Mini-max Inventory Management

Inventory tracking and sales tracking form the starting point for any good inventory control program.   Without knowing how much of any menu item you sold in a given week, or how much inventory you have consumed in that period, you will not know what your instantaneous food cost is, whether you are maintaining portion control, whether you are experiencing shrinkage, or whether you should adapt your menu.  By tracking sales, you can see where some menu items are dying, others are gaining in popularity.  By tracking sales, you can predict, year-over-year or week-over-week, what your sales might be in the upcoming period.  By predicting your sales, you can project your inventory needs. As a general rule, restaurants should conduct physical counts of inventory every month but preferably every week, and even daily on key items.  Without exception, restaurants should record the quantity of sales on every menu item, each day, and, if reasonable, during each peak period within the day.

However, tracking inventory is not just a task for restaurateurs and retailers. Every product-oriented business carries supplies, raw materials, finished goods and/or works-in-progress. These, too, should be monitored on a regular basis, and the most effective system of evaluation is the mini-max system.  

Mini/Max systems achieved a high level of popularity in chain department stores during the late 1970s.  By indexing prior period sales, factoring in an allowance for sales spikes, and multiplying that period’s demands by 2.5 times (allowing for double the order period and ½ to allow for emergency situations such as weather, shipment delays and supply shortages), the maximum inventory on hand is determined.  Using 1.5 times the period’s requirement, the store would know the minimum level to which that stock should fall before reordering to the 2.5 times level.  This was, in short, a minimum to maximum inventory ordering method that took subjectivity out of ordering, and the tendency to be overly cautious or overly optimistic.  Generally it works. However, if idiosyncratic demands of a local market are not considered in the national chain’s calculations, huge inventory spikes or shortages may result.  If there are anticipated peak demands (e.g. summer seasonal items or sale items), and mini-max order levels are not adjusted to reflect these needs, sales suffer.  In food service, as in any business, that simply is not acceptable.

Mini-max systems need to reflect the unique nature of each business and the particular demands of each market. They need to reflect potential supply line issues and waning demand or obsolescence. They should be fluid schemes, and responsive to emerging opportunity or problems.

A good mini-max system can provide the appropriate level of controls for any ordering program, but must be built into a thorough strategy of inventory management in order to be of greatest value.

Employee Collusion

In less than three months, the video department of a large Canadian grocery store had an inventory shrinkage of over $140,000, on sales of just over $400,000. That’s a 35% loss. Yet, there had not been one apprehension of any shoplifters in that period, due to heightened electronic article surveillance use. As well, close monitoring of shipments through the receiving doors and of bookkeeping in the office eliminated those two spots as sources of the loss. Then, one of the regional loss prevention officers noticed an oddity: there were several $1.47 and $1.49 sales in a two-week period, midway through the 3-month section. And, in every case, those odd sale amounts occurred during the shift of one employee. They began to monitor him closely.

Nothing happened for two months, until the employee again felt comfortable that he was not being watched.  Then, he sold a television to a young man, ringing up the sale. But the customer offered up only a ten dollar bill for the purchase, which was worth nearly $1,500. The team of investigators waited until the customer left the store, then apprehended him discretely. Another investigator continued to watch the employee. Within the hour, another young client purchased a laptop, a gaming console and software. Total value was $2,300. Again, only two fives were tendered. Now they had a pattern. The second customer was arrested, and the employee remained on duty while the LPOs waited for the police to arrive. In the meantime, they interviewed the “customers.” Both willingly talked, telling of the chain of purchases that they and four others had been making at the store. They repeated their confession to the police. Even though the employee later denied it, he was charged and convicted of eighteen counts of fraud. Only $22,000 of the almost $150,000 was recovered. That was the impact of collusion.

Collusion between staff and customers can be problematic in any operation, from retail to manufacturing, from office to service from warehousing to transportation. But it is only one arm of a many-limbed problem, with collusion between bookkeepers and suppliers being one of the most common sources of theft and fraud. Back-door loss often occurs when delivery driver and receiver/shipper choose to cooperate to commit theft or fraud. Sales reps and floor managers, employees and forepersons, bookkeeper and cashier, merchandiser/stocker and receiver or supply company office staff and receiving company back door employees also are common combinations.

Collusion also is one of the most difficult forms of theft or fraud to detect and deter, as well. Simple cameras or basic control systems frequently are not enough.  At the same time, catching such collusion does not guarantee conviction, as it may be difficult to show that the employee knew he or she was causing a loss, if an arrest is based on only one incident.

