Course Workbook. Inventory Management: Controlling Cost. National Food Service Management Institute The University of Mississippi

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1 Course Workbook Inventory Management: Controlling Cost The University of Mississippi 2012

2 Inventory Management Controlling Cost ii This project has been funded at least in part with Federal funds from the U. S. Department of Agriculture, Food and Nutrition Service through an agreement with the at The University of Mississippi. The contents of this publication do not necessarily reflect the views or policies of the U. S. Department of Agriculture, nor does mention of trade names, commercial products, or organizations imply endorsement by the U. S. government. The University of Mississippi is an EEO/AA/TitleVI/Title IX/Section 504/ADA/ADEA Employer. In accordance with Federal law and U.S. Department of Agriculture policy, this institution is prohibited from discriminating on the basis of race, color national origin, sex, age, or disability. To file a complaint of discrimination, write USDA, Director, Office of Civil Rights; Room, 326-W, Whitten Building, 1400 Independence Avenue, SW, Washington, DC or call (202) (voice and TDD). USDA is an equal opportunity provider and employer. 2012,, The University of Mississippi Except as provided below, you may freely use the text and information contained in this document for non-profit or educational use providing the following credit is included Suggested Reference Citation:. (2012).Inventory Management: Controlling Cost Workbook. University, MS: Author. The photographs and images in this document may be owned by third parties and used by The University of Mississippi under a licensing agreement. The University cannot, therefore, grant permission to use these images. For more information, please contact nfsmi@olemiss.edu.

3 Inventory Management Controlling Cost The University of Mississippi iii Building the Future Through Child Nutrition The was authorized by Congress in 1989 and established in 1990 at The University of Mississippi in Oxford and is operated in collaboration with The University of Southern Mississippi in Hattiesburg. The Institute operates under a grant agreement with the United States Department of Agriculture, Food and Nutrition Service. PURPOSE The purpose of the is to improve the operation of child nutrition programs through research, education and training, and information dissemination. MISSION The mission of the is to provide information and services that promote the continuous improvement of child nutrition programs. VISION The vision of the is to be the leader in providing education, research, and resources to promote excellence in child nutrition programs. CONTACT INFORMATION Headquarters Administration Division The University of Mississippi Phone: Fax: Education and Training Division Information Services Division The University of Mississippi 6 Jeanette Phillips Drive P.O. Drawer 188 University, MS Applied Research Division The University of Southern Mississippi 118 College Drive #5060 Hattiesburg, MS Phone: Fax:

4 Inventory Management Controlling Cost Table of Contents 1 Inventory Management Controlling Cost Online Course Checklist..2 Setting Inventory Turnover Rate... 4 Video Viewing Guide: Inventory Turnover Rate... 5 Inventory Turnover Rate Practice Activity. 7 Inventory Turnover Rate Self-Evaluation... 9 Video Viewing Guide: Loss Prevention Cost Control Checklist for Loss Prevention. 12 Loss Prevention Activity...15 Ordering Systems Factors. 16 Video Viewing Guide: Par Stock Levels.. 17 Cost Control Checklist for Ordering. 19 Video Viewing Guide: Controlling Waste Video.20 Cost Control Checklist for Controlling Waste.. 22 Causes of Waste of Food and Supplies Activity.. 23

5 Inventory Management Controlling Cost Inventory Management Online Course Checklist Instructions: In the blanks provided, write the date that each assignment is completed. 2 Introduction 1. Set a schedule for completing the course 2. Secure a 3-ring binder for Inventory Management Controlling Cost Course Workbook 3. Gather a pen or pencil and note paper Lesson 1: Inventory Turnover Rate 1. Lesson 1 Pre-Quiz 2. Video Viewing Guide: Inventory Turnover Rate 3. Inventory Turnover Rate Practice Activity 4. Inventory Turnover Rate Self-Evaluation 5. Lesson 1 Post-Quiz Lesson 2: Loss Prevention 1. Lesson 2 Pre-Quiz 2. Video Viewing Guide: Loss Prevention 3. Internal Control Procedures Checklist 4. Loss Prevention Activity 5. Lesson 2 Post-Quiz Lesson 3: Ordering Systems 1. Lesson 3 Pre-Quiz 2. Video Viewing Guide: Ordering Systems and Par Stock Levels 3. Cost Control Checklist for Ordering 4. Lesson 3 Post-Quiz

