1. Inventory Reports Red Lobster – Brigida & Erin
Ted’s Nebraska Grill – David Campbell
Blue Sushi – Brandon Thomas
McKenna’s – Meredith Beaver
Omaha Hilton – Stephanie Hatch
Stephanie Gigax
Red Robin - Kyle Shoemaker
Village Inn – Jessica Thomas
Michelle Hood

2. Key Term Review Approved supplier list Beverage alcohols
Bid buying plan
Capital expenditures
Cost-plus purchasing
Distributor sales representative
Furniture, fixtures, and equipment (FF&E)
Goods and services needs assessment
Instructor’s Notes:
Approved supplier list—list of suppliers that meet the operation’s standards for ethics, reliability and financial stability
Beverage alcohols—drinkable products that contain a significant percentage of alcohol. Examples include beers, wines, and spirits.
Bid buying plan—system that allows for various suppliers to respond to a request-for-bid or request-for-price (RFP)
Cost-plus purchasing—arrangement between a buyer and a seller in which the supplier sells their products at cost, plus an agreed-upon supplier markup
Capital expenditures—FF&E and other items that are expected to last for more than one year
Distributor sales representative—supplier’s salesperson
Furniture, fixtures and equipment (FF&E)—capital expenditure items used in a foodservice operation
Goods and services needs assessment—review of the (products and services) the operation currently has versus what it ideally needs
Mention that there are additional key terms for this chapter.

3. Key Term Review continued
In-process inventory
Nonperishable products
One-stop shop buying plan
Par
Perishable products
Perpetual inventory
Physical inventory
Pilferage
Instructor’s Notes:
In-process inventory—amount of inventory currently being used in production
Nonperishable products—items that do not support the growth of bacteria that cause spoilage
One-stop shop buying plan—arrangement where the operation selects one (or two) suppliers to meet all of the operation’s buying needs
Par—fully stocked, predetermined inventory level
Perishable products—items that are sold or distributed in a form that will experience significant quality deterioration within a limited period of time as a result of the action of bacteria, light, and/or air
Perpetual inventory—record or theoretical count of the products placed into and taken from inventory that is continually (perpetually) updated at a central storage facility
Physical inventory—real (physical) count of inventory items and their value
Pilferage—theft of small amounts of inventory. Also called inventory skimming or shrinkage. Often committed by employees of an operation.
Mention that there are additional key terms for this chapter.

4. Key Term Review continued
Plan of action (POA)
Procurement process
Purchase order
Purchase requisition
Ready-to-go
Receiving
Instructor’s Notes:
Plan of action (POA) —series of procurement steps that take into account the products that best meet the operation’s wants and needs and the suppliers that can best provide them according to the operation’s documented quality standards and buying practices
Procurement process—operation’s product selection, ordering, receiving, and storing processes, as well as the issuing of policies and procedures related to achieving the operation’s procurement mission and goals
Purchase order—when submitted via paper, a multi-part form that stipulates what product or service is wanted and when it is wanted; when submitted via computer, a saved purchase order file
Purchase requisition—internal procurement document that details, to a buyer, a department’s product needs before an order is placed.
Ready-to-go—items issued to the production unit in the form in which they will be consumed
Receiving—process of checking and then either accepting or refusing deliveries
Mention that there are additional key terms for this chapter.

5. Key Term Review continued
Request-for-bid
Request-for-price
Route salespeople
Shelf life
Spoilage
Stockless purchasing
Storage area regulations
Value-added products
Instructor’s Notes:
Request-for-bid—invitation, issued by a buyer to a vendor, to provide a bid for supplying a requested item
Request-for-price (RFP)—invitation, issued by a buyer to a supplier, to provide a firm price for supplying a requested item
Route salespeople—vendor delivery staff who repeatedly deliver, assess inventory, and then stock an operation’s supply of goods to bring them up to par level
Shelf life—item’s preservation period; or the amount of time a stored item remains at an acceptable quality level
Spoilage—condition that exists when a product’s quality has diminished to the point that it is no longer meets the operation’s quality standard and is unusable
Stockless purchasing—method of buying that permits an operator to purchase a large quantity of a product at the current price, but directs the supplier to store it and deliver it to the operation as it is needed
Storage area regulations—rules that detail who can enter and remove items from the storage areas. Storage area regulations should be strictly enforced.
Value-Added products—food and beverage items that have been canned, bottled, dried, or otherwise processed to reduce their perishability

6. Inventory Control 5
Inventory and Purchasing
OH 5-6

7. Chapter Learning Objectives
Calculate correct order quantities.
Estimate appropriate timing of orders.
Explain perpetual and physical inventory systems.
Instructor’s Notes
Indicate that these objectives (competencies) drive the information in the chapter and in this session.