To reduce collusion, regular monitoring & surveillance, knowing each employee individually, established policies and consistent  controls are essential. Collusion can be reduced, but it is almost impossible to eliminate. Your best choice is to keep the opportunity for loss to a minimum, by being a hands-on owner or manager.

Inventory Yields

If we look at inventory management as only physical stock management, we may be ignoring the best available control over loss of profits in our business. Inventory control applies as well to supply and materials management as it does to stock, and almost as well to human resource management.

Restaurant inventory management provides the simplest example. Yields of burger patties, buns, and even pickles, ketchup, lettuce and onions are obvious targets for inventory management. But beyond the hamburger itself, we should look at yields of such items as napkins, takeout containers and wraps and even yields of natural gas consumption to run our grills and fryers. They all vary, depending on the items being prepared and sold, and vary depending on management of our rush and off-peak demand loads.  Even grill stones can be managed, by monitoring sales and yields.

Yields often vary in food service outlets based on demand. However, the same yields analysis can reveal how items in production and manufacturing settings can be affected by fluctuating demand and “portion” control.  Yields on welding rods, grinding discs, jigs, etc. are vital to effective pricing and determination of margins and markups.

Hand in hand with use of yields analyses is regular, accurate use of waste (spoilage, damage) and return/refund sheets. Factoring in these negative forces on our yields will show us how to tweak product development, handling & sales to minimize waste and returns. With trendy or perishable items, monitoring patterns of sales, in conjunction with patterns of yields will provide valuable clues as to when to delete an item, adjust pricing or modify production to maintain profits for that item. For example, if you sell an item that needs diesel fuel in the manufacturing process, wild variations in price also will affect your profit, and you should be able, at a glance, to determine when you need to shift away from that item or find more cost-effective solutions for production. Other items may have strong seasonal impacts, particularly in the agriculture or food service industries.

Yields analyses will reveal the most effective pricing strategy, as well, and will show you, even before you put an item into production or on sale, whether that item is likely to be profitable, or at what level you need to sell in order to be sustainable. This means that yields analyses should form a key part of any business planning or feasibility studies.

Employee Leakage: Unintentional Loss

While employee theft gets the lion’s share of attention in business circles, and supplier/shipper fraud comes a close second, retailers point to shoplifting as the primary cause of shrinkage. Yet, all three combined barely equal, if not fall short of the losses in business due to inadvertent shrinkage.

The term “leakage” is more apt, because the losses may be a slow, methodical trickle, but they seep away day after day, year after year, unnoticed. Theft tends to be seen more often than fraud, but many stories have made the news about fraud, particularly in non-profit businesses and the financial sector. Leakage, on the other hand, is like a sieve, with tiny hole after hole allowing the profits to drain away.

Leakage occurs in almost every facet of a business.

The receiving door often is the most frequent source of loss, even when the receiving door problems infiltrate into the back office. Of all problems, failure to accurately count incoming and outgoing stock, supplies and materials is the most common. Tracking of damaged, returned or incorrect/inadequate goods is next. In food service, quality control problems are seen more often at the stock room than on the sales floor. In machining and fabricating environments, misuse of supplies or raw goods is a major issue, but quantity and quality controls are essential to control damage and inferior input/output of goods.  Stock handling and rotation also contribute to back door problems.

Receiving door problems that migrate to the office include mispriced goods, back orders, wholesale pricing problems and stale-dated or low-grade receipts. Simply losing paperwork adds another significant headache to managing inventory.

In the sales office or on the sales floor, myriad opportunities for leakage occur. Poor scanning and incorrect pricing issues lead the way in retail settings, while portion control and poor preparation & handling are top problem areas in restaurants. Failure to follow up on orders out often leads to customer service issues with quantities and quality. In the rush to capitalize on a sle, price quotes often do not reflect cost issues.

Throughout the operation, soft cost controls and operating expense issues drain profits. Energy costs are most obvious, followed by banking/credit issues and management  of supplies not directly linked to production. Maintenance of equipment (or the lack thereof) cost businesses in premature wear but, more critically, can create huge problems when malfunctioning equipment stalls a production run.

In any business, leakage easily can cost 3-5% of revenues. In most cases, that is the difference between profitability and bankruptcy. Yet, the investment to implement simple systems generally is less than ¼ of any recovery, so there is negligible risk to investing in a good operating system evaluation of your business.