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Tuesday, March 28, 2006

Forecasting 309-Covers Equal Portions

With an improved forecast of covers, proper use of POS historic data will provide a forecast of portions required for all key items. The POS files have counts on covers and menu items for each day. If you really enjoy number crunching, you can run probabilities (with confidence levels) for optimistic, realistic and pessimistic levels of cover counts.

Using visual portion control, you can build a table for purchase requirements on all menu driven reorder ingredients. Hopefully, you've setup market-based pricing with the suppliers of these key items. Check the market conditions, check your supplier quotes, make a final guess and make the call or fax the PO.

Now get ready for game day. Have your receiving team in place with scales, clear sinuses, a copy of the PO and the storage areas locked to delivery staff. Have them document the delivery and properly fill out any credit memos for invoice adjustments.

Now accounting will check the voucher for mathematical accuracy and age the payable based on industry terms. You'll be 80% of the way to lowering your food cost percentage to an "ideal" level.

Conversely, an automated perpetual inventory system provides roughly 20% of the total opportunity. Send the prepped food to the line storage locations and let the guests arrive. Follow standard portion guidelines and watch cooking temperatures and customer preferences closely(e.g. rare, well done, over easy, no cheese, etc.).

Now, watch your bank balance grow!

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Saturday, March 25, 2006

The Portion Cut Decision

In the early 1990s, I sent a monthly newsletter (POSitive ROI)to 500 restaurateurs using WinFax. At the time, most chefs were new to technology and the computers found in most kitchens were not well utilized. Despite the lack of back office expertise, the restaurants were all buying POS systems.

I was fortunate to have two very trusting early clients who let me explore the data flow on the front lines. My monthly reports became more insightful and readership grew as I featured stories on specific report capabilities and interface options.

One day, a chef who had received three stars from Bryan Miller of The New York Times contacted me. He invited me to his kitchen for a meeting and a cup of espresso. We discussed production issues and menu ideas. The New York restaurant goers were being treated to 4 and 5 course meals for $19.92 at the time. The Democratic Party Convention was in town and the meal special was hot.

At this restaurant, the menu was very ambitious and popular items included Wild Boar and spectacular Veal Chops. They had the right equipment to butcher large cuts and this chef had many marvelous ideas for use of the trim.

From a purely technical perspective, he could rip apart his personal computer and replace boards and cards with newer versions. On the software front, he had some basic spreadsheet models for calculating the cost of various menu ideas. We chipped in and bought a back office package with recipe costing and menu analysis.

To hit the cost percentage he required and give a full meal with dessert and coffee for $19.92, he relied on pasta entrees. During the time I spent onsite, we would explore the feasibility of selling butcher yields and menu suggestions to top-flight chefs with no computer expertise.

We spent hours tearing apart butcher yield sheets and built models for Veal Rack 306, Veal Loin 331 and lots of fresh fish. He preferred the meat cut from large animals because the ratio of meat to bones was better. To get the best utility from each large cut, he looked for a second high price menu option whenever possible.

I came away from all these sessions with a bias for portion control meats. The butcher yield sheets documented the huge additional portion costs involved when a particular piece yielded one less steak or chop. Most kitchens do not have the right equipment or a chef with Alpine training in butchering and yields.

If you decide to butcher an expensive cut of meat, I recommend a credit of zero for bones, ground meat trim and stew meat trim. To truly benefit from the trim produced, you need a menu designed to utilize all the meat.

The zero credit will force you to focus on getting the proper menu prices for the work and risk involved. Use the bones in stocks. Try some unique uses for the trim (e.g. ravioli filling). The trim should help you create some hugely profitable chef specials. This is a big advantage over competitors who may be serving "blowout" items about to spoil.

Wednesday, March 22, 2006

What Should Our Food Cost Be?

In a suburb of New Haven, CT, I was asked to help an event caterer organize accounting for receivables and payables. During our discussions, he decided to expand the scope of the project to include inventories and cost of goods sold.

Since I needed to gain a knowledge of his operation, I asked what his food cost percentage was the previous month. He said without hesitation: "Our food cost is phenomenal! We run a consistent 22%." I asked if he divided his revenue into components. He said he did not. Just to complete the basics, I asked for the recent beverage cost. I was told: "We shoot for a 10% beverage cost but it can vary depending on cash bars and open bars in any given month."

It was apparent they needed help analyzing alcoholic beverage service.

At this point, I felt it necessary to ask point blank how costs were computed. Event catering is very different from a la carte restaurant service. It is completely false to shoot for a restaurant style benchmark.

After two hours of sifting through financials, it was clear the operation was out of control on both food and beverage. The chef was reporting food cost as a percentage of the entire catering package. The pricing for a package typically covered food, beverage, entertainment, flowers, photographer (optional), limo service (optional) and prime location rental (optional).