6 Inventory Management Controlling Cost Lesson 4: Controlling Waste 3 1. Lesson 4 Pre-Quiz 2. Video Viewing Guide: Controlling Waste Video 3. Cost Control Checklist for Controlling Waste 4. Causes of Waste of Food and Supplies Activity 5. Lesson 4 Post-Quiz 6. Certificate of Completion for Inventory Management Controlling Cost Your signature

7 Lesson 1: Inventory Turnover Rate Setting Inventory Turnover Rate 4 The recommended days of inventory are used to determine the turnover rate. Formula for Setting Inventory Turnover Rate: = Average Number of Recommended Days Average Turnover Serving Days in a Month* of Inventory Rate *If your school s average number of serving days in a month is different, use your school s figure. Experts in the foodservice industry recommend that inventory should be turned over (used) a minimum of two to three times a month. This means that the minimum recommended turnover rate is two (biweekly deliveries) or three (weekly deliveries). Example: If deliveries are once a week and recommended days of inventory are = 3 (3.1 rounded down) Average Number of Recommended Days Turnover Rate Serving Days in a Month of Inventory The turnover rate of three means that the inventory should be used up three times per month. Example: If deliveries are once a week and recommended days of inventory are = 2 (1.8 rounded up) Average Number of Recommended Days Turnover Rate Serving Days in a Month of Inventory The turnover rate of two means that the inventory should be used up two times per month. More frequent deliveries mean fewer days of inventory are needed. Less frequent deliveries mean more days of inventory are needed.

8 Lesson 1: Inventory Turnover Rate Video Viewing Guide: Inventory Turnover Rate 5 Instructions: As you watch the video, Inventory Turnover Rate, listen for the answers needed to complete the statements below. Write your answers in the spaces provided. You may review the video again if needed. 1. In good inventory management practice, the goal is to. 2. Good management of the inventory is having what you need but not stockpiling. True or False 3. How do you determine the maximum amount of inventory to have on hand? a) b) 4. If you receive deliveries just twice a month, you would need no more than 9 days of inventory at one time. True or False 5. What helps you determine your inventory turnover rate?

9 Video Viewing Guide: Inventory Turnover Rate Answer Key Lesson 1: Inventory Turnover Rate 6 Instructions: As you watch the video, Inventory Turnover Rate, listen for the answers needed to complete the statements below. Write your answers in the spaces provided. You may review the video again if needed. 1. In good inventory management practice, the goal is to limit inventory to avoid tying up operating funds. 2. Good management of the inventory is having what you need but not stockpiling. True or False 3. How do you determine the maximum amount of inventory to have on hand? a) The number of serving days between deliveries b) Plus 1 or 2 days safety cushion 4. If you receive deliveries just twice a month, you would need no more than 9 days of inventory at one time. True or False 5. What helps you determine your inventory turnover rate? Your days of inventory

10 Lesson 1: Inventory Turnover Rate Inventory Turnover Rate Practice Activity 7 Instructions: Answer the questions below: The recommended level of inventory for the organization is seven days and the recommended turnover rate is three. The actual level at the end of the month was 15 days of inventory in stock and a turnover rate of Explain the significance of 15 days of inventory in stock and a turnover rate of What can the manager do to reduce the stock level of these products and still practice good cost control? After reviewing the inventory, the manager identified a number of items that should be used to reduce inventory levels. Some of the items are listed below. 4-ounce portion control dishes Ground beef, bulk Tomato sauce Raisins, individual packs Stainless steel cleaner 3. How would you explain to a manager-in-training why it is important to reduce inventory?

