MODULE: Quick Food Service Operations

Chapter 4: Inventory in Quick services Operations

Learning Objective:
 Discuss the inventory in quick services operation
 Compare the data in quick services operation
 Assess the students at the end of the lesson

Inventory Management Techniques

Selecting the right inventory management techniques for your business is no

easy task. The faster your business grows, the more difficult managing your
inventory becomes.

That’s why setting the right foundation from the start is so critical.

In this guide, we outline techniques, processes, and best practices for inventory
management.

Inventory management techniques

1. Bulk Shipments
2. ABC Inventory Management
3. Backordering
4. Just in Time (JIT)
5. Consignment
6. Drop shipping and Cross-docking
7. Cycle Counting

In this section we will explore the most common inventory management

techniques used by businesses of all sizes - along with the inventory holding
costs and potential profits of the most prominent.

Keep in mind that you’ll probably need a mix of different techniques to

develop the most comprehensive strategy for your business.
1. Bulk shipments
This method banks on the notion that it is almost always cheaper to purchase
and ship goods in bulk. Bulk shipping is one of the predominant techniques in the
industry, which can be applied for goods with high customer demand.

The downside to bulk shipping is that you will need to lay out extra money on
warehousing the inventory, which will most likely be offset by the amount of
money saved from purchasing products in huge volumes and selling them off
fast.
Pros of bulk shipments
 Highest potential for profitability
 Fewer shipments mean lower shipping costs
 Works well for staple products with predictable demand and long shelf lives

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 MODULE: Quick Food Service Operations
Cons of bulk shipments
 Highest capital risk potential
 Increased holding costs for storage
 Difficult to adjust quickly when demand fluctuates

2. ABC inventory management

ABC inventory management is a technique that’s based on putting products into
categories in order of importance, with A being the most valuable and C being the least.
Not all products are of equal value and more attention should be paid to more popular
products.

Although there are no hard-and-fast rules, ABC analysis leans on annual

consumption units, inventory value, and cost significance. Categories typically
look something like:

The key is to operate each category separately, particularly when selective

control, allocation of funds, and human resources are required.

Pros of ABC inventory management

 Aids demand forecasting by analyzing a product’s popularity over time
 Allows for better time management and resource allocation
 Helps determine a tiered customer service approach
 Enables inventory accuracy
 Fosters strategic pricing
Cons of ABC inventory management
 Could ignore products that are just starting to trend upwards
 Often conflicts with other inventory strategies
 Requires time and human resources

3. Backordering

Backordering refers to a company’s decision to take orders and receive

payments for out-of-stock products. It’s a dream for most businesses but it can
also be a logistical nightmare … if you’re not prepared.

When there’s just one out-of-stock item, it’s simply a case of creating a new
purchase order for that one item and informing the customer when the
backordered item will arrive. When it’s tens or even hundreds of different sales a
day, problems begin to mount.

Nonetheless, enabling backorders means increased sales, so it’s a juggling act

that many businesses are willing to take on.

If you’re a small retailer, it may not be feasible to risk overstocking. In this case,
you might consider labeling the item’s ―Buy now‖ button as ―Pre-order‖ or ―Get

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MODULE: Quick Food Service Operations
yours when it comes back in stock.‖ This creates a reasonable expectation for
customers that it will take a bit longer to arrive.

Alternatively, some businesses run with a ―no-stock‖ approach which

involves taking only backorders until they’ve generated enough sales to then
place a large bulk in order with a supplier.

Pros of backordering
 Increased sales and cash flow
 More flexibility for small businesses
 Lower holding costs and lower overstock risk
Cons of backordering
 Higher risk of customer dissatisfaction
 Longer fulfillment times

4. Just in Time (JIT)

Just In Time (JIT) inventory management lowers the volume of inventory that a
business keeps on hand. It is considered a risky technique because you only
purchase inventory a few days before it is needed for distribution or sale.

JIT helps organizations save on inventory holding costs by keeping stock levels
low and eliminates situations where deadstock - essentially frozen capital - sits
on shelves for months on end.

However, it also requires businesses to be highly agile with the capability to

handle a much shorter production cycle.

