How to create a “return factor” (RF) for an item.
Many items lend themselves to using a “return factor” (RF) to determine proper inventory levels. One example that comes to mind involves my experience at the restaurant company Nathan’s Famous - host to the 4th of July hot dog eating contest in Coney Island, NY.
The challenge was to determine how many hot dogs you would need for a certain period of time. So the key to solving the challenge was to calculate the RF for hot dogs. This calculation is based on 2 items. For example, if you did $1,250,000 in sales, and used 17,250 hot dogs, then your RF for hot dogs would be $1,250,000 / 17,250 = $72.46. This number - $72.46 - will enable you to calculate how many hot dogs you need to do XXX in business.
Let’s say you need to know how many hot dogs you need to do $25,000 in business. Just divide $25,000 by $72.46 and you get 345 hot dogs. You can use this RF to also calculate other things like: Reorder Point, Maximum Stock, etc.