Hotels, like all restaurants and bars that serve alcohol, have internal controls for inventory management but the truth is that because of dated tools and procedures, most hotel managers and executives have no idea how much inventory or money is lost from their beverage operations.
I've found inventory losses in hotel F&B departments from around $4,000 to over $50,000 per month, relative to sales volume.
Here’s the good news: Discovering if theses issues exist in your hotel and resolving them isn't as overwhelming as it used to be. With the right game plan and tools, in 4 to 6 weeks you can remove the guesswork and lower your beverage costs by five points or more by overhauling your inventory program.
In this article, I’ll provide you with six steps on how to approach this. First, let’s look at why hotels frequently have massive inventory and sales losses that go perpetually undetected.
As discussed in a previous article, bars typically lose 20 percent of their inventory due to variances from unfollowed recipes and unauthorized comps. Hotel inventory losses are commonly just as frightening, but they tend to be more hidden because of the following three reasons.
Banquet Outlet Financials
First, when calculating hotel beverage cost, banquet outlet financials are habitually combined with the restaurant and bar outlet data, producing just one set of performance numbers for executives to monitor their hotel beverage operations. This is a problem because hotel banquet outlets have a tendency to skew overall cost percentages down. Price markups for liquor, beer and wine are generally higher in banquets because of party package rates, which typically cause their beverage cost percentages to be much lower than other revenue centers. For example, we recently did an inventory discovery audit for a hotel and found a 19.5 percent overall beverage cost, which was within the hotel’s budgeted target. Looking deeper, we found that their banquet outlet had a beverage cost of only 11 percent. This is not uncommon. The hotel’s restaurant outlet sold more wine than liquor and beer, and therefore had an ideal beverage cost of 32 percent. Their lobby bar had a cost of 23 percent but experienced a 21 percent inventory loss, costing the hotel over $3,000 per week or $150,000 annually. This significant loss went completely undetected through hotel’s traditional financial analysis strategy.
Requisition & Transfer Errors
A lack of checks and balances ensuring requisitions and transfers from the stockroom and between outlets are recorded correctly is another contributing factor to hotel’s hidden beverage cost problems. Without accurate requisitions, it’s not possible to monitor usage for revenue centers or accurately produce analytics by outlet.
Measure Inventory Variance
Finally, hotels have hidden beverage cost problems because they don’t usually measure inventory variance with a liquor inventory control system, which enables bar employees to pour drinks without accountability. Instead, they calculate beverage cost financials once per month, which is almost completely useless for detecting or preventing inventory loss in most cases.
Follow these six steps below to be the inventory hero of your hotel and achieve record-setting pour cost numbers.
When we begin to work with a hotel on inventory management, our discovery audits inevitably find that requisition and transfer records are grossly inaccurate, incomplete, or missing altogether. Without a proper check and balance measure to confirm the data, these errors go undetected indefinitely. The first step in detecting and solving beverage cost issues is to establish procedures to ensure that these transactions are documented accurately.
Below are several suggestions for fixing your inventory requisition and transfer processes:
Measuring inventory variance means measuring the units used vs. units sold, which can be precisely calculated and rewarded. Monitoring variances instead of percentages means looking at how many drinks are missing instead of looking at what your beverage cost percentage is.
Monitoring beverage cost percentage has proven ineffective for stopping shrinkage. The reason is pretty basic: When you measure variances, you can provide specific feedback and ask your staff the right questions.
What Gets Measured Gets Managed.
Managing pour cost percentage is ineffective because it doesn’t stop over pouring or theft.
Here’s why: Setting pour cost targets doesn’t work because your target will almost always be wrong. Ideal pour cost targets fluctuate based on product mix, which constantly changes. Your markup cannot be the same across all categories of liquor, beer and wine. If it is, you’ll overcharge for margaritas and undercharge for Grand Marnier. Spirits will have a pour cost ranging from around 7 percent to ~45 percent depending on the product and how and where it is sold.