8. Managing Inventory Volume
Most important components of inventory management:
Knowing what products to order
Knowing when to order them
Instructor’s Notes
Purchasers use a variety of information to determine the optimal amount of inventory to carry.
Ask students to list reasons why a buyer’s estimate of the amount of inventory to have on hand might be incorrect and result in shortages. Answers are likely to include:
Unforeseen product outages from the supplier
Delayed or missing shipments
Theft (pilferage) from inventory
Demand by consumers that far exceeds the original forecasted levels
Loss of product due to improper preparation
Loss of product due to spoilage

9. Inventory Turnover A measure of how quickly food in storage is used.
The operation’s ordering procedure should reflect the inventory turnover rate of the operation.
Average annual turnover rate for full service
Food—20
Liquor—8.5
Instructor’s Notes
Be sure students understand what is meant by inventory turnover.
Ask students, “Why should an operation take inventory turnover rate into account when placing orders?”
Explain that food inventory is recorded as a dollar value, and not as the amount of food (in units) in storage.
Explain that, while there are no universal standards, many operations predict that food inventory will turn over twenty times per year, while liquor inventories will turn over eight to ten times per year. QSRs, however, may experience inventory turnovers of 200 times per year or even more.
Explain what a food turnover rate of 20 means. Be sure students understand that turnover rate is a useful rule of thumb and does not mean that absolutely every product in an operation’s inventory is replaced this often.
Note that the formula for calculating inventory turnover is explained in the Controlling Foodservice Costs Competency Guide.

10. Percentage of Sales Volume
Two inventory level rules-of-thumb:
Inventory values should equal no more than 1 percent of total annual sales volume.
Inventory values should not be more than approximately one-third of the average monthly product sales.
Instructor’s Notes
Explain to students that these rules of thumb will vary greatly from one operation to the next.
Ask students to list reasons why one foodservice operation’s required inventory level could vary greatly from that of another operation. Likely answers will include the amount of storage space available, frequency of deliveries, the perishability of the operation’s primary menu items, and cash management policies of the operation’s owners.

11. Optimal Inventory Level
Optimal inventory levels can be calculated by utilizing:
The par stock approach
The Levinson method
Instructor’s Notes
Explain that the use of the par stock approach is widespread.
Explain to students that the Levinson method is more complicated but is gaining in popularity.
Explain that both methods require the use of accurate historical usage data that will be reviewed next.

12. Calculating Product Usage
Step 1 – Calculate customer forecast
Customer count last period
+ (Customer count last period x % increase expected)
Customer count forecast for this period
Instructor’s Notes
Explain that this is the formula when customer counts are expected to increase.
Define historic usage data, and ask students to give examples of events in their own area that could affect customer counts. Examples could include sporting events, festivals, and the like.

13. Calculating Product Usage continued
Step 1 – Calculate customer forecast
Customer count last period
– (Customer count last period x % decrease expected)
Customer count forecast for this period
Instructor’s Notes
Explain that this is the formula when customer counts are expected to decrease.
Ask why an operation might forecast declining customer counts.

14. Calculating Product Usage continued
Step 2 – Calculate popularity index of the items
Number of customers choosing a specific entrée ÷
Total entrées sold =
Popularity index of specific entrée
Instructor’s Notes
Indicate that the popularity index is a measure of how many customers “out of one hundred customers” will likely buy the item.
Remind students that popularity indices must be computed only on similar items (desserts, appetizers, entrees, etc.).

