Inventory Turnover Rate : How To Calculate & Improve It
The ever-changing dynamics of customer preferences, seasonal ingredient availability, and unexpected supply chain disruptions are some of the reasons why managing a restaurant’s inventory is a complex and ongoing task. But maintaining strong control over one’s inventory and ensuring a good turnover rate of stock is essential to operating a profitable business, and both are closely linked.
This article covers all about the inventory turnover ratio, including what it is, how to calculate it, and how to optimize it. This key metric is used by most restaurant operators to measure the level of control they have over their inventory.
Table Of Contents
- What Is The Turnover Rate Of Stock & How Do We Calculate It?
- What Is A Good Inventory Turnover Ratio ?
- What Affects A Restaurant Inventory Turnover Rate ?
- Conclusion
1. What Is The Turnover Rate Of Stock & How Do We Calculate It?
The turnover rate, often referred to as the inventory turnover ratio, measures a restaurant's efficiency in selling and replenishing its inventory. It is a key metric for assessing a restaurant’s efficiency in controlling its inventory, and helps guide decisions on procurement, menu planning, and operational efficiency.
Where :
Cost of Goods Sold Food Cost is the total cost of the inventory that a business has sold during a specific period. It includes the cost of purchasing or producing the items sold, but it excludes operating expenses like salaries, rent, and utilities.
Average Inventory Value (AIV) is the addition of the value of inventory at the start of a period and the value of inventory at the end of the period, divided by 2.
A typical case would look like this, for the month of October :
Food Cost: $100,000
Starting Inventory : $35,000
Ending Inventory : $15,000
The Average Inventory Value would be equal to : (35,000 + 15,000) / 2 = $25,000
The Inventory Turnover Ratio would be equal to : $100,000 / $25,000 = 4
This means that the restaurant sold out its entire inventory 4 times during the month of October.
But, is selling out your inventory 4 times a month a good sign ?
2. What Is A Good Inventory Turnover Ratio ?
According to Optimum Control, the average Restaurant Inventory Turnover Ratio usually stands between 4 and 8.
A high restaurant inventory turnover ratio generally indicates that inventory is moving quickly, which is often considered positive. It’s usually a sign that you’re making sales and that you’re using fresh ingredients. It shows that you’re running an inventory that is managed in such a way that spoilage and waste are avoided.
But if it is too high, it may mean that you’re not keeping enough stock in your inventory, which means you should consider increasing the ordering quantities to avoid shortage.
A low restaurant inventory ratio may be a sign of overstocking or over-ordering of ingredients, or that sales are slow. Typically, if that is the case for your restaurant business, it would be wise to review the performance of your menu or come up with promotions on the items not selling.
Keep in mind however that the ideal inventory turnover rate can vary depending on the type of restaurant and cuisine :
- In some cases, a higher restaurant inventory turnover rate is desirable to minimize perishable items and reduce the risk of expiration, which would lead to food waste.
- But in other cases, a lower turnover rate may be acceptable, especially for businesses dealing with expensive items, such as expensive wines.
It is therefore important to interpret the inventory turnover ratio in the context of your restaurant business.
Once you start calculating your restaurant inventory turnover rate on a regular basis, you’ll realize that it is a reliable indicator of your usage and sales.
3. What Affects A Restaurant Inventory Turnover Rate ?
Several factors can affect the inventory turnover rate of a restaurant :
- Menu & Seasonality : If your menu remains unchanged during the year, some items may sell less during seasons. Take for example cheese fondue : it probably won’t be your best seller in August !
Tip : Adapt your menu to the seasons, or be aware that some of your items will have a different turnover rate than others. You could also offer a mix of items that can be consistently sourced throughout the year.
- Pricing & Menu Mix : The price of certain items makes them less of an easy sale. Higher-priced items are likely to lead to a lower inventory turnover ratio.
Tip : Reevaluate menu pricing and consider offering smaller, lower-cost menu items to encourage higher turnover.
- Storage Space : A smaller storage space means less space for stock ! Which may lead to an inability to order enough items to sustain the customer demand, and therefore an alarmingly high turnover ratio.
Tip : Optimize storage space by using vertical and horizontal storage solutions. You could also consider off-site storage for non-essential items.
- Shelf Life Of Ingredients : Fresh food has a shorter shelf life than canned food. Take into consideration the type of foods you’re storing and the effect they have on your inventory turnover rate.
Tip : Implement a First-In, First Out (FIFO) restaurant inventory system to ensure that ingredients with shorter shelf lives are used first. By following this approach, restaurants ensure the freshness of ingredients, enhancing the quality of dishes served to customers.
- Lack Of Traceability : Inventory Tracking Systems: Implementing an efficient inventory tracking system can help restaurant owners and managers monitor inventory levels, track usage, and make data-driven decisions to improve turnover.
Tip : Solution: Invest in a restaurant inventory management software to track usage and automate reordering based on historical data and real-time sales.
