.
  • Improved Supplier Relations: When the ordering process is automated, two things happen: first, you’ll never run out of essential items. Second, your relationship with your suppliers will improve as you’ll never need to worry about making last-minute phone calls to place or change your order, and your suppliers can plan ahead to ensure that they have enough inventory for you.

By incorporating technology into your inventory management, you can significantly reduce variance and enhance the overall efficiency of your restaurant operations.

Best Practices for Accurate Inventory Tracking

Regular and systematic physical counts of inventory, reconciled with digital records, provide a baseline for accuracy and help identify discrepancies promptly. To maintain precise inventory records and minimize variance, consider implementing the following best practices: 

  • Setting Up a Consistent Tracking Routine: Establish a regular schedule for tracking your inventory. Consistency in counting and recording inventory levels helps detect variances early and prevents inaccuracies from accumulating over time.
  • Importance of Detail in Inventory Records: Maintain detailed records of each item in your inventory, including its name, quantity, purchase price, and usage history. Accurate records make it easier to identify discrepancies and make informed decisions about reordering.
  • Regular Review and Analysis of Inventory Data: Regularly review your inventory data and analyze trends. Look for patterns in variances and adjust your inventory management strategies accordingly. This proactive approach can help prevent future discrepancies.

Stay on Top of Your Restaurant Analytics with SynergySuite

Managing inventory variance is an ongoing process that requires dedication and attention to detail. Continuous improvement in your inventory management practices can lead to reduced costs, increased efficiency, and improved customer satisfaction. Regularly review and update your inventory management procedures, adapt to changing circumstances, and stay open to new technologies and strategies.

It’s critical to have implemented a quality restaurant reporting and analytics platform like SynergySuite to readily stay on top of your data and make informed decisions. Many of the problems and challenges of running a restaurant can be solved or avoided with the right restaurant reporting tools.

We offer restaurant analytics software that captures and presents your data in an easy-to-understand dashboard. We make it simple to use your valuable data to save time, improve profitability, and ensure compliance with regulations.

Schedule a demo today to see how SynergySuite can help you take your restaurant business to the next level.

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