If you’re considering adopting a Just in Time inventory management

strategy, ask yourself the following:

Are my suppliers reliable enough to get products to me on time every time?

Do I have a thorough understanding of customer demand, sales cycles, and
seasonal fluctuations?

Is my order fulfillment system efficient enough to get orders to customers on

time?

Does my inventory management system offer the flexibility needed to update and
manage stock levels on the fly?
Pros of JIT
 Lower inventory holding costs
 Improved cash flow
 Less dead stock
Cons of JIT
 Problems fulfilling orders on time

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 Minimal room for errors
 Risk of stock outs

5. Consignment

Consignment involves a wholesaler placing stock in the hands of a retailer, but

retaining ownership until the product is sold, at which point the retailer purchases
the consumed stock. Typically, selling on consignment involves a high degree of
demand uncertainty from the retailer’s point of view and a high degree of
confidence from the wholesaler’s point of view.

For retailers, selling on consignment can have several benefits, including the
ability to:

 Offer a wider product range to customers without tying up capital

 Decrease lag times when restocking products
 Return unsold goods at no cost
While most of the risk in selling on consignment falls on the wholesaler, there are
still a number of potential advantages for the supplier:
 Test new products
 Transfer marketing to the retailer
 Collect useful information about product performance
If you consider selling on consignment — as either a retailer or wholesaler — set
terms clearly regarding the:
 Return, freight, and insurance policies
 How, when, and what customer data is exchanged
 Percentage of the purchase price retailer will be taking as sales commission
6. Dropshipping and cross-docking

This inventory management technique eliminates the cost of holding inventory

altogether. When you have a drops hipping agreement, you can directly transfer
customer orders and shipment details to your manufacturer or wholesaler, who
then ships the goods.

Similar to drop shipping, cross-docking is a practice where incoming semi-trailer

trucks or railroad cars unload materials directly onto outbound trucks, trailers, or
rail cars.

Essentially, it means you move goods from one transport vehicle directly onto
another with minimal or no warehousing. You might need staging areas where
inbound items are sorted and stored until the outbound shipment is complete.
Also, you will require an extensive fleet and network of transport vehicles for
cross-docking to work.

7. Inventory Cycle counting

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Cycle counting or involves counting a small amount of inventory on a specific day
without having to do an entire manual stocktake. It’s a type of sampling that
allows you to see how accurately your inventory records match up with what you
actually have in stock.

This method is a common part of many businesses’ inventory management

practices, as it ultimately helps ensure that customers can get what they want,
when they want it, while keeping inventory holding costs as low as possible.

Pros of cycle counting

 More time- and cost-efficient than doing a full stock take
 Can be done without disrupting operations
 Keeps inventory holding costs low
Cons of cycle counting
 Less comprehensive and accurate than a full stock take
 May not account for seasonality

Best practices for conducting an inventory count

How often you do a cycle count and how much stock you count will depend on
the types of products you sell and the resources at your disposal. For example,
you might do an ABC inventory analysis to determine your class A products, and
do a cycle count on your most high-value items more frequently than your other
items.

Regardless of your specific approach to inventory counts, here are some best
practices to follow:
 Count one category at a time – Ideally, you want to be able to cycle through
your entire inventory on a period basis. It’s best to focus on one category at a
time so you can count efficiently during business hours and not be impeded by
operational downtime.
 Choose count categories based on seasonality – The aim of inventory
counting is to be able to rectify any disparities in inventory as and when they
happen. It’s best to count products when they’re at their peak to ensure you
can fix any issues immediately.
 Mix up your cycle count schedule – It’s an unfortunate reality that inventory
shrinkage is sometimes due to staff theft, so aim to vary your schedule to deter
employees from ―gaming the system.‖

Types of inventory cycle count procedures

There are three main types of inventory cycle counts that you can use:
 Control group cycle counting – This type of cycle counting focuses on
counting the same items many times over a short period. The repeated
counting reveals errors in the count technique, which can then be rectified to
design an accurate count procedure.

