Collusion and Food Cost Control

Dear Joe,

Its quite late for me to find your blog, I have been in the hotel industry for almost twenty years, and from your posts I found all the similar questions and basically I have answered similarly to any hotel management that I have worked for, about the importance of controlling the purchase, but there come problems when The Purchasing guys happened to be the best friend of Financial Controller or the Golden Boy of  The Hotel General Manager, then all those theories that any Cost Controllers in the world follow, suddenly dissappear in the broad daylights.

For Example I have made a kind of Price Changes Index Calculation ( by the daily purchase price update from the suppliers invoices data ) to obtain that the purchase prices for all the goods highly fluctuative to catch the culprits when they play with the purchase prices , of course by getting the help from the suppliers to play this kind of game, it will be useless for me to make this kind of calculation.

 My question is, Have you ever found this kind of situation, and if you have, what tools dou you use to bring this situation into attention.

Thank you very much, I am expecting your response.

 Best Regards,

Zuhar

Thanks for your email Zuhar!  You very clearly isolated a pervasive problem with the cost control function.  Lack of follow through on recommendations is the number one issue in many organizations.  Outright collusion is a problem with too many operations.

My gut tells me over half the operators just don't take action when profit killing problems are brought to their attention.  The tendency is to show "patience" and wait for the next period's report.  By reporting daily, you are forcing their hand.  This process of timely follow up will often expose a crooked executive.

As a food and beverage controller, you may find career survival forces you to soft sell your suggestions.  Often, the person in this position has no access to the people who could take action.  If they go up the chain of command without a by your leave, they risk a loss of their income.

In the long run, the numbers will tell the story for everyone to see when they recognize the dishonesty has put the organization in jeopardy of non-existence.

When I was young, I left a job at a hotel due to very poor cash controls and constant theft.  At the time, I simply landed another job in my off hours and left.  Many people in hotels do not have this luxury.

Ski resorts tend to have timely reporting systems in place since their season is relatively short and weather patterns can have a major impact on profits.  I once encountered a management team at a ski resort with major denial issues.  The food and beverage controller documented significant unexplained inventory losses at every meeting and no action was ever taken.  The top executives were lining their home stock with top bottles of wine.  The wine steward had a great resume with many accolades.  He was ordering terrific labels and the wine went straight to the parking lot where it filled the trunk of the manager's car.

Years ago, I read an article which stated 20% of workers are dishonest, 20% are completely honest and the other 60% tend to follow the lead of the dominant players.  You could find yourself on the outside looking in if your organization has turned 80% dishonest.

Outlook for 2012

It is a presidential election year and, unlike 2008, I expect a stronger economy in 2012.  Specifically, operators who are value customer focused will see increases in covers and sales.  These value oriented customers will pay a small premium for quality while avoiding extravagance.

Commodity markets will see continued volatility due to severe weather patterns, the linking of grain prices to oil prices, and a overall increase in consumption.

The constraints on menu item prices will ease to a greater degree than 2011.  Operators will begin to pass inflation increases along to customers.

I expect employment to improve as Americans become more pragmatic and fill positions they have shunned in the past.  Many industries are still breaking even or showing a loss.  The workforce will need to grow with a stronger economy.  I see a year end unemployment rate below 8%.

Food Cost Formula Questions

Regardless of your business model, the food cost calculation is the same:

Food Cost = Beginning Inventory + Purchases - Ending Inventory

If you look closely at the formula, you will find your cost is closely related to purchases.  The purchase cycle involves purchase orders, competitive bids, packing lists, invoices, par stock levels, shopping lists, etc.  Only invoices should be included in the purchases each month.

Finding the inventory value is simple and complex.  The simple part involves an accurate count.  We have two levels of complexity in our industry.  The perishable nature of food guarantees a declining value as product ages.  The most costly event in a kitchen involves freezing a protein item with a high cost per pound.  It's better to buy it frozen at the start if portion control is a challenge in your operation.

