Inventory makes sense. It should be a straightforward enough system for food businesses to run. Count what you have, consider what you need, and boom: simply order enough to make up the difference.

You know that this is an oversimplification. Inventory is far more than that. Precise inventory tracking is not just a measure of on hand ingredients. Inventory is also the inflow and outflow, the receiving of, consumption, and waste of ingredients. It can be the value of ingredients on-hand, and an under-appreciated lever that can be pulled to optimize margins or cashflow.

The greatest benefits of a full inventory system are only available when food brands have complete visibility into both their actual and theoretical inventories.

In this article, we’ll look at:

• Why actual vs theoretical inventory is such a powerful metric to track

• How to calculate AvT inventory variance in real-time

• Closing the gap between actual vs theoretical to find more margin

Theoretical Inventory

Your theoretical inventory is a calculation of exactly how much inventory a food business should have after a certain period of time, based on how much food you sold/produced in that time period and how much ingredients you theoretically used according to the recipes.

 For example, let’s say you have 500 eggs. For every serving of scrambled eggs you sell, you use one egg. If you sell 300 servings of scrambled eggs over the course of a week, theoretically, you should have 200 eggs remaining in your inventory. 

This is helpful to calculate because it creates a zero-waste, zero-theft scenario of the perfect food prep/service environment. If you nail the theoretical inventory calculation, you can be certain you didn’t slash profit margins by way of losing/throwing out ingredients that you paid for.

As you know, it’s never that simple.

Also Read: Food Cost Is King In The Food Industry, So Why Is It So Hard To Figure Out?

Actual Inventory

Your actual inventory is a measure of how much inventory you have remaining (usable and accessible) in storage after a certain period of time, calculated by counting your stock or inventory on hand. This is the number your team capture at the end of a cycle count—the inventory is physically there.

For example, you thought you would have 200 tomatoes left after selling 300 bruschetta dishes. However, when you actually go in and count, there are only 125 tomatoes present. No matter what you believed would be the case based on theoretical calculations, there are only 125 tomatoes.

Most food inventory systems are built around calculating actual inventory. It’s practical for day-to-day operations and knowing what you need to order for next week. But there is also a huge missed opportunity.

Inventory Variance

Most food inventory systems are built around calculating actual inventory. It’s practical for day-to-day operations and knowing what you need to order for next week. But it’s also a huge missed opportunity. Without the ability to calculate both actual and theoretical inventory, you’re unable to calculate inventory variance

Inventory variance is the difference between your theoretical scenario and what actually happens. In other words, variance is a measure of how much food is being purchased, but not being valued properly in your costing calculations.

In our example, those 75 missing tomatoes are the inventory variance, and there are many reasons that variance can exist:

• Waste and Spoilage — Not properly rotating fresh ingredients, poor storage, supplier transportation mishaps, and slower-than-expected sales leads to some amount of ingredients spoiling before they’re able to be used.

• Increasing Trim Yield — Not enough time in the day for training or poor culinary technique leading to lots of trim may be the cause of these missing tomatoes. If one over-exhausted employee tosses out 20% more of each tomato than is necessary, that leads to more tomatoes being used for the same amount of items prepped. 

• Check the Delivery Dock — Did someone leave a crate of tomatoes on the delivery dock? It happens.

• 🏴‍☠️ Food Pirates — Some employees walk out with food. Sometimes believing it was too old or ugly to be sold or used, sometimes for less charitable reasons. 🦜

• Over Purchasing — What if you expected 200 tomatoes, but actually found 300? This may indicate inaccurate cycle counting leading to over purchasing, likely leading to extra spoilage unless you can push that inventory or get creative with recipes.

Measuring inventory variance offers a deeper level of clarity into a variety of potential team and operational issues that cut into already tight margins.

Also Read: Actual vs. Theoretical Food Costing: Why Accuracy Is Essential

In an ideal world, you would operate with zero inventory variance. No margin would be lost to spoilage, theft, or extra trim yield, and every single tomato you purchased would reach its maximum potential both in culinary use and in revenue. 

You will never achieve zero inventory variance, but can work to get as close as possible (and find new margins in the process).

When you measure inventory variance, the theoretical side of the equation is made up of precise expectations for exactly how much inventory you should be using on a per-ingredient basis. This means you can investigate the causes of inventory variance not only in broad strokes, but for each individual ingredient (most likely, starting with the ingredients with the highest variance).

For example, consider a non-commercial foodservice provider with 50 cafes. Managers may identify that, on average, 75 tomatoes are lost for every 500 ordered, a 15% inventory variance. The company’s most efficient kitchens, however, lose only 40 tomatoes (8% variance), and the least efficient kitchens lose 95 tomatoes (19% variance). 

For a culinary manager, this insight is enough to several things:

• Identify the best practices from high-efficiency kitchens. Knowing where your low-variance kitchens are enables you to assess the team’s training, workflow, and practices to find what makes them so efficient in inventory usage.

• Identify points of failure in lower-performance kitchens. Insights from low-variance locations can be contrasted against high-variance locations to bring them up to par in operational excellence. 

• Lower variance and increase margins everywhere. Lowering variance means you make more money on your expenses by turning as much of your inventory as possible into sold product.

Small improvements like this multiply across teams and locations. 

Also Read: Return On Investment: A Look At Galley’s Impact On Profitability

Most inventory systems and processes, because they are based on actual inventory, are built on top of manual cycle counts by staff. This means inventory is only updated when someone has the time to complete a count. In many cases, full counts only happen on a once or twice-monthly basis. 

We’ve already hinted at how this creates challenges for culinary managers, they need to be able to spot leaks in the bucket and address issues with waste or theft or training quickly, but the count delays have downstream impacts as well. 

For example, purchasing in-between those manual cycle counts is based on demand assumptions and smaller section counts, not full actual inventory. This delay in counts requires procurement teams to look at historical inventory and sales from the last couple of weeks, then make educated guesses as to what needs reordering. Experienced purchasers can become pretty good at this, but the more time that passes between a complete cycle count and a purchase order, the more likely purchasers are to order more or less than is required. 

On the other hand, when a purchaser or buyer can look at the theoretical inventory for today and compare it to the expected theoretical inventory, the level of precision for every purchase order increases because they can buy what’s actually needed for this week—not what they hope is needed.

Let’s say it costs a noncommercial foodservice company $175 to buy 500 tomatoes. A 15% inventory variance means $26.25 of that order is lost somewhere. That’s $26.25 in COGS that is not translated to any revenue. Now let’s imagine that, between culinary and purchasing improvements, that company can reduce their inventory variance to 13%, or $22.75. 

If you’re placing that order every week across 50 locations for an entire year, lowering your $26.25 lost inventory to $22.75 saves $9,100—and that’s just on tomatoes!

Galley Gives an Accurate Report of Actual vs Theoretical Inventory

Galley is a recipe-first food data platform that takes all your food and recipe data, layers on your sales data, and tracks your theoretical inventory in real-time, tracks actual inventory when you complete cycle counts, and give you price data into your inventory variance. 

Find out more about how Galley can shine a light on your real versus theoretical inventory: Get in touch for a demo of the software.

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Tracking actual vs theoretical inventory is a missed opportunity for food businesses. Learn how to master your inventory, make better buying decisions, and increase your margins.