Expert Advice on Hospitality Topics

Inventory Levels Affect Cash Flow

The aim is to maintain that fine balance between J. running out and holding too much stock. Get it wrong, and you'll find that your working capital isn't working for you! Remember, the larger your inventory, the more difficult it is to control.

• Keep inventory at a minimum level. But not so low that you risk running out. Recommended inventory for high-turnover brands is approximate­ly one to two weeks' worth of stock.

• Jump in with special promotions. If you think you've miscalculated and overstocked, shift the inventory sooner rather than later, while it still has high value.

• Get to know the drinking patterns of your regular patrons. This information helps you calculate the bar pars or minimum inventory levels for each bar and the main stockroom.

• The perpetual inventory is a valuable tool. Keeping tabs on the flow of liquor, wines and beverages through your operation is probably the best way of knowing where to pitch inventory levels. Monitor stock daily.

• Weekly deliveries. In the drinks industry, this is the norm. Work your inventory levels around these weekly deliveries and avoid the cardinal sin of running out.

Manage Your Stock Wisely and Maximize Profits

Your challenge, in a nutshell, is to order liquor, wine and other beverages in the right size and quantity and at the right time and price.

• Inventory deliveries - timing. Schedule well liquor, beer and house wine deliveries for the same day each week, ideally a couple days after you place the order.

• Well liquor quantities. Order items with a short turnover rate, such as well liquor, in bulk. Well liquor moves fast, offering you a great opportunity to boost cash flow. Take advantage of case discounts. Also, consider larger 1.75-liter bottles instead of the usual 1-liter bottles if you think your turnover warrants it. There are big savings to be made in this area. Use larger bottles for special promotions.

• Beer is different. In order to sell beer at its freshest, arrange for deliveries on a weekly basis, or dally, if your establishment has the capacity to cope with the extra workload. Little and often is better when it comes to maximizing on beer profits.

• Wine. Order house wine weekly, other wine bottles by the case once a month. Only buy special vintage wines once or twice a year. Take a specialist's advice before stocking up on expensive wines. They can cost you dearly.

• Liquor and liqueurs. The following is a useful guideline: If it takes less than five weeks to turn a product, order by the case. If it takes longer than five weeks to sell a particular brand of spirits, order by the liter.

Track Inventory - Track Costs

In order to control inventory, you need to know exactly what stock you have/had and where it is or when you sold it (known in the trade as "cradle-to-grave" accounting). To operate a cost-effective tracking procedure, it is crucial that you document all liquor, wines and beverages as they progress through the inventory cycle. Choose whatever tracking method works best for your establishment, but don't think you can do without some form of system. You can't. On a positive note, however, developing such a system is one of the best ways of keeping a tight rein on expenditure. Follow this six-step guideline and you shouldn't go wrong! There are several cheap, off-the-shelf forms that you can use to help you with your record keeping.

• Step 1: Purchase order. The purchase order is the first form in the cycle. It provides a detailed record of every item purchased.
• Step 2: Perpetual inventory. This second form tracks the movement of liquor, wines and beverages from the storeroom to various locations within the establishment. It also tracks each product's turnover rate. The perpetual inventory is also used for accounting purposes.
• Step 3: Requisition form. This records the actual transfer of inventory from the storeroom to a specific location within the operation. This form is also used to record breakage.
• Step 4: Bar par form. This records the quantity of each brand of liquor, wine or beverage currently stocked behind the bar.
• Step 5: Depletion allowance form. This form is used to track the amount of spillage and wastage and to record any complimentary drinks.
• Step 6: Physical inventory form. Used primarily when completing end-of-period accounts, it records the result of physical stock audits.

Monthly and Annual Inventory Control

Daily inventory control is the first, essential step towards keeping costs in check. In fact, no business can function without daily records. But, look ahead. To maximize control of overall costs, establish sound monthly and annual inventory procedures. Drain every dime out of your liquor, wine and beverage inventory -long-term!

• Monthly inventory. Month-end figures are crucial for determining the financial success of your operation. Devise a simple monthly inventory sheet and use it, without fall.
• Physical count. Carry out a monthly physical bottle count. Check totals against the perpetual inventory figures.
• The "Cyclops." This handheld scanner reads the Universal Pricing Code (UPC). It can really speed up the monthly stock check!
• Weighing scale. Use a precision liquor-weighing scale. These devices are extremely fast and easy to use. They can calculate to within 1/40 of a fluid ounce.
• Annual inventory. Use annual inventory figures to review overall costs. For example, now is the time to consider price increases or to discontinue lines that are no longer cost-effective.
• Resolve queries. Merely recording monthly and annual inventory figures is not enough. Resolve any discrepancies immediately. It all adds up!

General Inventory Procedures

Minor overall changes can result in major cost reductions. Take a fresh look at your existing inventory system. In every establishment, there is general room for improvement. For minimum effort, you can get maximum value out of your stock.

