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When managing a restaurant, it can feel as though you’re constantly playing a game of catch-up. You have customers to serve, phones to answer, and deliveries at your back door. A fast-paced environment is to be expected, but that chaos doesn’t need to spill over into your day-to-day operations or your customer experience, where it can start affecting your bottom line.
A well-implemented inventory management system is the best antidote to operational chaos. It will help you avoid losing money to unnecessary waste, and help you increase profit margins, which is more important than ever, given rising food inflation and labour costs.
What is restaurant inventory management?
Restaurant inventory management is the process of tracking food and beverage stock to maintain required levels of ingredients, allow for timely reordering, and reduce waste.
Nowadays, most restaurants use dedicated restaurant inventory management software, which integrates with other apps like a POS system, to automate tracking.
Why is inventory management important?
Inventory management is a core part of smooth restaurant operations. When done poorly, it has knock-on effects across the whole restaurant: chefs and bar staff can’t fulfil orders, customers become unhappy, and the standing of the brand is damaged. Well-managed inventory, however, lays a firm foundation for long-term profitability.
Here are some key reasons why inventory management is important:
- Rising food and labour costs in the UK mean that it’s more important than ever to manage food inflation and minimise costs.
- Resourceful use of ingredients cuts the cost of goods sold (the direct cost of producing menu items) – leading to savings you can then pass on to diners.
- Restaurants that track fluctuations in customer numbers and habits, which inventory management software makes possible, are better equipped to deal with unexpected and seasonal demand.
- By eliminating concerns around shrinkage (or lost inventory), restaurants can safely expand the range of products they offer.
- Costs of ancillary services, particularly restaurant bars, quickly add up if not monitored closely – inventory management allows you to improve bar inventory and offer a targeted selection of products without racking up unseen costs.
- Good inventory management improves cash flow by freeing up capital that would otherwise be tied up in stock, which can then be used elsewhere in the business.
Let’s look at the practical elements of managing restaurant supplies so that you can keep costs low, menus exciting, and – most importantly of all – customers happy.
How to reduce food waste
Reducing food waste is essential for maximising profitability. It’s also a necessary part of running a sustainable restaurant, and a key selling point for an increasingly eco-conscious customer base.
Fortunately, reducing food waste isn’t a complex process. It’s a natural outcome of good inventory management. Following a handful of best practices will ensure that you size portions appropriately, limit spoilage, and don’t over- or under-order supplies.
Portion control
Sizing portions reduces food waste for obvious reasons. However, judging whether portions are too small or too large requires human input. Restaurant managers and owners should combine two strategies: manual plate waste checks and customer surveys.
Manual plate waste checks can be carried out by most staff members. If cleared dishes consistently come back to the kitchen with leftovers, this is a reliable sign that portions are too large. Meanwhile, customer feedback in the form of surveys alerts you to undersized portions. Diners are usually more than willing to say if a portion was too small, and it’s a question you can ask directly on feedback slips.
Over-ordering
Over-ordering happens when you purchase more stock than is required to meet demand for menu items. This is typically a result of human error, poor forecasting, or inaccurate tracking.
An inventory management system gives you full oversight of the ingredients you have in stock. It also alerts you to over-ordering by calculating your inventory turnover ratio, which divides the cost of goods sold (COGS) over a given time by your average inventory.
Here’s the formula for calculating your inventory turnover ratio:
Inventory Turnover Ratio = COGS / [(Inventory at End of Previous Period + Inventory at End of Current Period) / 2)]
Example: The cost of goods sold over a month is £100. Starting inventory was worth £10, and finishing inventory was £30. Your average inventory value is (£10 + £30)/ 2 = £20. Therefore, your inventory turnover ratio is £100 / £20 = 5.
The number tells you how many times you sell and replenish your stock over the specified period. A low score (under four) indicates over-ordering, while a ratio of between four and eight usually points to healthy turnover. There are some exceptions, such as when you’re stockpiling in anticipation of supply issues.
Spoilage
Over-ordering in the restaurant industry is particularly problematic because of spoilage. The window to turn over stock is much smaller than in other industries and, as such, the risk of losing money is dramatically higher if inventory turnover is too slow.
While ordering at the right level is the best thing you can do to reduce spoilage, there are also other actions you can take. Storing items in appropriate temperature-controlled environments, labelling adequately with use-by dates, and opting for suppliers of high-quality produce that will last longer will all help.
Kitchen errors
Kitchen errors create a lot of food waste. Overcooking spoils ingredients, which must then be discarded, poor chef technique results in excess trim, and misreading tickets produces dishes that can’t be served at all and go entirely to waste.
Effective hiring and training of kitchen staff reduces issues related to overcooking and preparation. At the same time, implementing a kitchen display system prevents miscommunication between front and back of house staff and helps maintain an orderly kitchen.