15. Calculating Product Usage continued
Step 3 – Calculate supply needed
Customer count forecast for period x
Popularity index for item =
Forecast product usage
5,200 x .20% = 5,304
5,304 x 0.41
2,175
Instructor’s Notes
Review the formula and the example.
Remind students that popularity index values are always less than 1.00.
Point out that in this example, the operation expects 5,304 customers. The calculated popularity index for the menu item is That means that 2,175 customers are forecasted to order this item.

16. Calculating Product Usage continued
Once forecasted supply has been determined, use one of the following inventory calculation methods.
The par stock approach
The Levinson method
Instructor’s Notes
Remind students that the par stock approach is easiest (and tell them that it will be examined first).

17. The Par Stock Method
Step 1 – Request and accept the supplier’s stated delivery schedule.
In most cases, the buyer cannot alter this schedule without incurring significant additional expense.
Instructor’s Notes
Explain that, only in very rare cases, will a vendor significantly change delivery schedules to accommodate a single customer (just as few restaurants will change their posted operating hours to accommodate one customer).

18. The Par Stock Method continued
Step 2 – Determine par levels for each item
Par levels are affected by:
Frequency of vendor delivery
Available storage space
Product perishability
Instructor’s Notes
Define the term par level.
Ask students to list any other factors that may might affect management’s determination of acceptable/proper par levels.

19. The Par Stock Method continued
Step 3 – Calculate the order quantity.
Subtract the amount on hand (current inventory) from the established par level.
Instructor’s Notes
Ask students to discuss the importance of physically counting the operation’s relevant inventory before establishing the order quantity.

20. The Levinson Method
Step 1 – Request and accept the supplier’s stated delivery schedule.
Remember—the buyer cannot generally alter this schedule without additional expense.
Instructor’s Notes
Ask students to tell why it is important for operators to know a vendor’s potential (as well as normal) delivery dates when seeking to most effectively manage inventory purchases.

21. The Levinson Method continued
Step 2 – Determine par levels for each item.
Recognize that product usage between order and delivery dates must be estimated.
Instructor’s Notes
Remind students that this is also done when using the par level approach.

22. The Levinson Method continued
Step 3 – Forecast the amount of each item needed.
Determine raw pounds (or other appropriate measurement) needed by computing:
Portion factor (PF)
Portion divider (PD)
Instructor’s Notes
Define portion factor and portion divider.
Point out that the formula required to compute the PF and PD will now be illustrated.

23. The Levinson Method continued
Portion factor (PF) computation
16 oz ÷
Amount needed for one serving =
Portion factor
Instructor’s Notes
Note that this is the formula to be utilized when items are ordered by the pound.
Ask students to list common entrée items that are not ordered by the pound.

24. The Levinson Method continued
Portion divider (PD) computation PF x
Edible yield percentage =
Portion divider
Instructor’s Notes
Refer students to page 78 of the chapter to see a mathematical illustration of this computation.

25. The Levinson Method continued
Order size computation
Number of forecasted servings ÷
Ingredient’s PD =
Order size
Instructor’s Notes
Refer students to page 78 of the chapter to see a mathematical illustration of this computation.
Ask students to compare and contrast the advantages and disadvantages of the par level and the Levinson methods of ordering.

26. The Levinson Method continued
Given the following data, compute the number of cases needed to serve 1,575 customers:
Ingredient: Iceberg lettuce
Serving size: 4 ounce
Edible Yield: 75 percent
Minimum weight: per case: 36 pounds
Given the following data, compute the number of liters needed to serve 250 customers
Ingredient: Gin
Serving size: 55 milliliters
Servable Yield: 95 percent
PF = 16/4 = 4.0
PD = 4.0 x 0.75 = 3.0
Number of raw (AP) pounds needed = 1575/3.0 = 525 lbs
Number of cases needed 525lb/36lb per case = (order 15 cases)
PF = 1000/55 = 18.18
PD = x 0.95 = 17.27
Number of liter needed = 250/17.27 = (order 15 liters)