• Timing. Move all drinks to a designated storage area as soon as they arrive. Don't let stock hang around. Drinks (and wine especially) need to be stored in an ambient environment, or their quality can deteriorate rapidly - and so can your profits! Also, unattended drinks, languishing in receiving areas, present a great temptation. Liquor is high on any thief s hit list.

• Faulty goods. When receiving merchandise, look out for cracked and chipped bottles, mislabeled boxes, outdated or cloudy beer, correct type and vintage of wine, raised corks, leaking and weeping bottles, damaged labels and wrong-size bottles. Contact the supplier immediately about any dis­ crepancies.

• Storage area. Your storage area must be fit for its purpose. Poor storage conditions can result in poor quality, breakage and escalating costs.

• Security. Basic, but obvious. A good security system removes temptation and reduces the risk of external break-ins.

• Rotate stock. First in, first out. This is important and avoids wastage, overstocking and running out. Pay special attention to beers: their shelf-life is limited. Most beverages, also, have no longer than a month before the sell-by date.

• Control. Large or small, every drinks outlet needs some form of control procedure. Track your products from the moment they arrive at your premises to when they are sold. While this doesn't have to be complicated, the key to any good control system is to make sure that all the liquors, wines and beverages are located in the right place at the right time and are being rotated properly.

Make the Most of Your Storage Areas

• Location. Define storage areas. Are you using the most convenient areas for storage? Rethink. Centrally located storerooms and walk-in coolers make ideal storage areas. Easy access saves time and money.
• Other storage areas. "Storage" means more than an area for dumping received goods! Storage locations include shelves, workstations, reach-in refrigerators and behind the bar. Keep all these areas accessible and clutter-free. It speeds up your operation and reduces breakage.
• High-value wines. Consider separate cellaring for prestige wines, somewhere away from the busy "shop floor" environment. As turnover of such wines is slower, accessibility is not top priority. More important is security and perfect storage conditions (even vibrations can affect the quality of good wines!).
• Extra security. All drinks should be stored in a secure area. Organize the layout of storage areas to offer maximum security for liquor and high-value wines. Only personnel who need keys should have them.
• Quantity. Drinks can be stored in bulk in the main storage area. Drinks in general storage areas, such as behind the bar, are better stored in the units or quantities in which they are sold.
• Environment. Know your product and store it accordingly. Maintain proper temperatures, humidity and ventilation. Wine is particularly sensitive to environmental influences. It can easily absorb odors from nearby food storage areas. Poor storage practices can quickly reduce the quality of stored inventory - and nothing affects profits like quality!

The purchasing department is the linchpin when it comes to reducing costs. It is much easier to control costs in this area than anywhere else in the operation. The bottom line is that astute buying techniques offer the best opportunity for a business to increase its overall profits.

• Monitor market trends. An upsurge in popularity of a certain beverage can lead to increased competition amongst vendors. Play them off against each other occasionally. Negotiate. You have nothing to lose!

• Welcome new ideas. Purchasers should always be on the lookout for new ideas and new ways of reducing costs. Don't close your door to sales rep­resentatives. They may genuinely have something of interest to your establishment. Consider their promotional discounts.

• "Opportunity buys." Don't rule them out. Take a look at items that may soon be discontinued or overstocked merchandise where a supplier has simply miscalculated demand. You could make big savings.

• Cooperative purchasing. Consider "pool" purchasing with other enterprises. It can give you added purchasing power.

• Change purchase unit size. Buy drinks in larger volumes. This can trim costs considerably, particu­larly in the case of liquor purchases where sell-by dates tend to be more generous.

• Place multiple orders. Consider buying your full range of drinks from one wholesaler. It may offer you amazing reductions, especially if it's keen to do business with you on a repeat basis.

As a purchasing manager, it is important to set standards. Decide up front exactly what types of drinks you need to purchase and the conditions under which you will place an order. These are your purchase specifications.

• Consult fellow members of staff. Their input is important. Of course you want them on your side, but oftentimes, it is they who know best what will sell (and what won't!).

• Purchase specifications must reflect the image of your establishment. Consider your target audience, the standards it demands and the price it is prepared to pay.

• Keep a written copy. It represents your establish­ment's overall purchasing standards and rules. It doesn't have to be a lengthy document; a few bulleted points will do.

• Purchase specifications should focus on the following areas: quality, quantity, consistency, reliability of vendors and availability of merchandise.

• Document your purchase specifications to vendors. Vendors need to be reminded of the standards you expect from them. Specs are also useful in the event of a dispute.

• Back up your purchase specification document with an additional product information list. Tabulate the information in chart format. Include information such as brand, country of origin, alcohol content (where applicable) and, in the case of wines, year and vintage. Use it to jog your memory when writing out purchase orders or placing orders by phone. This type of handy list can also help you spot "substitutes" when you receive the goods!

