Estimated reading time: 6 minutes
Best for: Small food manufacturers, commercial kitchens, bakeries, caterers, and packaged-food businesses
What You’ll Learn
- What food producers should track in inventory
- How inventory affects cash flow and profitability
- How to establish simple inventory procedures
- How lot numbers and expiration dates fit into inventory
- How recipes and production can automatically reduce inventory
What Is Inventory Management?
Inventory management is knowing:
What you have, where it is, how much it is worth, and when it needs to be used.
For a food producer, inventory can include:
- Raw ingredients
- Packaging
- Work in process
- Finished products
Poor inventory management creates waste, stockouts, unnecessary purchases, inaccurate food costs, and potential traceability problems.
The goal isn’t to count everything constantly.
The goal is to maintain enough accurate information to make good purchasing and production decisions.
Why It Matters
Inventory represents cash.
If you have $15,000 of ingredients and finished products sitting in your facility, you effectively have $15,000 of business resources tied up in inventory.
Too little inventory can stop production.
Too much inventory can lead to spoilage, waste, and cash-flow problems.
Good inventory management attempts to maintain the right amount of inventory at the right time.
The Four Numbers You Should Know
For important ingredients and products, you should be able to determine:
Quantity on Hand
How much do we currently have?
Inventory Value
What did that inventory cost?
Usage
How quickly are we consuming it?
Reorder Point
When should we purchase more?
You don’t necessarily need sophisticated forecasting to improve inventory management. Simply having reliable answers to these four questions is a major improvement for many small producers.
How Inventory Moves
A simple food-production inventory cycle looks like this:
Purchase → Receive → Store → Produce → Sell
Each step changes inventory.
When ingredients arrive, ingredient inventory increases.
When a production batch is made, ingredient inventory decreases.
Finished-product inventory increases.
When finished products are shipped or sold, finished inventory decreases.
The closer your records follow this actual physical movement, the more useful your inventory information becomes.
Use FIFO or FEFO
FIFO — First In, First Out
Older inventory is used before newer inventory.
This works well for many products.
FEFO — First Expired, First Out
Inventory with the earliest expiration or best-by date is used first.
FEFO can be more appropriate when ingredients or products have significantly different expiration dates.
Physical storage should make this easy.
Don’t put newly received ingredients in front of older ingredients and expect employees to constantly move things around to find the oldest product.
Design the storage system around proper rotation.
Lot Numbers Matter
Food inventory isn’t just about quantity.
For many ingredients you should also know the supplier lot associated with the inventory.
That becomes extremely important if an ingredient is recalled.
Instead of asking:
“Did we ever use this ingredient?”
you want to be able to determine:
- When it was received
- Which production batches used it
- Which finished products were affected
- Which customers received those products
Inventory management and lot tracing should therefore work together.
Cycle Counts vs. Full Inventory
You don’t have to shut down the business every week to count everything.
A better approach for many businesses is cycle counting.
Count high-value and high-usage ingredients frequently.
Count lower-value, slow-moving ingredients less frequently.
For example:
Weekly: expensive proteins, chocolate, oils, packaging, high-volume ingredients
Monthly: spices, low-volume ingredients, miscellaneous supplies
Then periodically conduct a complete physical inventory.
Set Reorder Points
A simple reorder point can be calculated using:
Average Daily Usage × Supplier Lead Time + Safety Stock
Suppose you use ten cases per week and your supplier normally requires one week to deliver.
You don’t want to discover you need more inventory when the last case is opened.
Set a reorder level that gives you enough time to receive the next shipment.
Common Mistakes
Buying too much because of a discount. Saving 5% doesn’t help if 20% of the product eventually gets discarded.
Not recording waste. Damaged, expired, spilled, or spoiled ingredients must be removed from inventory records.
Mixing units of measure. Cases, pounds, ounces, gallons, and individual units need consistent conversions.
Ignoring packaging. Running out of labels or containers can stop production just as quickly as running out of ingredients.
Counting without correcting. If the physical count doesn’t match the system, investigate and correct the difference.
Best Practices
Keep storage areas organized and clearly labeled.
Date received ingredients when appropriate.
Rotate inventory consistently.
Establish standard units of measure.
Record waste and spoilage.
Maintain reasonable reorder levels.
Conduct regular cycle counts.
Track supplier lots where traceability requires it.
Most importantly, make inventory management part of normal operations rather than a once-a-year accounting exercise.
Software Tips
Inventory management becomes much more powerful when connected to recipes and production.
If a batch requires:
10 pounds of oats
4 pounds of peanut butter
2 pounds of honey
recording that production batch can automatically reduce those ingredients from inventory.
Similarly, recording finished production can increase finished-product inventory.
This reduces duplicate data entry and provides a much better picture of inventory between physical counts.
Questions We Hear Every Week
How accurate does inventory need to be?
Perfect inventory is difficult. The objective is information accurate enough to make good purchasing, production, and financial decisions.
How often should we count inventory?
High-value and fast-moving items should be counted more frequently. Many businesses benefit from weekly cycle counts and periodic complete counts.
Should packaging be inventory?
Yes, particularly packaging that is essential to producing or shipping your products.
What about expired or damaged inventory?
Remove it from usable inventory and record it as waste or loss.
Related Guides
- Recipe Costing
- Food Cost (COGS)
- Batch & Lot Tracing
- Shelf Life
Final Thoughts
Don’t make inventory management more complicated than necessary.
Start by identifying your most important ingredients and finished products.
Know what you have, keep it organized, rotate it properly, and establish a regular counting process.
Once those basics work consistently, automation and more sophisticated inventory controls become much more valuable.