27. Evaluate Edible Portion Costs of Ingredients
Given the following data, determine the EP cost for one serving of each ingredient:
Ingredient Edible Yield Serving size AP Price/#
Raw Corned Beef Brisket 50% 4 oz $1.38
Raw Corned Beef Round 75% 4 oz $1.45
Cooked Corned Beef Brisket 90% 4 oz $2.98
Cooked Corned Beef Round 95% 4 oz $2.45
Step 1- Compute each ingredients PF:
All are 16/4 = 4
Step 2- Compute each ingredients PD
4 x .50 = 2.00
4 x .75 = 3.00
4 x .90 = 3.60
4 x .95 = 3.80
Step 3- Compute each ingredients EP cost
$1.38/2.00 = $0.69
$1.45/3.00 = $0.48
$2.98/3.60 = $0.83
$2.45/3.80 = $0.64

28. Evaluate Edible Portion Costs of Ingredients
Given the following data, determine the EP cost for one serving of each ingredient:
Ingredient Edible Yield Serving size AP Price/KG
Fresh Raw Spinach 60% 90 grams $1.75
Frozen Leaf Spinach 100% 90 grams $2.95
Frozen Chopped Spinach 100% 90 grams $3.25
Step 1- Compute each ingredients PF:
All are 1000 grams/90 grams = 11.11
Step 2- Compute each ingredients PD
11.11 x .60 = 6.67
11.11 x 1.00 = 11.11
Step 3- Compute each ingredients EP cost
$1.75/6.67 = $0.26
$2.95/11.11 = $0.27
$3.25/11.11 = $0.29

29. Inventory Costs
The best operators compute economic order quantity (EOQ).
The EOQ is the most cost-effective amount to order.
The EOQ can be computed in dollars (EOQ in dollars) or number of units (EOQ in number of units).
Instructor’s Notes
Explain that the EOQ seeks to establish the best amount to buy.
Refer students to the two computations on page 80 of the chapter that illustrate these concepts.

30. Food Costs AP price ÷ Edible yield percentage = EP per product unitPD =
EP per serving
Instructor’s Notes
Explain that the PD is the portion divider they learned about previously.
Ask students to identify factors that affect an item’s actual EP per serving.
Review the calculations on page 83 of chapter and, if necessary to complete student understanding, also review Exhibit 5c on page 86.

31. Food Costs continued Standard cost Menu price Total standard cost =
EP per serving of all items on the plate
Standard cost ÷
Percentage of menu price =
Menu selling price
Instructor’s Notes
Explain that plates of food that include multiple items must have a known total standard serving cost if they are to be priced properly. For example, the price of a hamburger and fries sold for one price must be determined by considering the standard costs for both the hamburger and the fries.
Point out that percentage of menu price as used in this context is identical to the term target food cost percentage.

32. Inventory Control Methods
Perpetual inventory management
Physical inventory management
Instructor’s Notes
Remind students that a perpetual inventory is a system of inventory management that relies on theoretical (ideal) counts of inventory.
Indicate that a physical inventory system relies on a real count of inventory items.
Ask about advantages that will typically accrue to managers who use each of these two alternative inventory management systems.
Explain that periodic inventory counts of perpetual inventories are still needed to compute actual costs of food.

33. Inventory Loss Control
Managers can minimize inventory losses by:
Installing proper locks
Prohibiting employee loitering near receiving and storage areas
Ensuring that accounts are credited properly
Clearly marking paid invoices as “PAID”
Comparing invoices with purchase orders
Instructor’s Notes
Explain that additional inventory loss reduction techniques include:
Employing “mystery shoppers” or “spotters” in the front of the house
Running periodic integrity (background) checks and drug tests on all employees
Prohibiting employees from entering or leaving the premise through the dock door

34. How Would You Answer the Following Questions?
The (Levinson method/par stock) approach is the ordering method which is most widely used.
AP price divided by edible yield percentage equals
Standard plate cost
Menu price
EP per product unit
Percentage of menu price
A __________ inventory system is based upon a theoretical count of inventory items.
Marking paid invoices as _________ can help operators reduce inventory loss due to theft or pilferage.
Instructor’s Notes
Par stock C
Perpetual
Paid

