MODULE: Quick Food Service Operations

Chapter 3: Operation in the Quick Food Service Operations

Learning Objective
 Identify the operation in the quick food service operation
 Cite the importance of quick food service operation
 Assess the study at the end of the lesson
Inventory Management is a systematic approach to sourcing, storing, and
selling inventory—both raw materials (components) and finished goods
(products).
In business terms, inventory management means the right stock, at the right
levels, in the right place, at the right time, and at the right cost as well as price.
Entrepreneurs, founders, and independent brands now live in a native commerce
world where small-to-medium businesses compete against global
conglomerates.

We’ve put together this definitive guide to inventory management to level the
playing field and help you grow your brand with speed, scalability, and smart
insights. You’ll find everything you need from inventory control basics to best
practices and formulas to advanced automation processes.
Inventory management definition

As a part of your supply chain, inventory management includes aspects such as

controlling and overseeing purchases — from suppliers as well as customers —
maintaining the storage of stock, controlling the amount of product for sale, and
order fulfillment.

Naturally, your company’s precise inventory management meaning will vary

based on the types of products you sell and the channels you sell them through.
But as long as those basic ingredients are present, you’ll have a solid foundation
to build upon.

Small-to-medium businesses (SMBs) often use Excel, Google Sheets, or other

manual tools to keep track of inventory databases and make decisions about
ordering.
However, knowing when to reorder, how much to order, where to store
stock, and so on can quickly become a complicated process. As a result,
many growing businesses graduate to an inventory management app,
software, or system with capabilities beyond manual databases and
formulas.

With these systems, the procedures of inventory management extend beyond

basic reordering and stock monitoring to encompass everything from end-to-end
production and business management to lead time and demand forecasting to
metrics, reports, and even accounting.

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Retail inventory management
Retail is the broadest catch-all term to describe business-to-consumer (B2C)
selling. There are essentially two types of retail separated by how and where a
sale takes place.
 First, online retail (eCommerce) where the purchase takes place digitally.
 Second, offline retail where the purchase is physical through a brick-and-
mortar storefront or a salesperson.
Wholesale, on the other hand, refers to business-to-business (B2B) selling.
Knowing the differences and best practices of retail and wholesale is critical to
success.

Most businesses maintain stock across multiple channels as well as in multiple

locations. The diversity of retail inventory management adds to its complexity and
drives home its importance to your brand.

Importance of inventory management

For any goods-based businesses, the value of inventory cannot be overstated,

which is why inventory management benefits your operational efficiency and
longevity.

From SMBs to companies already using enterprise resource planning (ERP),

without a smart approach, you’ll face an army of challenges, including blown-out
costs, loss of profits, poor customer service, and even outright failure.

From a product perspective, the importance of inventory management lies

in understanding what stock you have on hand, where it is in your
warehouse(s), and how it’s coming in and out.

Clear visibility helps you:

 Reduce costs
 Optimize fulfillment
 Provide better customer service
 Prevent loss from theft, spoilage, and returns

In a broader context, inventory management also provides insights into your

financial standing, customer behaviors and preferences, product and business
opportunities, future trends, and more.

Inventory management program

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Before digging into strategies, techniques, and processes, let’s take a look at
some of the inventory management basics for beginners: namely, the
terminology and formulas you’ll need.

Inventory management terms

Barcode scanner

Physical devices used to check-in and check-out stock items at in-house

fulfillment centers and third-party warehouses.
Bundles

Groups of products that are sold as a single product: selling a camera,

lens, and bag as one SKU.
Cost of goods sold (COGS)
Direct costs associated with production along with the costs of storing
those goods.
Deadstock
Items that have never been sold to or used by a customer (typically
because it’s outdated in some way).
Decoupling inventory
Also known as safety stock or decoupling stock; refers to inventory that’s
set aside as a safety net to mitigate the risk of a complete halt in
production if one or more components are unavailable.
Economic order quantity (EOQ)
EOQ refers to how much you should reorder, taking into account demand
and your inventory holding costs.
Holding costs
Also known as carrying costs; the costs your business incurs to store and
hold stock in a warehouse until it’s sold to the customer.
Landed costs

These are the costs of shipping, storing, import fees, duties, taxes and
other expenses associated with transporting and buying inventory.
Lead time

The time it takes a supplier to deliver goods after an order is placed along
with the timeframe for a business’ reordering needs.
Order fulfillment

The complete lifecycle of an order from the point of sale to pick-and-pack

to shipping to customer delivery.
Order management

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Backend or “back office” mechanisms that govern receiving orders,
processing payments, as well as fulfillment, tracking and communicating
with customers.
Purchase order (PO)

Commercial document (B2B) between a supplier and a buyer that outlines

types, quantities, and agreed prices for products or services.
Pipeline inventory

Any inventory that is in the “pipeline” of a business’ supply chain — e.g., in

production or shipping — but hasn’t yet reached its final destination.
Reorder point

Set inventory quotas that determine when reordering should occur, taking
into account current and future demand as well as lead time(s).
Safety stock

Also known as buffer stock; inventory held in a reserve to guard against

shortages.
Sales order

The transactional document sent to customers after a purchase is made

but before an order is fulfilled.
Stock keeping unit (SKU)

Unique tracking code (alphanumeric) assigned to each of your products,

indicating style, size, color, and other attributes.
Third-party logistics (3PL)

Third-party logistics refers to the use of an external provider to handle part

or all of your warehousing, fulfillment, shipping, or any other inventory-
related operation. Fourth-party logistics (4PL) takes this a step further by
managing resources, technology, infrastructure, and full-scale supply
chain solutions for businesses.
Variant

Unique version of a product, such as a specific color or size.