This area of purchasing offers a great scope for cost reductions. Unfortunately, it is often neglected. Do so at your peril! Many well-devised purchasing plans fall at this last hurdle. Don't marginalize this important procedure.

• Check merchandise thoroughly. Even when you are in a hurry, it is vital to check all received merchandise carefully. It may be your only (and last) chance to identify problems. Most vendors have a time limit written into their contracts for notifying them of discrepancies and shortages.

• Adopt a "checklist" approach. The person receiving the merchandise needs to do the following:

-Verify the supplier

-Check quality

-Check quantity

-Check price (if applicable)

-Note any discrepancies on the receiving note

-Sign and date, only when satisfied with the above

• Follow up any queries. Contact the vendor (preferably in writing), outlining any shortages, discrepancies or other problems, immediately. Most problems are quickly resolved. But stating your dissatisfaction, in writing, is a wise move. Sometimes queries become wrangles and you can end up with a long, drawn-out dispute on your hands. It's good to have something in writing!

• Tie up paperwork. Tedious, but important! The person who receives the goods or a designated member of staff needs to mark all invoices with some form of "Received" stamp, noting the date of receipt and who received the merchandise.

• Introduce a random audit of your receiving process. Identify any problem areas before they get out of hand! A basic audit should compare quantity and quality of merchandise delivered with the original purchase order. Carry out a volume or unit count of liquor, wines and beverages. Also, double-check that cases contain the number of bottles stated on the "outer." Finally, check that all documentation has been accurately processed.

Keep Purchasing Procedures Simple

Whatever the size of your operation, certain repetitive purchasing procedures are unavoidable. At the very minimum, a buyer has to complete a purchasing requisition, a purchase order, a shipping instruction, a receiving report and carry out some form of quality control. Purchasing procedures, however, exist for a good reason. Save time, effort and money by simplifying them.

• Change your attitude. Instead of viewing purchasing procedures as an irritation, think of them as a support system. Accurate documentation in this area has rescued many a business  from the jaws of liquidation.

• Concentrate on basics. Buyers should always have adequate purchasing procedures in place. The key, however, is to avoid overkill. If a certain procedure in the buying cycle is irrelevant to your establishment, get rid of it. A written requisition, for example, may not be necessary if you regularly "call off stock ordered on a contract basis. Adapt and be flexible.

• The purchasing requisition. Save time. Establish a pared-down requisition procedure that identifies ongoing requirements and automatically triggers the purchasing cycle.

• The purchase order. No skimping here! The purchase order is a legal contract between purchaser and vendor. Even in small organiza­tions, the purchase order needs to be put in writing. Get it right. It can save time, hassle and money in the long run. A computer-generated purchase order considerably reduces human error.

• The shipping instruction. Keep it simple. This piece of documentation is merely a confirmation of instructions from the buyer to the seller. Whether handwritten or computerized, the shipping instruction needs only to contain simple information. It should include the purchase order number for the shipment, and it, too, should be numbered for record-keeping purposes.

• The receiving report. Again, simplify. Although an important document in the purchasing cycle, it only needs to contain basic information: the quantity and condition of the merchandise, whether the merchandise tallies with the original purchase order, a record of stock shortages, the recipient's signature and the date of receipt.

Define Your Purchasing Duties

It is all too easy to get bogged down in the day-to-day activities of purchasing. Remind yourself, occasionally, of your areas of responsibility. It helps you to focus on doing a good job.

• Don't lose sight of your overall goal. Your responsibility, as a purchasing manager, is to maximize value so that your establishment gets the most for its money. No more, no less.

• The cycle of duties. Always bear in mind that a purchaser's areas of responsibility cover an entire cycle of activities: identifying the needs of the establishment, planning, sourcing merchandise, purchasing, receiving, storing and issuing.

• Control. Effective management and control of the purchasing cycle, with a constant eye on costs, is your number-one duty.

• Dealing with vendors. The purchasing department (even if you are a one-man band) is responsible for all external dealings with vendors. The purchaser should be able to handle all vendor-related queries.

• Avoid taking your purchasing problems onto the "shop floor." Front-of-house personnel will not appreciate interruptions while they are trying to please customers. Apart from emergencies, keep all purchasing queries for later.

• High standards. It is the purchaser's duty to make sure that all merchandise purchased is fit for its purpose and of a consistently high quality. High standards = good value.

A Good Purchasing Security System Can Save You Big Bucks

Build security into your purchasing procedures. The choiceof security system, however, depends a lot upon the size of your operation. If you are the "head cook and bottle washer" of a small establishment, security is a much simpler issue. If, however, you are part of a larger enterprise where a number of personnel are involved in purchasing, then security becomes a major concern. If this is your lot, give the following issues serious consideration:

• Set up a reliable purchasing control system. Whether your chosen system is manually operated or computerized, it must be free from loopholes. 