The second level of complexity involves the preliminary preparation of meat, seafood and produce.  Trimming and butchering activities need to be standardized.  Using a standard yield %, it is possible to assign the correct value to prepped items.  For example, a prime steak purchased for $10/pound may have a yield of 80%.  The cost per servable pound is $12.50.  This is the cost to use on the inventory sheet in calculating the extension.

A Review of the Outlook for 2011

I missed the year end unemployment rate by a half percent:

I expect 2011 will usher in a new wave of job creation. This wave will take the unemployment rate down below 8% by year end. Some of the job growth will take place in the Rust Belt.

Dining does continue to favor casual (and fast casual) concepts:

Restaurant dining has become less formal in recent years. I expect this trend to continue with greater speed. Diners want to get out more often than the past few years and they want to be recognized by the management.

My prediction regarding the decline in non-alcoholic beverage spending was spot on:

McDonald's starts the year with $1 for all sizes of coffee and soft drinks. The price pressure on non-alcoholic drinks will continue. Expect your guests to scrutinize their checks looking for prices on specials and drinks. If you price your soft drinks modestly and include the pricing on your menus, the move to complimentary tap water may start to shift back to revenue generating drink options.

Oil prices did increase 14% and the markets were volatile:

With any economic uptick, we can expect market prices to increase. We ended 2010 with higher prices for gas and grains. These markets will be volatile with an upside bias.

 Source:  CNN Money


The sales at top concepts did increase in 2011.

I expect the comparable unit sales statistics to be positive in 2011. The strong concepts will see 5% plus growth.

Food Cost Software Follow Up

We had a huge response to the food cost software newsletter.  I'd like to respond to everyone who wrote to me by category:

Why purchase a sophisticated (complicated) software tool?

The answer for this question depends not just on the complexity of your business but also on your use of the word SIMPLE.  Often in technology you will find it is very expensive to get a simple solution.  The iPad is a great example.  Apple spent many hours in development to get a light weight, fast, easy to use solution.

In accounting software (food cost control is based on a cost accounting model), you need to define the reports you want to receive first.  Then you need to imagine how complicated your operating environment is for an outsider to learn.  Pretend you are hiring someone who needs to know everything you know regarding food production.

If you have a 100% from scratch menu, you may want a sophisticated package.  As long as you prepare the same items each day, you would see a benefit.  If you go to the market everyday to shop around, I wouldn't bother.  You need a fast recipe card system to quickly get a feel for what you need to charge.

Every organization with multiple concepts and/or multiple profit centers, may be disappointed in the long run if they go with a cheap solution.  Profit center accounting is demanding and requires a solid structure designed to handle the comparison and history reports.

I have never used this type of software before.  Should I spend thousands of dollars to get the reports I need?

Unfortunately, food cost control software tends to become shelfware (not used) for many companies.  They build the original database and get excited about the recipe costing capability.  Many stop cold at this point.  These light users may return once a year to update menu prices.

The decision to invest heavily in cost control software depends on your willingness to constantly enter details of invoices each day.  On a POS system, the wait staff is performing your data entry work as they send orders to the kitchen and bar.  There is no data entry staff in your back office performing up-to-the-minute updates.  If you want a perpetual inventory system to control theft in real time, the purchase data needs to be as fresh as the POS data.

I am telling you there is a need to hire or train a cost control person or team.  Once you begin to see a much better return on the labor cost and time spent on cost control by switching to a comprehensive solution, the investment may make sense.

Are the low cost solutions the most simple to use?

No.

Are the high cost solutions the most difficult to setup?

Yes.

If you were in my position, would you buy a food cost control solution?

Yes.  100% sure.

To wrap up this follow up, I did receive emails from people using various solutions with a common concern.  It seems customer support is poor for many of these solutions.  I can tell by the tone of these emails the sales team over sold the prospect.  Most of the complaints were from people who found the project was anything but SIMPLE.