- Marketing & Promotions : Specials, promotions, and marketing campaigns can impact demand for specific menu items, potentially affecting inventory turnover.
Tip : Solution: Monitor the impact of promotions on inventory turnover. Use data to refine promotional strategies and manage inventory effectively.
Ultimately, restaurant owners and operators can maintain a solid inventory turnover rate by establishing strong controls over their restaurant inventory.
Recommended Reading
Restaurant Inventory Management : The 8 Tips You Need To Know About
4. Conclusion
In conclusion, effective restaurant inventory management is essential for profitability. The inventory turnover ratio, calculated by dividing Food Cost by AIV, measures efficiency in controlling inventory.
An ideal turnover ratio typically falls between 4 and 8, but this can vary by restaurant type. High turnover suggests efficient inventory control but if it’s too high, it could lead to shortages. A low ratio may indicate overstocking or slow sales, necessitating adjustments.
Understanding your unique context, including menu, pricing, storage space, ingredient shelf life, and traceability, is crucial. Implementing strategies like seasonal menu adjustments, pricing revisions, and efficient storage can improve inventory turnover.
Regularly calculating the ratio provides insight into usage and sales, helping you make informed decisions to enhance your restaurant's performance and profitability. It remains best practice to opt for a restaurant inventory management software to help you automate many of these tasks
About Supy
In today's culinary world, precision and efficiency are more vital than ever, making Supy's restaurant inventory management system indispensable.
Supy, a tailored restaurant inventory management software, offers an intuitive interface that transforms inventory tracking from a chore to a breeze, suitable for both seasoned managers and newcomers. Its real-time analytics shine a spotlight on inventory statuses and sales trends, empowering timely, data-driven decisions.
Beyond tracking, Supy enhances supplier interactions, from ordering to delivery monitoring all whilst ensuring optimal restaurant inventory management. Its predictive analytics stand out, helping forecast ingredient needs and reducing wastage. And with cloud integration, every stakeholder stays connected to the inventory data, anywhere and anytime.
Supy's adaptability, offering reports from daily stock views to yearly analyses, signifies it's not just another system, but a cornerstone for modern restaurant inventory management, promoting profitability with sustainability.
FAQ
What is inventory turnover rate in restaurants?
Inventory turnover rate measures how often inventory is used and replaced over a period.
(Check out our Inventory Management Solutions to streamline operations.)
Why is a high inventory turnover rate beneficial?
High turnover indicates efficient stock use, which reduces waste and optimizes cash flow.
How do you calculate inventory turnover rate for a restaurant?
Divide the cost of goods sold (COGS) by the average inventory during a specific period.
What does a low inventory turnover rate indicate?
A low rate may indicate overstocking, inefficiency, or slow-moving inventory items.
How can restaurants improve their inventory turnover rate?
By optimizing par levels, tracking usage patterns, and adjusting orders based on demand.
What is an ideal inventory turnover rate for restaurants?
This varies, but most restaurants aim for a higher turnover to minimize holding costs.
How does inventory turnover affect food cost control?
Effective turnover management helps reduce spoilage and aligns stock with actual demand.
(Read our guide on Reducing Food Costs for more tips).
Can seasonal trends impact inventory turnover rate?
Yes, seasonal demand changes affect turnover, requiring adjustments in ordering.
Why is inventory turnover important for multi-location restaurants?
High turnover ensures that each location uses fresh ingredients, critical for quality control.
How does Supy help track and optimize inventory turnover?
Supy’s tools allow for real-time tracking of inventory levels and usage trends.
What role does waste management play in turnover rate?
By reducing waste, restaurants increase the efficiency of inventory use and improve turnover.
Can turnover rate help in setting reorder points?
Yes, tracking turnover helps determine when stock should be replenished.
How often should restaurants review their inventory turnover rate?
Monthly or quarterly reviews are common, but high-turnover restaurants may review weekly.
What is the relationship between turnover rate and profitability?
Higher turnover often correlates with lower waste and better cost management.
How can a restaurant balance turnover rate and par levels?
By adjusting par levels based on turnover, restaurants can maintain the right amount of stock.
(For more on par levels, see our Par Level Guide.)
Does inventory turnover vary by cuisine type?
Yes, turnover rates may vary based on cuisine, as some require fresher ingredients than others.
What is the impact of menu engineering on turnover rate?
Menu changes can influence turnover by affecting ingredient usage and sales of specific items.
(Learn more about Menu Engineering.)
Can central kitchens help with managing inventory turnover across multiple locations?
Yes, central kitchens centralize inventory control, ensuring consistency in turnover across locations.
How does forecasting improve inventory turnover?
Forecasting based on historical data helps align inventory with demand, improving turnover.
Why should I track my restaurant’s net profit margin?
Net profit margin shows the percentage of revenue that remains after all expenses, a critical measure of profitability.
What’s the impact of a high inventory turnover rate on supplier relationships?
Consistent high turnover fosters reliable relationships, as it creates steady demand for suppliers.