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 Random sample cycle counting – If your warehouse has a large number of
similar items, you might randomly select a certain number of items to be
counted during each cycle count. This helps reduce the disruption of any one
category at once, meaning you can carry out a count during business hours.

 ABC cycle counting – As mentioned above, ABC cycle counting uses the
ABC inventory management technique and Pareto principle to classify items in
A, B or C categories based on value. With this approach, A items are counted
more frequently than B and C items.
Inventory cycle counting in the real world
IKEA is a great example of a business that uses both a sophisticated inventory
management system and sporadic cycle counts to optimize inventory.
Using the company’s proprietary inventory system, on-site logistics
managers can view their store’s stock levels and monitor any discrepancy in
expected sales (unique to each store) versus inventory levels.
For example, let’s say that IKEA’s MALM bed frame has been selling
much slower than expected. In this case, the logistics manager can manually
check and confirm the stock of the bed frame. This means logistics managers
only need to cycle count if the system catches a discrepancy.

https://www.tradegecko.com/inventory-management/techniques-process

Inventory management process

While there’s no one-size-fits-all approach to inventory management, the most
successful businesses utilize tools to make inventory optimization faster, easier,
and more accurate.
Instead of managing inventory manually or periodically, cloud-based inventory
and order management solutions equip you to manage inventory perpetually with
real-time updating and counts.

The benefit to you and your customers is having the right inventory in the right
place at the right time. It also allows you to monitor sales channels, locations,
and currencies within a company-wide single source of truth.

Let’s break that down into three pillars of an inventory management strategy …

1. Real-time inventory visibility

It’s not how much data you have. It’s what you do with it.

To join the ranks of the world’s fastest-growing businesses, you must have the
inventory visibility necessary to trust your inventory quantities and locations.

It’s next to impossible to manually update and synchronize inventory counts and
locations if you have a multichannel strategy. Lacking visibility often results in

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out-of-stocks, dead stock, and preventable returns. Your inventory quantities and
locations must offer an honest accounting of stock quantities and locations.

In addition, transparency challenges you with unvarnished data that inform

crucial decisions. For instance, it can significantly improve fulfillment and delivery
accuracy which reduces returns.

Enhanced inventory visibility also helps you better track your inventory turnover
ratio — a key metric in assessing the health of your business. Such insight can
inform product pricing adjustments and future re-stocking decisions to improve
profitability.

2. Optimization via smart insights

Inventory management should make life easier, not harder.

The right process takes the guesswork out of scaling your business and
minimizes the risk of mistakes. With real-time visibility at your fingertips, you can
make data-informed decisions about:

 Ordering
 Reordering
 Sales channels
 Locations
 Warehouses
 Forecast demand
 Procurement
 Allocation
 Seasonality
 Profitability

And you can do it all with the speed needed to stay competitive in an evolving
market. Combining quantitative and qualitative modeling melds historical sales
data with current economic and market forces to better predict demand and
allocate inventory accordingly. With the right system, you’ll have access to the
insights necessary to make smarter, more profitable decisions.

3. Integrated supply-chain automation

Focus on growth, instead of tedious day-to-day tasks.

With automation, you’ll never run out of inventory as you’ll receive automated
backorder notifications and replenishment reports in real-time. For instance, if the
quantity of an item in stock drops below the reorder value, automation can
instantly alert you that the item needs to be reordered.

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With the right integrations, replenishment may be automated too or the
automated restock alert can be checked against predictive demand forecasts and
then reordered.

With multi-location inventory, automated rule-based order routing can match

orders with stock in warehouses that are closest to the customer. Routing orders
in this manner saves time, expedites fulfillment, and reduces shipping costs.

Finally, automation can also help you improve the customer experience and
increase retention with automated order confirmation emails. The system you
select may integrate with your email service provider, which positions you to
update customers regarding the status of their shipment and sends emails with
discounts, upsell, and cross-sell opportunities.

As you grow and finesse your inventory management strategy, it’s essential to
choose a system that can integrate multiple links in your supply chain — from
pure stock control to shipping, eCommerce, logistics, accounting, and beyond.