Inventory management formulas

If you’re new to inventory, you’ll probably come across a lot of formulas that
might seem confusing at first. However, with a little bit of homework, these
formulas can be very useful for keeping stock levels optimized.

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Here’s an overview of some of the most common inventory formulas

If you’re new to inventory, you’ll probably come across a lot of formulas that
might seem confusing at first. However, with a little bit of homework, these
formulas can be very useful for keeping stock levels optimized.

Here’s an overview of some of the most common inventory formulas…

1. Economic order quantity (EOQ) formula

2. Days inventory outstanding (DIO) formula
3. Reorder point formula
4. Safety stock formula
1. Economic order quantity (EOQ) formula

Your EOQ is the optimum number of products you should purchase to minimize
the total cost of ordering or holding stock. Figuring out your EOQ can potentially
save you a significant amount of money.

EOQ = √(2DK / H), or the square root of (2 x D x K / H)

Where:

D = Setup or order costs (per order, generally includes shipping and handling)
K = Demand rate (quantity sold per year)
H = Holding or carrying costs (per year, per unit)

Compute the economic order quantity for a product using the calculator
below:

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2
×

Demand How many units of product you need to buy

×

Order Cost Also known as fixed cost. This is the amount you have to spend on
setup, process, and so on.
÷

Holding Cost Also known as carrying cost. This is the cost to hold one unit per
product in inventory.

½
EOQ = 159

Calculating this manually for a whole inventory can be time-consuming and prone
to human error.

The good news is that we've made working out your EOQ easy.
Download free EOQ calculator
2. Days inventory outstanding (DIO) formula

Days inventory outstanding (DIO), also known as days sales of inventory (DSI),
refers to the number of days it takes for inventory to turn into sales. The average
inventory days outstanding varies from industry to industry, but generally a lower
DIO is preferred.

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Determining whether your DIO is high or low depends on the average for your
industry, your business model, the types of products you sell, etc.

3. Reorder point formula

The reorder point formula answers the age-old question: When is the right time to
order more stock?

Calculating your reorder point takes three steps:

1. Determine your lead time demand in days

2. Calculate your safety stock in days
3. Sum your lead time demand and your safety stock

Calculate your product's reorder point using the calculator below:

Lead time in days Time it takes for a purchase order from a supplier to arrive
×
Average daily usage Average number of units of a product you sell per day

+
Safety stock Additional inventory that to mitigate risk of stock outs
Start by adding your data above

Know exactly when it’s time to place an order for a

new shipment of products.
Download free ROP calculator

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4. Safety stock formula

As we touched upon earlier, safety stock acts as an emergency buffer you can
break out when it looks like you’re on the verge of selling out. You want to have
enough safety stock to meet demand, but not so much that increased carrying
costs end up straining your finances.

While this sounds like common sense, the trick is to decide on how much safety
stock to carry:

1. Multiply your maximum daily usage by your maximum lead time in days
2. Multiply your average daily usage by your average lead time in days
3. Calculate the difference between the two to determine your safety stock

You've got the basics down, so what's next?

Learn about the different types of inventory management in the next chapter.

Types of inventory management

Typically, inventory types can be grouped into four categories: (1) raw materials,
(2) works-in-process, (3) maintenance, repair, and operations (MRO) goods, and
(4) finished goods.

Raw materials are any items used to manufacture components or finished

products. These can be items produced directly by your business or purchased
from a supplier. For example, a candle-making business could purchase raw
materials such as wax, wicks, and decorative ribbons.

Works-in-progress inventory refers to unfinished items moving through

production but not yet ready for sale. In the case of a candle-making business,
work-in-progress inventory might be candles that are drying and unpackaged.
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Maintenance, repair, and operations (MRO) goods-are items used to support

and facilitate the production of finished goods. These items are usually
consumed as a result of the production process but aren’t a direct part of the
finished product. For instance, disposable molds used to manufacture candles
would be considered MRO inventory.

As you’ll see below, there are other terms such as “decoupling inventory” and
“pipeline inventory” used to describe types of stock-based on its theoretical
purpose and use. Nonetheless, physical inventory almost always falls into one of
the four categories above.

SKUs: Organizational building blocks

Stock keeping units — commonly known as SKUs — are product codes that you
and others use to search and identify stock on hand from lists, invoices, or order
forms.

Setting up an easy-to-understand system for SKUs is important because it’s the

main way you’ll identify and differentiate product variants; this includes
monitoring…

 Stock availability
 Product locations and types
 Sell rates, margins, profitability, or lack thereof
 Inventory shrinkage due to theft, spoilage, or other loss

Stick to an alphanumeric system for your SKUs and avoid accents and symbols
that can cause formatting issues in Excel or elsewhere. Remember that the more
stock you have, the harder it is to go back and develop a naming system, so it’s
best to choose one as soon as you start holding it.
https://www.tradegecko.com/inventory-management/inventory-management-types

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are products that have completed the production process and are ready to
be sold: the candles themselves.

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