Effective restaurant inventory strategies to implement
Restaurants that get inventory management right take a multi-pronged approach. They account for all operational areas, from tech integrations to manual checks.
While inventory management is a group effort, one individual (usually the restaurant manager) should ideally take ownership of the process at a high level. This will ensure that the machine works as a whole and that all relevant metrics are tracked.
Regularly perform inventory counts
While it’s possible to automate many aspects of inventory tracking with an integrated set of apps and hardware, manual checks are still important. They can verify what your software is telling you, especially when you first take delivery of stock. Additionally, they alert you to ingredients that are at risk of spoiling.
Consistency is important. Manual inventory checks should be carried out on a regular basis — usually weekly at a minimum — and according to clear standard operating procedures (SOPs).
Establish optimal stock levels for food
What is an optimal stock level? The short answer is one that results in an inventory turnover ratio of between four and eight.
Your inventory turnover ratio measures how efficiently you’re processing ingredients. A low number indicates you’re holding on to too much produce, while a number that’s excessively high indicates you may be unprepared for periods of peak demand.
Finding the optimal level for your restaurant is an ongoing process, requiring regular review and adjustment. Measuring ingredient usage rates, menu item popularity, and past sales will help you maintain optimal stock levels.
Establish PAR levels
Periodic automatic replenishment (PAR) acts as a safety net for inventory management. It takes into account the minimum acceptable level of stock for an item. If stock falls below that level, the ingredient or beverage is automatically reordered to bring it back to the acceptable level.
Here’s the formula for calculating the PAR level of an ingredient:
PAR Level = (Average Daily Usage × Delivery Lead Time) + Safety Stock
Example: If you use 30 fillet steaks per day on average, the delivery time is 3 days, and you need 40 steaks as safety stock, the PAR is (30 × 3) + 40 = 130.
Using PAR levels prevents stockouts and costly last-minute reorders, limits waste from excess stock, and protects against disappointing customers.
Implement FIFO
First in First Out (FIFO) is a system in which the oldest stock is used first. It’s an especially effective method of managing perishable goods.
Follow these steps to implement FIFO:
- Label deliveries with the date you received them.
- Organise new items by date behind older ones.
- Train staff to retrieve the oldest stock first.
- Perform manual checks of expiry dates regularly.
- Prioritise fresh produce over frozen where appropriate.
- Use soon-to-expire ingredients for specials.
FIFO is a relatively simple process, but it’s highly effective at preventing spoilage and ensuring all ingredients are used.
Track food waste
The Waste and Resources Action Programme estimated that the UK hospitality and food services sector produced 1,122,000 tonnes of waste between 2022 and 2023, with up to 18% of all purchased food going in the bin. Translated into financial terms, 18% represents a big potential cost saving.
You should track food waste across the following areas:
- Spoilage: Ingredients expiring before use
- Plate waste: Customers leaving food due to large portion sizes
- Preparation waste: Trimmings and kitchen mistakes
- Over-ordering: Stock purchased but left unused
When you monitor specific types of food wastage, you can target the problem directly by taking measures such as reducing portion size or limiting over-ordering.
Organise your storage space
A well-organised storage area is indispensable for performing efficient inventory checks, reducing waste, and maintaining food hygiene.
Here’s how to keep your storage space organised:
- Set up automated temperature alerts (especially for perishables).
- Label all food clearly with delivery and expiry dates.
- Follow food hygiene practices (like separating raw and cooked food).
- Regularly clean and organise your storeroom, ideally on a weekly or daily basis.
- Use clear containers for easy identification.
These guidelines might seem simple, but good food storage practices are the foundation of effective inventory management. If you can’t access a clean, clearly labelled area, it’s very difficult to effectively monitor stock.
Train staff
According to a 2024 CIPD analysis of employment data, hospitality has the highest employee turnover rate of all UK industries. The loss of trained staff makes it difficult to maintain high inventory management standards, so ongoing, comprehensive staff training is vital.
You should hold regular sessions for new and existing staff, covering accurate inventory tracking methods, use of software, procedures for receiving and inspecting deliveries, FIFO, waste tracking, portion control, and food hygiene.
Your training programme will be unique to the demands of your particular restaurant. List all the skills required to manage inventory effectively and ensure that your training programme accounts for them. If necessary, consider outsourcing the programme to a specialist training company.
Use menu engineering
Menu engineering is the process of analysing dish popularity to limit waste and maximise profitability.
By monitoring the popularity and profit margins of each dish, you can make informed decisions regarding price, placement and promotion and refine your menu accordingly. Menu engineering also helps you limit losses due to stock seasonality since you can align your most popular dishes (or similar variants) with available ingredients.
A menu item cost tool helps you pinpoint the ideal price point for your menu items to maximise profit without losing customers.