11 Lesson 1: Inventory Turnover Rate Answer Key for Inventory Turnover Rate Practice Activity: 8 1. The level of inventory of seven days means that the inventory on hand should be only enough for serving seven days. Having 15 days of inventory means that the inventory level was more than twice as much as should have been in storage. The recommended turnover rate of three means that the inventory should be used up three times per month. Having a turnover rate of 1.6 means that the stock levels are too high and the inventory is used at only about half the rate recommended. There is too much stock on hand. 2. The manager can reduce the inventory levels of the following products. Four-ounce portion control dishes serve appropriate salads and desserts in portion control dishes. This type of service can reduce labor cost for the service line since students can serve themselves. Ground beef, bulk evaluate the menu and determine where bulk ground beef can be used. Some examples include: chili, spaghetti, taco meat, and sloppy joes. Tomato sauce consider changing the menu to include recipes with this ingredient. The items above would use both the ground beef and the tomato sauce. Raisins, individual packs offer raisin packs as an alternate choice for the fruit/vegetable component. If appropriate, sell them a la carte. Stainless steel cleaner use the cleaner on hand until it reaches minimum levels. The shelf life on such a product should be long. 3. Meet with the manager-in-training and use the coaching process (USED) to teach about reducing inventory. Understanding Ask the manager-in-training what he knows about reducing inventory. Build on that knowledge. Use current cost figures and the most recent total inventory value to explain the amount of money that is tied up in inventory and not available for other uses in the organization. Show the calculation the organization uses for inventory valuation. Describe ways that inventory can be reduced. Showing Using the menu and the physical inventory, give examples of ways to use current stock. Experiencing Ask the manager-in-training to use several menus and the physical inventory and give examples of ways to reduce inventory Doing Allow the manager-in-training to make changes in the menu that would reduce inventory levels (with supervisor approval, according to the organization s procedures).

12 Lesson 1: Inventory Turnover Rate Inventory Turnover Rate Self-Evaluation Instructions: Meet with your director or supervisor to get the answers to the following: 9 Days of inventory in stock in your kitchen Recommended days of inventory in stock for your kitchen Inventory turnover rate in your kitchen Recommended turnover rate for inventory in your operation Instructions: Using the information provided by your director or supervisor, evaluate your inventory level and mark which statement best describes your kitchen. Currently, we have about the right amount of inventory Currently, we have too much inventory* Currently, we have too little inventory * If your answer was too much inventory, make notes below of ideas you have for using the excess inventory. Develop a plan for reducing inventory and keeping your turnover rate and inventory levels at the recommended level.

13 Lesson 2: Loss Prevention Video Viewing Guide: Loss Prevention 10 Instructions: As you watch the video, Loss Prevention, look for examples of how to prevent loss of inventory. Record them below. You may review the video again if needed. 1. What are some ways to prevent loss of inventory? 1) 2) 3) 4) 5) 6)

14 Lesson 2: Loss Prevention Video Viewing Guide: Loss Prevention 11 Answer Key Instructions: As you watch the video, Loss Prevention, look for examples of how to prevent loss of inventory. Record them below. You may review the video again if needed. 1. What are some ways to prevent loss of inventory? 1) Keep outside entrances locked at all times 2) Schedule more than one employee for opening, closing, and receiving 3) Lock pass-through doors 4) Lock storage rooms for supplies and food 5) Store small equipment in locked storage areas 6) Use clear garbage bags

15 Lesson 2: Loss Prevention Cost Control Checklist for Loss Prevention 12 Instructions: The manager or an employee can use this checklist to evaluate the internal controls in the foodservice. Task OK Improve 1. Know who has authorized access (keys) to the kitchen area and limit access only to approved persons. Delivery persons should not have keys to the facility. 2. Keep locks and keys secure. Maintain a list of the people who have keys. 3. Change locks and keys if there is a possibility of unauthorized people having keys to the storage areas, refrigerators, or freezers. 4. Keep the outside entry locked at all times for security of foods and supplies and for personnel safety. 5. Schedule more than one employee to be present for kitchen opening and closing. 6. Allow deliveries only during hours when a trained person is available to receive the delivery, check it in, and store food and supplies properly. 7. Require that deliveries be made during specified hours and only when the delivery can be properly checked in. Deliveries should never be left on the dock or unattended in any unsecured area. 8. Use correct receiving procedures to prevent distributor theft. 9. Keep food and supplies securely locked in limited access areas and use an issuing procedure. 10. Use proper storage procedures. 11. Rotate inventory of all foods and supplies using First In, First Out. 12. Determine if there is a way to block and lock pass-through between the kitchen and cafeteria during non-production hours. (Examples: a window from the dining room to the dishroom or a window from the kitchen to the service line.) If you are unable to block and lock the pass-through, move small equipment, supplies, and all food into locked storage at the end of each day. 13. Do not allow food leftovers to be taken home by employees. This is a violation of federal regulations.

