At the recent NRA Show in Chicago, one of the five major trends cited was “Big Data.” Well, my “big data” revelation is one of the greatest Profit Tools I’ve ever used: the Inventory Turnover Ratio (ITR), a core cost control metric.
Just for fun, ask 100 kitchen managers what their food cost ratio is, and they’ll have no problem telling you. Ask them what their ITR is, and they will look at you in complete befuddlement. Yet, the ITR is the key metric to controlling food cost. With the right data, it virtually takes seconds to calculate, and it speaks volumes about the financial health of the food cost equation in the back of the house. The ITR is the perfect expression of “big data” in a simple metric.
Remember the 80/20 Principle: The Secret to Achieving More with Less (1997 and 2008) by Richard Koch? He theorised that 20% of the activities drive 80% of the results. I would maintain that the ITR is a variation on that seminal work. It is the 5/50 principle: 5% of the effort in prioritising properly calculating the ITR every week will drive 50% of the intended results… and within weeks.
The reason is counterintuitive. Most chefs, managers and owners believe that the best way to control (i.e. lower) food costs is to buy cheaper and grind that DSR or MA on price. But, since distributors make most of their money by putting cases on trucks, the inevitable result will be purchasing more than they need. If they need two cases of tomato paste, they’ll buy five because there’s a 10% discount. This occurs all the time in the bar side; only they call buying a case of Jack Daniels when they need three bottles a post-off. This is classic old school selling.
The ITR guarantees that the operation will carry less inventory and free up cash. The less there is to count, the more accurate the inventory valuation will be. The less product the prep cooks have to work with, the more careful they will be to hit their portioning and ingredients specifications. There will be less waste, theft and pilferage… it’s just human nature.
The Inventory Turnover Ratio “formula” is weekly food cost of sales divided by weekly ending food inventory.
So, for example, $10,000 of food cost of sales divided by $15,000 worth of food inventory would give you an ITR of 0.67.
The ITR is like gravity. It is absolutely predictable. As the ITR goes up, food cost goes down.
Inventory
Turnover Ratio Food Cost
0.3 35%
0.4 34%
0.5 33%
0.6 32%
0.7 31%
My hero, Peter Drucker, said it best: “If you can measure it, you can manage it”.
For a complimentary copy of my special report, Inventory Turnover Ratio, please contact me at bill.main@sbcglobal.net.
Tucker W. “Bill” Main, FCSI, CSP