In addition, the data provided in pour cost management isn’t powerful enough to allow you to ask the right questions needed to change behavior. As an example for the leverage of managing variances instead of pour cost percentage, imagine which of these two questions would be more effective:
Most hotels combine all outlet financials into one set, but this does not provide enough data to be effective. Now that you’ve gotten your requisition system on track, you can start to isolate your reporting by outlet. This is critical for achieving optimal inventory numbers for two important reasons.
First, analytics should be provided for each area in order for outlet managers to fully understand where issues are occurring. It does little good to hold an all-staff meeting and address inventory performance when the issue rests solely with your lobby bar staff.
This second reason to isolate reporting is that, depending on how drinks are sold, some outlets will have different criteria to base performance on. You should set targets based on fair objectives. For example, when drinks are sold by item through a POS in a bar revenue center, you should set this outlet up with inventory variance targets. However, because banquet events are generally package parties, they are best benchmarked by percent targets of cost of goods sold, along with inventory variance reporting for each cash bar party. Variance reports can only be created when drinks sales are recorded by item or at least using category keys. Package parties often times are at portable bars without POS
Using a Bluetooth enabled scale and barcode scanner is the fastest and most accurate method for taking a physical inventory of open btls.
Speed is important for practical reasons. If inventory is too difficult and time consuming, it will not be done frequently enough to give the relevant feedback needed to be effective.
Don’t Eyeball Open Bottles
Most bar inventory apps and bar control software, 9 of 10 that I found on a recent look, somehow only let you visually eyeball open bottles for measuring open bottle inventory. Look, eyeballing might be good enough for putting together a liquor order. However, how can you expect to be taken seriously or hold a bartender accountable for shrinkage by using information collected in this subjective way? Guesstimating an open bottle is an opinion, which is usually wrong for btls that you can see through. What about all of the bottles that you can’t see through? The beer kegs that you can’t see through? How would you visually determine how much are in these bottles below?
Choose Inventory Technology that Syncs with Your POS System
Inventory information means little without its corresponding sales data. Most bar inventory apps and software do not match up item sales data with item usage for a variance report. With so many POS systems out there, make sure your inventory software and POS are friendly.
To achieve the best inventory performance, you should take a full inventory once per week, along with quick, daily spot checks on individual brands that have shown issues during the weekly report.. A good strategy is to set performance targets by outlet. If targets aren’t reached with the weekly full inventory, ask the bartenders to take daily inventories using a convenient bar inventory app until the numbers match up. This strategy has enabled our software to help over 50,000 bars and restaurants maintain variance targets of 3 percent or less which, based on many factors, can result in net profit increases of $4,000 to $40,000 per month. Monthly or bi weekly inventory reports are less reliable and effective due to missing information and lack of communication with the bar staff. Less frequent inventories have proven to produce a higher variance average, which almost always offsets the perceived labor savings.
Weekly inventories are also important in completing accurate liquor, beer and wine orders that are based on recent consumption trends. Most venues order product weekly. To do this accurately, the order should be intelligent and based off of recent inventory movement data, not just based on previous orders or what the vendor tells you to order.
Ordering too much liquor will not increase your liquor pour cost, but it will unnecessarily tie up cash that could otherwise be used to improve your business, cash flow and marketing. If you order something on a hunch and never end up using it, you may as well have just given the product away.
How do Consumption Based Ordering Systems Work?
Consumption-based inventory ordering systems, such as our InteliPar system, look at previous usage history to determine what should be ordered. The system should consider several factors such as the buffer percentages, average usage and vendor minimums.
For example, let’s say you used an average of 100 ounces per week of Tito's vodka for the past several weeks. With a buffer included to account for a busier week possibility, the par level would adjust to 120 ounces or 2.9 btls on hand. If on hand inventory fell below 2.9 btls, the system would suggest an order of one. Or, if you prefer Tito’s vodka is only ordered by case lot, the system would request 12 btls ordered. When usage for Tito’s increases or decreases, the par level will automatically adjust, creating a true “just-in-time” ordering system to minimize overstocks as well as preventing you from running out of the products you actually need.
To learn more about how to implement just in time inventory at your venue, download the following E-book.
There you have it! Have you tried any of these ideas before? We’d love to hear your thoughts and comments.
Until next time,
Ken Gillie
Sculpture Hospitality – the Inventory Experts