Among the many challenges that go into managing a bar or restaurant is dealing with shrinkage or lost product, a huge profit drainer. According to beverage auditing companies Beverage Metrics and Stock-Taker, industry average shrinkage rates are 25 percent, and the National Restaurant Association reports that 75 percent of shrinkage is due to theft.
While many restaurants and bars focus on inventory control systems to reduce shrinkage, reconsideration of ordering processes can be even more helpful. These simple tips will help you make smarter purchases that reduce shrinkage, and ultimately generate greater profits for your establishment.
Avoid Purchasing Based on Quantity Discounts
We know it can be difficult to resist a good deal. And while it might seem like quantity discounts increase overall profitability due to the potential of reducing your cost per ounce, factoring estimated shrinkage into the equation will directly counteract these cost reductions.
Let’s assume a regularly priced case of vodka costs $200 and the distributor is running a two-plus case quantity discount that grants you 10 percent off each case if you purchase two or more.
Despite only needing one case, that 10-percent discount is too tempting, so you buy two cases for $360 (Two times $200 per case – Two times $20 discount per case). Instead of spending $200, you end up spending an additional $160 and getting twice as much product.
If we assume 25 percent shrinkage, $40 (25 percent x $160) of this additional product will be lost. Since the $40 loss is equal to the total discount you received in the first place, shrinkage ends up wiping out any cost benefits of the order. Top it off with the extra space and time needed to count the additional product, and that good deal suddenly feels like a rip-off.
Purchase to Reduce Sitting Inventory
Since shrinkage takes the discount out of Quantity Discounts, how can you increase profitability with smarter ordering? Focus on one key goal when making purchase decisions: reducing sitting inventory.
If you have $40,000 in inventory and sell $10,000 of product each week, you have four week’s worth of sitting inventory on hand. By reducing your sitting inventory to $30,000, you will not only gain $10,000 back in your pocket, but you will also reduce your shrinkage by $2,500 (25 percent times $10,000). Remember that if 25 percent of any product you purchase will be lost to shrinkage, the less product you have on hand the less you lose, and therefore the greater your profits.
By only ordering product that you absolutely need, you will quickly reduce your sitting inventory levels, increase your bar’s efficiency, reduce shrinkage losses, and increase your bar’s overall profitability.