Invest in restaurant inventory management solutions
Most restaurants rely on semi-automated inventory management systems, using manual inputs primarily to perform checks and monitor waste (although even this can be automated to a degree).
Modern inventory management solutions have the following features:
- Real-time stock tracking
- Automated reordering alerts
- Expiry date tracking
- Forecasting tools
- Support for multiple channels (e.g., delivery apps)
- Barcode scanning
- POS integrations
Inventory management systems become even more powerful when they’re integrated into a system like the Square Restaurant POS.
This adds a powerful layer of automation where inventory is automatically updated – at the ingredient level – based on sales. This takes much of the manual work out of tracking stock because verified sales data syncs directly with the inventory management tool.
Advantages of inventory management for restaurants
Now you understand the how of inventory management, let’s take a look at the why. A semi-automated, comprehensive system supported by a well-chosen suite of apps, including POS that integrates with third-party solutions, offers an array of advantages.
Less food waste
Accurate stock tracking – particularly as measured by your inventory turnover ratio – prevents overordering. In addition, optimised rotation through the FIFO system minimises losses due to spoilage.
Lower cost of goods
Purchases that align with exact demand reduce the costs of goods because buyers only order what is needed. Accurate forecasting also prevents over-purchasing during periods of increased demand.
Better supplier management
Tying purchases to specific suppliers helps you see which are delivering the most value, enabling you to make cost-effective purchase decisions. Inventory management software makes it relatively easy to chart purchasing patterns in relation to specific vendors.
Satisfied customers
There’s nothing worse than disappointing customers by telling them their favourite item is off the menu. Good inventory management ensures that ingredients are always available, even during periods of supply chain disruption.
Increased profits
Reduced waste, cost-effective ordering, and menu engineering all improve margins. Given that returns are already slim in the restaurant industry, this is one of the most important benefits of inventory tracking.
Real-time visibility
Regular inventory tracking with the assistance of automation software gives you ongoing, immediate visibility into stock levels, regardless of how many channels you sell through. This allows you to make or adjust reorders quickly.
Essential KPIs to track restaurant inventory
Inventory management is effectively an analytics task, since it involves measuring the movement of inventory across several Key Performance Indicators (KPIs). Let’s look at the most important ones.
Food loss cost
Your food loss cost calculates the total value of food that is wasted over a given period. If you’re tracking wastage in your inventory management system, you can usually calculate this automatically.
Here’s how to calculate your food loss cost:
Food Loss Cost = Total Food Weight × Cost per Unit × Time Period
Example: You lose an average of 1 kg of steak per day. Each kg costs £10. Over a week, your food loss cost is (1 x £10 x 7) = £70.
Cost of goods sold
Cost of goods sold (COGS) measures how much you spend on ingredients and direct labour costs, such as kitchen staff wages, to create your products. It does not include operational costs like the wages of front-of-house staff.
Here’s how to calculate the cost of goods sold:
Cost of Goods Sold = Starting Inventory + Direct Costs – Ending Inventory
Example: You have a starting inventory of £100 at the beginning of the month. You pay kitchen staff £50 and spend £50 on ingredients. Your ending inventory is £75. The cost of goods sold is (£100 + £100 – £75) = £125. During that period, it cost you £125 in direct costs to serve your customers.
Food cost percentage
Your food cost percentage shows how much of a menu item’s price, on average, is spent on ingredients. A healthy range is between 25% and 35%.
Here’s how to calculate food cost percentage:
Food Cost Percentage = (Food Cost / Food Sales) × 100
Example: Your total food costs for the month were £100. Sales amounted to £350 over the same period. Your food cost percentage is (100 / 350) × 100 = 29%.
Inventory turnover
Your inventory turnover ratio tells you how many times you’re selling and replenishing stock over a given period. Aim for a monthly ratio of four to eight.
Here’s how to calculate inventory turnover ratio:
Inventory Turnover Ratio = COGS / [(Inventory at End of Previous Period + Inventory at End of Current Period) / 2)]
Example: The cost of goods sold over a month is £100. The value of your starting inventory was £10, and the value of your finishing inventory was £30. That leaves your average inventory value as (£10 + £30)/ 2 = £20. Your inventory turnover ratio is £100 / £20 = 5. You have sold and replenished your total inventory five times in a month-long period.
Restaurant Inventory Management FAQs
How can I manage restaurant inventory?
You can manage restaurant inventory by tracking stock, using FIFO rotation, and implementing inventory management and integrated POS solutions like Square. This reduces costs and maximises profitability.
Who is responsible for inventory management?
Responsibilities for inventory management are usually shared between managers, chefs, kitchen staff, and (to a limited degree) front-of-house staff. A manager should oversee the process.
How often should restaurants take inventory?
Restaurants should take manual inventory checks weekly at a minimum. If you deal with a large volume of perishable goods, you should consider checking inventory every day.