The aim is to integrate and automate as many of your supply chain components
as possible to improve inventory accuracy, speed, and cost
https://www.tradegecko.com/inventory-management/inventory-process
Inventory management best practices
It’s common to see best practices loosely defined by phrases like ―operational
excellence‖ or ―world-class.‖ But these descriptions are little more than fluff.

True best practices are achieved through continuous improvement, tying each
operation to customer value, and a collective mindset that embraces technology
to create sustainable success.

Here are 10 inventory management best practices that can guide you:

1. Start with your own data

The ability to effectively leverage large amounts of data used to be cost-

prohibitive for smaller organizations. Today, the best strategies surround
collection, aggregation, and insights from a single source of truth … yours.

Inventory management software has changed the game by allowing SMBs

to:

1. easily create that single source of truth, and

2. benefit from crowd sourced learning that are built into the solutions
themselves.

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2. Maximize inventory turnover

Inventory turnover calculates how many times specific goods have been sold and
reordered during a given period. It’s a ratio that first divides COGS by average
inventory:

Then, divide your inventory turnover rate by 365 to determine how many days it
normally takes to turnover that inventory:

Maximizing inventory turnover can dramatically increase profitability by helping

you determine the right reordering points and thereby reduce holding costs as
well as spoilage.

3. Learn your ABCs

To maximize turnover, you have to know what inventory to prioritize. Not all
products are created equal.

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Highlighted above, ABC inventory management places products into three
categories based on their value to your business. It’s an adaption of the Pareto
principle: 80% of all effects come from just 20% of causes.

Applied to inventory:

 A: Items of high value (70%) and small in number (10%)

 B: Items of moderate value (20%) and moderate in number (20%)
 C: Items of small value (10%) and large in number (70%)

As you assign merchandise to each category, align value with your company’s
goals. Normally, this is profitability but it can also be increasing market share
through gross sales.

4. Then, forecast demand

With demand volatility at an all-time high, there is no universal standard, which is

why demand planning and inventory optimization are hard to get right.

Traditionally, accurate demand forecasting has been easier said than done.
Extensive product ranges, multiple sales channels, promotional offerings, price
changes, and external factors like seasonality have made it difficult to get an
accurate picture of future growth. Especially if you rely on spreadsheets and
trawling through volumes of historical data.

Today, however, automated demand forecasting is available to businesses of all

sizes, thanks to intelligent inventory management systems.

5. Automate everything you can

Workflow automation refers to systematizing part or all of a workflow to improve

efficiency and lower human dependencies. In essence, it means utilizing
technology to centrally manage a complex web of working parts while reducing
the need for manual labor.

Automating part or all of a supply chain has huge potential benefits — namely,
freeing up your people while increasing productivity and accuracy. In fact,
a report by McKinsey predicts that automation could accelerate the productivity
of the global economy by between 0.8% and 1.4% of global GDP annually.

With the right system, workflow automation is achievable for any business:

 Customize the storefront experience for both B2C and B2B buyers
 Streamline selling across multiple channels and stock locations
 Set-and-forget your purchasing and order processes
 Automatically track revenue and expansion goals
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 Apply bulk actions for high-order volumes
5. Automate everything you can

Workflow automation refers to systematizing part or all of a workflow to improve

efficiency and lower human dependencies. In essence, it means utilizing
technology to centrally manage a complex web of working parts while reducing
the need for manual labor.

Automating part or all of a supply chain has huge potential benefits — namely,
freeing up your people while increasing productivity and accuracy. In fact,
a report by McKinsey predicts that automation could accelerate the productivity
of the global economy by between 0.8% and 1.4% of global GDP annually.

With the right system, workflow automation is achievable for any business:
 Customize the storefront experience for both B2C and B2B buyers
 Streamline selling across multiple channels and stock locations
 Set-and-forget your purchasing and order processes
 Automatically track revenue and expansion goals
 Apply bulk actions for high-order volumes
7. Follow FIFO or LIFO

First-in, first-out (FIFO) is an accounting discipline that — just as the name

implies — means the first items in your inventory are also the first ones to leave:
i.e., oldest items go first. Last in, first-out (LIFO) is the opposite: that is, the
newest items take priority.

