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What are the most effective inventory turnover metrics for a restaurant?

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Inventory turnover is a key performance indicator for any business that sells physical goods, but especially for restaurants that deal with perishable items. It measures how efficiently you manage your inventory and how often you sell and replace it. In this article, you will learn what are the most effective inventory turnover metrics for a restaurant and how to calculate and improve them.

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Measure with inventory turnover ratio:

This metric indicates how often you sell and replace your stock annually. By monitoring it, you can identify inefficiencies and adjust purchasing to maintain optimal inventory levels.### *Track days inventory outstanding:DIO reveals the average time taken to sell your entire inventory. Using this metric helps streamline stock management, reduce holding costs, and improve cash flow.

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Ilhan Karacam

General Manager | Market Strategy…
Mukund Kumar

Certified International Supply Chain…

1 Inventory Turnover Ratio

The inventory turnover ratio (ITR) is the most common and simple way to measure your inventory turnover. It shows how many times you sold and replenished your entire inventory in a given period, usually a year. To calculate it, you divide your cost of goods sold (COGS) by your average inventory value. For example, if your COGS is $100,000 and your average inventory value is $10,000, your ITR is 10. This means you sold and replaced your inventory 10 times in a year. A higher ITR indicates higher efficiency and lower holding costs, while a lower ITR may signal overstocking or slow sales.

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Ilhan Karacam

General Manager | Market Strategy, Sourcing, Sales Management, Business Development
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The inventory turnover ratio compares the cost of goods sold to the average inventory value, while days Sales of inventory measures how many days it takes to sell inventory. These metrics help optimize inventory levels, reduce waste, and boost profitability.

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Raúl Valdés Linares

Experto en Retail | Incremento de rentabilidad | Reducción de Costos | Partner and Principal Business Consultant at ERA Group Latin America | 3x Ironman
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The inventory turnover ratio, also known as inventory turnover, is a critical indicator that measures how quickly a company sells its inventory during a specific period. The relationship between inventory turnover ratio and cash flow generation is significant. Efficient inventory turnover reduces the need to invest large sums of money in holding inventory. This frees up capital that can be allocated to other areas of the business or used to pay down debt.

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2 Days Inventory Outstanding

The days inventory outstanding (DIO) is another way to measure your inventory turnover. It shows how many days it takes you to sell your entire inventory on average. To calculate it, you divide your average inventory value by your COGS and multiply by 365. For example, if your average inventory value is $10,000 and your COGS is $100,000, your DIO is 36.5. This means it takes you about 37 days to sell your inventory. A lower DIO indicates faster inventory turnover and higher liquidity, while a higher DIO may indicate lower demand or excess inventory.

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Raúl Valdés Linares

Experto en Retail | Incremento de rentabilidad | Reducción de Costos | Partner and Principal Business Consultant at ERA Group Latin America | 3x Ironman
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By reducing the time that products remain in inventory, the company can reduce the risk of products becoming obsolete. This, in turn, contributes to the reduction of losses associated with the sale of outdated products. Efficient inventory management results in greater liquidity, as the company can quickly convert its inventory into cash. This makes it easier to face operating expenses and financing. The ability to quickly move inventory can improve supplier relationships as the company can adjust its orders based on fluctuations in demand.

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3 Inventory Turnover by Category

While the ITR and DIO are useful for evaluating your overall inventory performance, they may not capture the differences among different types of inventory. For example, some items may have higher demand, higher margins, or shorter shelf lives than others. Therefore, it may be beneficial to calculate your inventory turnover by category, such as food, beverages, supplies, etc. This way, you can identify which categories are performing well and which ones need improvement. To calculate your inventory turnover by category, you follow the same formula as the ITR or DIO, but use the COGS and average inventory value for each category instead of the total.

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4 Inventory Turnover by SKU

Another way to measure your inventory turnover is by SKU (stock keeping unit), which is the smallest unit of inventory that you track. For example, a SKU could be a specific dish, ingredient, or product that you sell. Calculating your inventory turnover by SKU can help you optimize your menu, pricing, and ordering decisions. It can also help you reduce waste, spoilage, and theft. To calculate your inventory turnover by SKU, you follow the same formula as the ITR or DIO, but use the COGS and average inventory value for each SKU instead of the total or category.

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Richard Salt

Community Sales Manager - HQ Hitchin
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In my experience it can be beneficial to conduct daily counts on lines which you get the highest loss on. These are usually the high cost items like coffee beans. Daily counts give you a more detailed picture of when you are loosing your stock in the week. It also narrow’s down whose shifts you maybe loosing stock on. As a lot of the times, stock goes missing due to your team over-portioning or in some cases stealing stock. Your daily counts ideally need to be ideally done in the evening and then the following morning. And should be worked out with your sales, wastage and deliveries taken into account.

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Raúl Valdés Linares

Experto en Retail | Incremento de rentabilidad | Reducción de Costos | Partner and Principal Business Consultant at ERA Group Latin America | 3x Ironman
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SKUs with high turnover imply that less capital is tied up in inventories. This means that the company can use that capital for other purposes, such as investments or to meet its financial obligations. Rapid rotation by SKU allows the company to quickly adjust to market trends. It can identify which products are popular and proactively respond to changing consumer demands.

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5 Inventory Turnover Benchmarking

To make the most of your inventory turnover metrics, you need to compare them with some benchmarks. These could be industry averages, best practices, or your own historical data. Benchmarking can help you set realistic and achievable goals, identify gaps and opportunities, and track your progress and performance. However, you should also consider the factors that may affect your inventory turnover, such as your business model, location, seasonality, customer preferences, and competition. Therefore, you should not rely on a single metric or benchmark, but use a combination of them to get a comprehensive and accurate picture of your inventory turnover.

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Mukund Kumar

Certified International Supply Chain Professional / Manager I Strategic Planning I Demand & Supply Planning I S&O Planning I Integrated Business Planning I Sourcing I 3PL | Service Excellence I Lean Six Sigma
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I prefer Inventory Turnover benchmarking as it can help to measure the performance with the multiple combinations and this will lead to continuous improvement and help us to manage all other parameters

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6 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?

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Jessica de Meillon

Head of Retail | Focussed on Retail Growth and Operations
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- GMROII: Pinpoints high-profit items by comparing gross margin to inventory cost, guiding profitability-focused stocking. - Waste Percentage: Tracks inventory lost to spoilage or over-preparation, crucial for reducing costs and enhancing sustainability. - Stock-to-Sales Ratio: Balances inventory with sales, preventing overstocking or shortages, ensuring efficient supply chain management. On the back end other great ones to view are; - Menu Mix Analysis (MMA): Analyzes item popularity and profitability, shaping menu strategies to boost turnover. - CSat related to food quality Scores: Monitors feedback on food quality, affected by inventory management, essential for maintaining high service standards.

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What are the most effective inventory turnover metrics for a restaurant?

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6

1 Inventory Turnover Ratio

2 Days Inventory Outstanding

3 Inventory Turnover by Category

4 Inventory Turnover by SKU

5 Inventory Turnover Benchmarking

6 Here’s what else to consider

Inventory Management

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What are the most effective inventory turnover metrics for a restaurant?

1

2

3

4

5

6

1 Inventory Turnover Ratio

2 Days Inventory Outstanding

3 Inventory Turnover by Category

4 Inventory Turnover by SKU

5 Inventory Turnover Benchmarking

6 Here’s what else to consider

Inventory Management

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