Rory Crawford
August 26, 2015
Posted in Restaurant Management, Industry & Culture
Dealing with shrinkage or lost product
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%, and the National Restaurant Association reports that 75% 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 2+ case quantity discount that grants you 10% off each case if you purchase 2 or more.
Despite only needing one case, that 10% discount is too tempting, so you buy two cases for $360 (2 x $200 per case – 2 x $20 discount per case). Instead of spending $200, you end up spending an additional $160 and getting twice as much product.
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If we assume 25% shrinkage, $40 (25% 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 4 weeks 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% x $10,000). Remember that if 25% 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.
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Can you please account for the the additional loss (higher % loss) experienced if 1 case is purchased vs 2 cases? Assuming $200 liquor purchase (1 case) vs $360 purchase (2 cases);
Total Shrinkage
1 Case = (25% * $200) = $50
2 Case = (25% +$360) = $90
So if the business buys one case at a time over the “medium run/long run” it is losing $10 more to Shrinkage per case.
Therefore, can you all clarify the following statement,
“Remember that if 25% 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.”
It seems like this would be hurting not helping profit?