35. Key Term Review As purchased (AP) price Bin card Capital cost
Carrying cost
Customer count forecast
Economic order quantity (EOQ)
Edible portion (EP) cost
EP per product unit
EP per serving
Instructor’s Notes
As purchased (AP) price—cost of an item as delivered to the operation
Bin card—record of when an item was delivered, when it was issued, and if applicable, when it was returned to storage
Capital cost—amount of an operation’s money that is used to maintain inventory levels. Also known as opportunity costs.
Carrying cost—expense incurred for insuring and maintaining storage space, as well as the costs of spoiled, outdated, or expired items. Also known as storage costs.
Customer count forecast—estimate of the number of guests to be served in an upcoming accounting period
Economic order quantity (EOQ)—amount to order which will yield the lowest possible order costs
Edible portion (EP) cost—cost of a single portion as delivered to the guest
EP per product unit—as purchased (AP) price of an item divided by its edible yield percentage
EP per serving—as purchased (AP) price of an item divided by its portion divider (PD)

36. Key Terms Review continued
Forecasted usage/supply of a particular item for this period
Historical usage data
In-process inventory
Inventory turnover
“Just in time” (JIT) inventory management
Levinson method
Management information system (MIS)
Menu price
Instructor’s Notes
Forecasted usage/supply of a particular item for this period—amount of an item that is anticipated to be used in a defined time period
Historical usage data—previously recorded customer counts, menu item popularity indices, and analysis of outside influences that should be considered prior to establishing optimal future inventory levels
In-process inventory—products currently used in production
Inventory turnover—amount of time it takes for inventory to move from the operation’s receiving area to the guest’s table for consumption.
“Just in time” (JIT) inventory management—purchasing method designed to minimize the amount of product held in inventory between delivery dates
Levinson method—order system that bases the size of the order on historical data and forecasted customer counts
Management information system (MIS)—computer aided data gathering and analysis tools designed to assist managers in effectively completing their tasks
Menu price—selling price of an item. Computation of menu price may vary based upon the pricing system utilized in a specific operation.

37. Key Terms Review continued
Opportunity cost
Optimal price
Order size
Par stock approach
Percentage of sales volume
Perpetual inventory management
Perpetual inventory system
Physical inventory management
Instructor’s Notes
Opportunity cost—amount of an operation’s money that is used to maintain inventory levels. Also known as capital costs.
Optimal price—lowest possible edible portion cost of an item plus the value added by the product’s quality and associated supplier services. Note: the term optional price on page 82 should be optimal price.
Order size—amount to order that is based upon the number of forecasted portions needed divided by the ingredient’s portion divider
Par stock approach—system for determining the optimal amount of an item that should be in stock from one delivery date to the next
Percentage of sales volume—inventory valuation method that relates recommended inventory levels to an operation’s annual sales volume.
Perpetual inventory management—recording and managing inventory based upon theoretical counts
Perpetual inventory system—process that utilizes a record or theoretical count of the products placed into and taken from inventory and that is continually (perpetually) updated
Physical inventory management—process of managing inventory that relies upon a real (physical) count of inventory items

38. Key Terms Review continued
Popularity index
Portion divider (PD)
Portion factor (PF)
Reorder point
Standard cost
Standard serving cost
Storage cost
Total annual costs
Instructor’s Notes:
Popularity index—measure of the frequency with which a menu item is selected by guests. It is computed as the number of customers selecting a given menu item divided by the total number of that item that have been sold.
Portion divider (PD)—number of portions available in one portion (or other appropriate measure) after the item’s edible yield is considered
Portion factor (PF) —number of portions available in one pound (or other appropriate measure)
Reorder point—number of units to which on-hand inventory must be reduced before an additional order should be placed
Standard cost—same as standard serving cost but for a single item
Standard serving cost—sum of the individual edible portion (EP) costs for items making up a combination plate
Storage cost—expense incurred for insuring and maintaining storage space, as well as the costs of spoiled, outdated, or expired items. Also known as carrying costs.
Total annual costs—amount of money required per year to order and store a menu item

39. Chapter Learning Objectives— What Did You Learn?
Calculate correct order quantities.
Estimate appropriate timing of orders.
Explain perpetual and physical inventory systems.
Instructor’s Notes
Ask students to do a personal assessment of the extent to which they know the information or can perform the activity noted in each objective.