If you sell perishable items, then FIFO is a necessity. Otherwise, you’ll end
up with spoiled inventory that you’ll have to write-off as a loss.
For non-perishable goods, LIFO is usually the default because you won’t
need to rearrange warehouses or rotate batches. The only caveat is if you sell
both non-seasonal staples alongside highly seasonal products, in which case
you’ll need a mixed approach.
8. Keep your pipeline flowing

Pipeline inventory refers to any item that’s been purchased but hasn’t yet
reached its final destination. For example, if a wholesaler buys stock from an
overseas manufacturer, that stock is considered pipeline — i.e., within the
business’ supply chain — during the shipping and receiving process.

Optimal pipeline inventory can be calculated by multiplying lead time — how long
it takes between ordering and receiving stock — by demand rate — how many
units you sell between orders:

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Keeping your pipeline flowing smoothly is one of two safety measures to ensure
you don’t run into stockouts.

9. Decouple inventory for additional safety

Decoupling inventory — or decoupling stock — refers to goods that are set aside
in case of a hitch or stoppage in production. This inventory is also known as
safety stock.

Decoupled inventory provides a safety net to mitigate the risk of a complete halt
in (1) production if one or more components are unavailable and (2) order
fulfillment in the case of stockouts.

Considering pipeline inventory and decoupled inventory together is important

because they help you strike the right balance between risk and cost. Maintaining
that balance makes for effective inventory management and sustained growth.

10. Kit and bundle to increase AOV

Inventory kitting — also known as ―product bundling‖ — groups, packages, and

sells separate items as a single unit. When a kitted or bundled item is purchased,
an inventory system should automatically link each individual item to the sale.

Bundling can benefit both B2C and B2B businesses by:

 Increasing average order values

 Keeping holding and shipping costs down
 Offering customers convenience and flexibility
 Tracking and maintaining stock levels more effectively
 Preventing deadstock by selling old or unwanted inventory

Here’s how to get started bundling:

1. Define a pack size

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If you sell packs made up of multiples of products, you can quickly set up
different pack sizes for existing products using a pack size variant. This
essentially creates a new product from your bundled products.

2. Select products for a bundle

If you want to make a product bundle of different variants (such as blue

pajamas and yellow slippers), you can easily do so with bundles functionality.

3. Enable batch tracking

You also have the option of assigning product variants to batches for tracking.
This helps to ensure you have enough stock on hand of each variant.

Putting the techniques, process, and best practices to work

The truth is even the best techniques, the best process, and the best best
practices have their limits outside of a centralized inventory management system.
Otherwise, you’ll find yourself fighting an uphill battle.

This is even more vital when it comes to pillars like real-time visibility,
automation, and smart insights…
https://www.tradegecko.com/inventory-management/inventory-best-practices

Inventory analysis: inventory management KPIs to improve performance

Advisors and business owners can adopt several universally accepted inventory
management ratios and KPIs (Key Performance Indicators) to help them
monitor business.

Extracting, analyzing, monitoring and reacting to relevant inventory ratios can

help the business improve its performance, cash flow and profitability.

Inventory management KPIs can be compared to external industry standards,

where available; however, finding suitable comparisons can frequently be
difficult. Many small- to medium-size businesses will need to rely on defining their
own ratio and KPIs goals, and using these to monitor ongoing performance.
Further to this, they will benefit from categorizing inventory and analyzing group
performance. For example, a shop that has both fast-moving (such as fresh food)
and slow-moving goods (such as notepads) will have a richer understanding of
their inventory performance if they define and analyse inventory by their
performance within their category.