16 Lesson 2: Loss Prevention Designate a place for employees to store coats and handbags (not in the storeroom). 15. Request that employees not bring large bags to work. 16. Use clear trash bags and check trash and garbage containers periodically. These can be used to move food outside the building for pick-up later. 17. Know your inventory by visually inspecting the storeroom, freezers, and refrigerators at the end of the day to make it easier to notice if any items are missing. 18. Keep a perpetual inventory of more expensive items in storage. 19. Keep a perpetual inventory of USDA Foods. 20. Maintain a monthly physical inventory. 21. Leave food items in cases until ready for use. This makes it easier to take a physical inventory and to determine if anything is missing. Missing cans are not as obvious as missing cases. 22. Use teachers checkout sheets for loan of kitchen items. 23. Follow policies on use of the cafeteria by outside groups in the school or community. It is best practice to require a member of the foodservice staff to be present any time the kitchen is used. This procedure should be written and approved by the School Board. 24. Establish policies for use of the kitchen and dining room by other programs such as an After School Care Program. 25. Lock down small equipment that cannot be moved into locked storage areas. (Example: electronic scales). 26. Train staff to observe customers to prevent theft on the service line. 27. Position line servers and cashiers where they can see the service line. 28. Position cashiers at the exit of the foodservice area. Ideally, customers should pass by the cashier at both the entry and exit of the foodservice area.

17 Lesson 2: Loss Prevention 29. Place packaged a la carte items where the cashier can give them to the customer at the time of payment or have an employee monitor selfservice lines that offer prepackaged items Have a secure lock system on all vending machines that the foodservice operates. Machines often come with universal locks that can be opened by anyone with a key to the same brand of vending machine. 31. Have two people verify counts of product. 32. Record a beginning and ending count of items and reconcile to sales counts. Two people should verify counts. 33. Train dishroom personnel in correct procedures to clean and sort returned trays to prevent loss. 34. Consider sorting trays only in the dishroom if loss of silverware and small dishes cannot be solved by increasing awareness of students and employees. 35. Monitor inventory of silverware and dishes and use procedures to limit loss. Involve students and employees in solving a loss problem.

18 Lesson 2: Loss Prevention Loss Prevention Activity 15 Instructions: Answer the following questions about your foodservice operation. 1. List any losses of inventory that have occurred during the last few months: 2. What changes will be made to prevent loss of inventory?

19 Lesson 3: Ordering Systems Ordering Systems Factors 16 Some organizations may choose to use bulk purchasing or warehousing to obtain better prices due to larger quantities ordered. Care should be taken with this approach as the true cost is not the price paid for the products. When evaluating the true cost of warehousing for bulk purchasing, other factors must be considered. Factors to consider: If warehousing is rented, how much does it cost? If warehousing is owned by the organization, what is the value if it had to be rented? Cost of equipment is calculated at replacement cost divided over a five-year period. What is the yearly maintenance cost for refrigerator/freezer space and operation? What is the cost of pest control service? What is the total cost of utilities electric, gas, water (if warehouse space is shared, this cost should be prorated based on square footage)? What is the cost of delivery equipment (trucks) divided over a five-year period? What is the cost of fuel, oil, grease, tires, insurance, and repairs for delivery equipment? What is the cost of salaries, including fringe benefits, for warehouse personnel working for foodservice? What is the cost for administration, including scheduling deliveries and data entry, plus the cost of any fringe benefits? What is the loss of interest calculated at the average dollar amount of inventory times the interest rate? What is the cost of inventory losses for the year? Add all of the above to determine actual warehouse cost. Divide the sum by the total number of cases of food and supplies that were delivered to the warehouse during the year. The answer gives you a warehousing cost per case. Add this amount to the purchase price per case of the food or supply to obtain a true comparison of cost for bulk purchasing that must be warehoused.

20 Lesson 3: Ordering Systems Video Viewing Guide: Ordering Systems and Par Stock Levels 17 Instructions: As you watch the video, Ordering Systems and Par Stock Levels, listen for the answers needed to complete the statements below. Write your answers in the spaces provided. You may review the video again if needed. 1. A good ordering system helps by letting you order food based on a) b) c) 2. Keeping accurate records or histories is very important because. 3. Par stock level means the amount of stock needed in inventory of a particular item. True or False 4. When it is time to re-order always,. 5. Knowing the par stock level for items in inventory helps.

