Commentary

7 ways data can cut costs and drive profitability

Billy Jones, CEO of orderly talks about how restaurant owners can lower their operational costs and effectively manage inventory without compromising day-to-day operations.

October 1, 2018

By Billy Jones, CEO, Orderly

Every restaurant operator knows that there are plenty of ways to lose money in the restaurant business — with food cost management (or lack thereof) being a main driver in restaurant survival. To start to get a handle on food costs, restaurateurs have to keep track of their spending…in detail. It's not good enough to know you spent $500 in produce and $800 with Supplier X. However, sorting and deciphering 10-12 invoices per week from six different food and beverage suppliers becomes part of the everyday nightmare for restaurateurs that is crucial to managing inventory and food costs.

But, how can restaurant owners lower their operational costs and effectively manage inventory without compromising day-to-day operations? To do that, you have to first start with understanding and taming the relentless stream of chaotic invoice and receipt data coming from suppliers. Getting this information from the paper invoice into digital form is definitely tedious and can also be fraught with error. Even keeping an up-to-date list of your ingredients is hard. So much so that 60 percent of small restaurant owners do not consistently take inventory, which can jeopardize their probability.

This is where a data-driven approach can help restaurant and group owners successfully manage their inventory and, if effective, optimize their food cost — the biggest driver of their profitability. Best practices to scale back operation costs and improve inventory levels and costs include:

Find a solution to digitize your paper invoices: There are a number of solutions out in the market that are specifically tailored to converting restaurant supplier invoices into digitally useful data. Instead of spending your valuable time keying in this detailed information, let them do the work. You can then spend your time learning from that data.
Organize the data and get a food cost percentage: Your food cost (cost of goods sold) is the single most important metric to understand with regard to making sure your food spend is efficiently translated into profits. The key to this is accounting for inventory levels. Relying on the ratio of your overall food spend versus sales is too simplistic. Because your inventory levels will vary from week to week, your spend-to-sales ratio will vary too much to be of value. Therefore, it starts with having an up-to-date, organized ingredient list (see point 1). Getting your food cost is sort of like stepping on the scale when you want to lose weight — you gotta do it.
Put yourself on a diet: Once you know your true food cost, you can start taking steps to improve it. That starts with setting a goal and measuring yourself against it. Most likely, you can estimate your sales for the upcoming week, so commit yourself to a spend target too. Sometimes, just doing that helps raise the consciousness of your staff.
Learn how peer restaurants are doing: Not all food cost numbers are created equally! If you are running a pizza restaurant, your food cost percentage should be well less than a steak or seafood restaurant. Do some research and know where your peers are. As part of that research, you will also be able to think about your food quality and menu pricing relative to your peers. Sometimes you are running a real efficient operation with good ingredient prices, but you are simply not charging enough for your items or are serving too big of a portion.
Track ingredient costs & taking action: Armed with your purchase data, it is possible to track your ingredient prices over time. Some solutions also enable you to plot your prices paid against market benchmark pricing, and other solutions will be able to show you comparisons between different suppliers or varied pack sizes (e.g. a split case). In other words, is your chef buying a split case of lemons every three days instead of buying a full case every week? Are you paying a lot more than other barbeque restaurants for your beef brisket? Even a 5 percent higher price can make a huge difference to your bottom line. Don't be afraid to work with your suppliers to get better pricing. It also might be a good idea to call some other suppliers for important ingredients too.
Keep a waste log: Ultimately of course, you want the food that you buy to be sold for a profit. When your operations are not efficient, profit leaks out often in the trash can, in one of your employee's take-home bag, or onto your customers' plate. To help start learning where your issues are, take the simple step of keeping a Waste Log. It can be as simple as posting a clipboard next to the trash cans and having your staff write down what they are throwing away and why. Did the lettuce go bad? Write it down. Did we burn a steak? Write it down. Did we drop some chicken? Write it down. At the end of the week, you can total up the amount of money this waste cost you and start taking steps to limit waste.
Identify other usage issues: Once you know your waste and know it's not the cause for your food cost woes, then you can start looking for other usage issues. Sometimes your challenge might be theft or over-portioning. Whenever you purchase food that's not sold to your customers, you lose profitability. Waste, theft and portioning are some of the trickiest issues to detect, but with the detailed data history, you can start to use data analytics to pinpoint these issues. Be sure to look for solutions that can help you find what specific ingredients seem to have the issues, so you can take steps to correct, whether that be training or reviewing security camera footage.

It's easy to turn out the lights at the end of the night or lock up supplies like towels, aprons and napkins, but enhancing the inventory process in order to reduce unnecessary costs is no easy feat. Restaurant owners should not have to go through this process solo. Data science is there to help track every ingredient, to maintain pricing and ensure that operators have enough but not too much of the right ingredients stored in their walk-ins. With a large percentage of restaurants failing to keep track of key metrics, a data-driven approach can be the difference between restaurant owners siphoning money out the door or thriving in profit.