Here I explore five ratios and inventory management KPIs, explaining what they
are, how to calculate them, what they indicate, and how they can assist in
managing the businesses inventory.
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1. Inventory turnover ratio
Inventory Turnover is a measure of the number of times inventory is sold and
replaced in a time period. This ratio is calculated by dividing Sales by Inventory.
The time period is typically a year but can be shorter.
Analyzing inventory churn helps a business to plan at all levels of its
income statement. It allows one to better forecast the cash likely to be required to
reinvest in inventory in the coming months based on past performance.
It allows one to identify underperforming sales lines and products so that those
products can be moved more quickly, either via specials or a focus on those
products which may have previously been neglected.
This, in turn, will free up cash flow and shelf space for higher volume or
better performing products. It can also improve inventory logistics and supplier
relationships. The cost of transportation can be reduced if proper attention is paid
to this ratio and, finally, it allows one to consider inventory storage capacity
requirements as the business expands.
2. Inventory write-off
Inventory Write-Off represents inventory that no longer has any value in the
business (as opposed to write down, where the inventory value has been
reduced). Inventory could be written off due to technological obsolesce, theft or
damage. Inventory Write-off is simply the dollar value of the stock to be written
off. It can be allocated to the Cost of Goods Sold account, but this will distort the
Gross Margin percentage. My preference is to isolate it by allocating it to a Write-
Off account.
The Inventory Write-Off value reflects how much writing off inventory is
costing the business. If the level is concerning, further investigation into why the
write-off is necessary and corrective action may need to be undertaken.
Every growing business should have a process to identify slow-moving or
non-saleable products and consider scrapping or writing off some of those items
to create room for more profitable products.

It’s important to have a process in place to do this periodically. The last

thing you want is to find out, sometime in the future, that your inventory is not the
value recorded in the Balance Sheet, meaning you must incur a major write-off in
the Profit and Loss Statement.
3. Holding Costs
There are various types of inventory costs. A few include ordering costs,
holding costs and shortage costs. Once you understand where each of these
costs is applicable to your business, the next step is to determine the best way to
value your inventory. A valuation method is used to determine your business's
profit.
So how do you decide which costing method is best suited to your
business model? How do you ensure that you are accounting for all inventory
costs?
Our Gecko Anika takes us through three different inventory costs and four
valuation methods:

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Holding Costs (sometimes referred to as carrying costs) are costs incurred
in storing and maintaining inventory. They could include insurances, costs
associated with the space housing the stock, security, and associated equipment
and labor costs.

An example of a holding cost could be a forklift truck required to move

stock in the warehouse. Holding costs are simply the cumulative dollar value of
these various costs. Typically, they’re accounted for separately but, when
reporting, may be grouped together.

The Holding Costs indicate the additional costs involved in managing the
businesses inventory. Although they can be easily overlooked, they are an
important cost to monitor when making decisions about inventory.

If, for example, inventory levels drop due to seasonal fluctuations, hiring out
excess storage space to assist in covering the holding costs may be worth
considering.
You can engage a business to manage inventory for you, and understanding
your holding costs will assist you in evaluating your options and deciding on a
suitable business model for inventory management.
4. Average inventory

Average Inventory is the median value of inventory, over a defined time period.
The Average Inventory ratio evens out seasonal fluctuations, effectively
normalizing the data. It is an indicator of how fast inventory is selling, and the
average volume kept on hand. A fluctuation may highlight issues with purchasing
or sales.

5. Average Days to Sell Inventory

The Average Days to Sell Inventory is a measure of how long it takes a company
to buy or create inventory and turn it into a sale. Average Days to Sell Inventory
is calculated as (Inventory divided by Cost of Sales) multiplied by the number of
days in the year.

The Average Days to Sell Inventory ratio alerts the business owner to how long
on average, in days, it takes to sell each item of inventory.

The old adage ‘time is money’ is why the analysis of this report is so important.
When businesses tie up capital in holding inventory items, there is an opportunity
cost to do so.

Consider the following example... A car dealership purchases a car to be

displayed in the yard. The cost of the car is $20,000. The business’s cost of
capital is 6%. Therefore, for every month the car sits in the yard, the business
has an opportunity cost of 6% × 20,000 ÷ 12 = $100.

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If the average time it takes the business to sell each car is 180 days, the
business should research to see if the car might sell in a faster amount of time
should the retail price be reduced. If the car sold 30 days faster once the price
was $100 less, the business would be indifferent, but if the car sold 30 days
faster once the price was $90 less, the business would, in fact, be ahead
financially by $10. The case is even more compelling when retail price is
considered in place of item cost.

https://www.tradegecko.com/inventory-management/inventory-analysis

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