21 Lesson 3: Ordering Systems Video Viewing Guide: Ordering Systems and Par Stock Levels 18 Answer Key Instructions: As you watch the video, Ordering Systems and Par Stock Levels, listen for the answers needed to complete the statements below. Write your answers in the spaces provided. You may review the video again if needed. 1. A good ordering system helps by letting you order food based on a) Planned menus b) Order guidelines c) History of production 2. Keeping accurate records or histories is very important because it allows you to see over a period of time how much of a certain item you are using and also allows you to know if you need to order more or less of that item. 3. Par stock level means the amount of stock needed in inventory of a particular item. True or False 4. When it is time to re-order always, check the packs in stock and subtract the amount from the par stock level. This is the amount to order. 5. Knowing the par stock level for items in inventory helps determine how much to order without over stocking and possibly wasting food.

22 Lesson 3: Ordering Systems Cost Control Checklist for Ordering 19 The manager can use this checklist to evaluate ordering for inventory management. Instructions: Use the Cost Control Checklist for Ordering to evaluate your ordering system for inventory management. After completing the Checklist, make a note below of the two highest priority changes you need to make for better ordering to control your inventory. Task OK Improve 1. Order paper and chemical supplies based on the history of use. Set up minimum and maximum par stock levels and order according to these levels. 2. Order food items as specified by the menu. 3. Establish par stock levels for items that are used on a daily basis. 4. Order in the nearest quantity to the amount needed based on information from the menu, the order guide, the Food Buying Guide, standardized recipes, and past production records. 5. Order only what is needed to cover the time period between deliveries, plus an amount needed for a cushion. 6. Order food in quantities that can be used in a short time period to assure best quality and prevent spoilage. 7. Evaluate par stock levels near the end of the school year. Par stocks may need to be reduced to eliminate or significantly reduce inventory that must be held over the summer.

23 Lesson 4: Controlling Waste Video Viewing Guide: Controlling Waste Video 20 Instructions: As you watch the video, Controlling Waste, listen for the answers needed to complete the statements below. Write your answers in the spaces provided. You may review the video again if needed. 1. The best way for the manager to control waste in their operation is to stay in the manager s office and monitor the inventory on the computer. True or False 2. List some major areas to watch for controlling waste. a) b) c) d) e) f) 3. Controlling costs for food and supplies is a big part of inventory management. True or False

24 Lesson 4: Controlling Waste Video Viewing Guide: Controlling Waste Video 21 Answer Key Instructions: As you watch the video, Controlling Waste, listen for the answers needed to complete the statements below. Write your answers in the spaces provided. You may review the video again if needed. 1. The best way for the manager to control waste in their operation is to stay in the manager s office and monitor the inventory on the computer. True or False 2. List some major areas to watch for controlling waste. a) Overproduction b) Waste during production c) Incorrect preparation procedures d) Improper care of leftovers e) Excess plate waste f) Misuse of condiments and disposables 3. Controlling costs for food and supplies is a big part of inventory management. True or False

25 Lesson 4: Controlling Waste Cost Control Checklist for Controlling Waste Instructions: The manager can use this checklist to evaluate waste control. 22 Task OK Improve 1. Set aside a specific time to plan production. 2. Assemble the information and materials needed to plan production. 3. Use appropriate tools to plan production including recipes, Food Buying Guide, past production records, and current attendance. 4. Observe production in progress, provide coaching, and make changes where needed. Observe the following: Following recipes and package directions Measuring and weighing ingredients Using appropriate cooking methods and correct temperatures Using timers to prevent overcooking Selecting and using the right piece of equipment for the task 5. Supervise adjustment and use of standardized recipes. 6. Involve all employees in control of waste. 7. Monitor waste of ingredients during production due to overtrimming, overcooking, etc. 8. Use just-in-time food preparation for appropriate items to prevent waste due to overproduction and assure quality. 9. Properly store leftovers at the end of the meal. 10. Post a list of leftover food items that need to be used. 11. Plan for use of leftovers. 12. Train dishroom personnel on how to observe and report waste on trays and plates. 13. Periodically monitor the waste of food and paper supplies in the dishroom. Determine the reasons for waste.

26 Lesson 4: Controlling Waste Causes of Waste of Food and Supplies Activity 23 Waste of food and supplies adds to inventory cost and overall production cost in the foodservice operation. The manager is responsible for identifying causes of waste and controlling it. Instructions: In the spaces below, identify one or more examples of waste. Overproduction Waste of food during production Using incorrect culinary techniques to prepare food Improper care of leftovers Excess plate waste, misuse of condiments and disposables Which of these causes do you consider to be the primary cause of waste in your kitchen? On a piece of paper, describe ways you plan to control the waste you have listed here.

27 The University of Mississippi P. O. Drawer 188 University, MS The University of Mississippi