• Beware of bogus documentation. Make sure that routine purchasing procedures are accurately documented from start to finish. Attention to detail in this area will help alert you to breaches of security. Be constantly on the lookout for
  calculation "errors," deliberate duplication, "incorrect" invoices and bogus credit requests. These are all common ploys used by unscrupulous purchasers and vendors.

• Beware of the possibility of kickbacks. Some buyers have been known to "work" with suppliers in return for benefits such as money or gifts. Unfortunately, it happens all too often. Such "practiced" buyers and sellers are often masters of disguise, so don't be green, be keen!

• Beware of purchaser theft. This can take several forms. Purchasers may order merchandise for their own personal use or they may buy wholesale with the intent to "selling on." A carefully designed purchasing system will take care of most of these problems.

The quality of the merchandise purchased sets the tone and standards for the whole establishment. Don't leave quality to chance. Mistakes can be expensive. Word spreads fast and you want a good reputation!

• Be up-front about quality. Make a conscious decision to purchase "quality" merchandise at the stage when the goals of the business are being established.

• The products you are buying must be suitable for their intended use. Studies have proven that the more suitable a product, the higher its quality. Make sure that the quality of any product measures up to the needs of your establishment.

• Quality must apply throughout the establish­ment. When it comes to quality, don't concentrate on alcohol beverages alone. Of course the types of wines, spirits, beers and liqueurs you sell are all crucially important; but don't forget the non­alcoholic beverages, such as quality coffee and soft drinks. Consumers in this sector of the market are a discerning and vociferous bunch! Something as simple as a poor cup of coffee can drive a customer away, never to return.

• Don't compromise on quality. Don't be distracted by poor-quality "offers" or bulk buys that you think, on the spur of the moment, might just "do." They won't. You'll end up regretting the purchase.

• Evaluate each product's quality in relation to cost. The most expensive product is not necessarily the best product for your enterprise. When making purchasing decisions, there is no need to sacrifice quality.

• Look at quality from a clientele perspective. What level of quality do your guests expect? Meet their requirements.

• Review your vendors for quality. Do you suffer from wastage due to poor quality products? Assess the quality level of potential vendors by first asking for samples. Document quality specifications to vendors. It is important to avoid misunderstand­ings.

Do you have a purchasing strategy? If not, you need one - NOW! It's never too late. A good buying plan is one of the quickest (and easiest) ways to reduce costs and make sure that your establishment gets the most for its money. Remember, the best place to control costs is in the purchasing department. The plan doesn't have to be complicated - just well thought out and straight­forward to implement. A few bulleted points will do. Keep your plan simple and stick to it.

• Use a simple five-prong purchasing strategy.

You want to buy:

• The right product
• Of the right quality
• At the right price
• At the right time
• From the right source

• Think of purchasing as a cycle, not a one-off  activity. Purchasing is not just a matter of  phoning or e-mailing through another order. You  don't want to run out, nor do you want to  overstock.
• Purchasing is not a separate activity. What, how and when you buy must always (yes, always!) reflect the overall goals of your establishment. Trends change - so must you, the purchaser.
• Commit your purchasing strategy in writing. Write your plan down on paper; save it on your computer, or any place where it is easily accessible. You never know when other members of staff will need to deputize.
• Step back. Get an overview. Ask yourself whether you're buying on the basis of long-term fixed prices  or current market prices. You should be doing both.

Tighten Up Your Purchasing Procedures

Although it's not always the easiest thing to do when you're busy, the introduction of even a few basic "tightening up" procedures can make the purchasing manager's life a whole lot easier - and reduce costs!

• Use your written purchasing strategy as a step-by-step guide. It saves time and money in the long  run. Even if you are 100 percent familiar with your establishment's current purchasing procedures, it's all too easy to overlook a crucial link in the procedure and end up wasting time backtracking  or duplicating effort.

• Reassess your timing techniques. Timing is crucial. Tune in to the drinks' market price fluctuations. The wine industry in particular is prone to seasonal fluctuations. Also consider the bulk  buying of soft drinks in anticipation of the summer season.

• Review your purchasing schedule regularly. Consumption of liquor, wines and beverages fluctuates, from month to month and year to year. A buying pattern that worked well last year may be be way off the mark today. Consider whether it is better to buy daily, weekly, or in the case of certain drinks, monthly.

• Take a fresh look at the layout of your purchase order. Is it accurately laid out, and are your instructions easy to follow? Remove any ambiguity - and remove the unnecessary hassle of processing "returns."

• Check out your vendors. Do they have a good track record for quality and reliability? Are they easy to deal with when things go wrong? Update your vendor contact list regularly, and always remain alert to possible new suppliers. Keep existing vendors on their toes!