How to Determine Optimal Inventory Levels For Your Bar
Bar managers love their giant inventory. They must. Why else would they have $20,000 of inventory on-hand when they’re sales are only $60,000 per month?
I assume it’s the variety. Like owning a stamp or coin collection. It’s fun to show off your array of rare whiskeys and Scotches to people who walk in, which for some bars is fine because that’s their main theme. For instance, if you’re a whiskey bar and people are expecting a wide range of whiskeys, then you sure as shootin’ better have a nice selection. I get that.
What I don’t get are the mainstream bars that employ a bar manager who manages based on his whims. Just last week he went to this “totally awesome” classic cocktail bar he visited in Manhattan, and so now he’s inspired to create an iconic mixologist cocktail menu, and so he orders unique inventory to create this menu. In the meantime, the bar he is managing, The Six-Shooter Country Lounge, attracts clients with skin tight Wranglers and shit-kickers. This, of course, makes this particular manager a total moron.
I work with all sorts of bars: sports bars, dive bars, lounges, corporate restaurants and upscale places, and even though all of these themes are drastically different, the inventories they carry are all tragically similar when it comes to an over-inflated inventory. Why is this exactly? 5 Reasons:
- Very little training is offered when it comes to learning how to manage a bar, let alone in the area of how much inventory to carry.
- Managers think they have to bulk order everything in order to save money.
- They accumulate free bottles from vendors that eventually turns into a forest of dead stock in the storage room.
- They feel the need to order excessive back-ups for every brand they carry so they don’r run out.
- The feel like every week they need to order something, even if there’s nothing that needs ordering.
The first and most basic step to improving your bar business numbers is by managing your inventory, but I’ve also found it the hardest area to tackle because owners and managers have an ego when it comes to helping them run their bar more efficiently. Every time I tell them they have too much inventory on-hand, they go into great detail defending why they need 15 bottles of Blue Curacao on-hand even though their usage numbers show that they go through about 0.5 bottles per month. And just when I think I’m making progress, another case of Creme de Menthe shows up on a Tuesday delivery. At this point I put my hands on my hips in a scolding pose while the manager slumps down and gives me that darty, shifty-eyed guilty look of a dog who just ripped the couch to shreds while I was out shopping.
HOW TO DETERMINE HOW MUCH INVENTORY YOU SHOULD HAVE ON-HAND
The first step to getting a grip on your inventory is to determine how far away you are from your goal. After 5 years in business and approximately 2,000 inventories that I have personally performed myself for clients, this is the formula I have created that will tell you how lean or fat your inventory is. It’s simple, yet telling:
Total Inventory Value On-hand ÷ Total Sales Per Month
Total Inventory Value On-hand for June = $15,000
Total Sales for June = $75,000
Ratio = 20% (15,000 ÷ 75,000)
If these were your numbers, they wouldn’t be horrible, as I’ve seen MUCH worse, but it’s still too high. I just took on a new client last week who’s ratio was 43%!!! That was a forehead slapper for me.
The inventory ratio that I recommend for optimal inventory is 15%. So if your sales were $75,000, you should have about $11,000 – $11,500 of inventory on-hand. In this case, that would mean you would need to cut your inventory by about $3,500 – $4,000, which is a big difference.
Figuring out this ratio couldn’t be easier, so no excuses. Simply go back and look at your inventory on-hand (assuming you take accurate inventory and have your prices updated) and then run a P-mix report to see what your bar sales were for the same time period, and then use a calculator to determine the ratio, unless you went to MIT and can run numbers in your head like Rain Man.
Once you get this number, then we can work on setting up your par levels to get that number down. Don’t know how to figure out your par levels? That too is a formula. Give me a shout out at Dave@therealbarman.com and I’ll happily provide it for you.
Cheers, until next time.
Dave, The RB