Adding together the 22% and 10% to get a F&B total of 32% was my first attempt to get the staff focused on how 22% might possibly be a high number. I explained a restaurant would never divide food cost by the combined food and beverage sales. They then realized the 22% might not be as great as they had imagined. The reply was: "So we're good; not great."

They asked: "What should our food cost be?" I said about $5 per person for most events.

I mentioned my catering background. My remote site feeding background focused on cost per manday. One person in camp per day would be entitled to housekeeping services, food and beverages. We kept all financial data in categories and divided each category's cost by the number of mandays in the period.

We decided to rework the cost of goods sold data. The rework provided a method for tracking costs by event category. Once they had a clearer picture, the food cost swings were more apparent. Eventually, they had a system of control which allowed separate reporting for open bar events and cash bar events.

A second benefit emerged from the project. Precise pricing for clients was possible. Depending on menu mix and selection of entertainment and service options, a quote was provided with a minimum count and a price per attendee.

Their final menu included three layouts on a fixed price basis. Gold, Platinum and Diamond service food choices were offered at three price levels. Regardless of menu choice, clients could choose from the full list of auxiliary services with a per person charge for each.

Once the operation realized their food cost results were not phenomenal, they began to track costs and profits increased.

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Friday, March 17, 2006

Purchasing Dollar vs. Food Cost Percentage

One way to increase awareness of food cost control problems and opportunities is to assign a greater weight to significant ingredients and recipes. It is very difficult to have a meaningful discussion about a tenth (using food cost as a percentage of sales). In fact, I find many huge problems overlooked in operations with a singular focus on food cost percentage.

When analyzing the menu prices, they say: "percentages don't pay the bills, dollars do". The same is true in reverse. You don't pay suppliers a percentage of your sales. You pay them in dollars.

So we need a way to make our numbers and statistics have greater impact. A simple start is to shift the key factor from food cost percentage to purchasing dollar analysis. For an operation with a target cost of 33.3%, the result is a tripling of the values. Since the key factor is $1.00 vs. 33.3%, the supporting figures will triple as well.

It's probably best to give a short example before proceeding too far with this change. Imagine the overall food cost percentage is 33.3% and you have subgroups as follows: meat (12%), seafood (4%), dairy (3%), produce (7%), groceries (5.3%), and baked goods (2%). Now, we will shift to a breakdown of your purchase dollar by category: meat (36%), seafood (12%), dairy (9%), produce (21%), groceries (16%), and baked goods (6%).

We can plainly see the meat and seafood represent almost one half of purchases. Category analysis is a single factor. You can imagine how expanding the value assigned to other factors will improve visibility.

In the end, you'll hit a lower food cost percentage by assigning weights to issues in relationship to the entire purchasing dollar. I start every food cost control project with the objective of buying 10%* less food for the same sales level.

*Note: That's a 3.3% change in food cost percentage in an operation like the example above.

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Wednesday, March 15, 2006

Yield Analysis

If you expect to hit a consistent food cost percentage, make sure you actually receive everything you've paid for on all the invoices.

Once the goods have been safely stored in freezers, coolers and dry storerooms, the next biggest source of variance is production. Over production is a huge issue in food service since the value of produced food declines rapidly. Finished products should be served as intended whenever possible. You can't ask someone to pay a premium price for a twice roasted piece of meat.

All production starts in the prep phase and the most expensive mistakes are generally made with protein items. Perhaps you need to slice a peeled tenderloin into 8 ounce steaks. Maybe you are a gambler and have decided to butcher a veal rack. Generally, every operation has at least one major prep item which significantly impacts food cost.

If you hit the shore, most good operators can tell you how much it costs to make a crab cake (based on the most recent delivery). The deli managers can see the cost of a sandwich change based on examining the exterior fat on the briskets. Even french fries have a tendency to yield below average portions.

The one item I find lacking in the prep and butchering operation is a sense of standard yield. People seem to be aware of major discrepancies. If the short loin yielded 75% instead of 81%, there is plenty of discussion but not many know their cost of goods sold will be 8% higher.

A lack of standard yields turns many problems into anecdotal discussions in the weekly management meetings.

Try to develop standards and track actual results against these figures. You'll start to see why a particular vendor always has a lower price per pound. You will develop an awareness of delivery mistakes which allow you to request and receive credits.

Pay the right price for what you actually receive and make sure you get the precise standard expected.

Sunday, March 12, 2006

How Close Should You Get To Your Supplier?

During a tour of a large institutional kitchen, I asked the manager why the deli meat salesman was in the walkin cooler with a two wheel truck. He said the salesman is fantastic and saves the company loads of time.

In explaining the relationship, he described the entire process. After placing the delivery items in the walkin cooler, the salesman takes an inventory and compares stock levels to historic usage. He then completes an order form for the manager. The manager simply signs for the delivery and the new order.

Twice a week, this process takes place with minimal management involvement.

It seemed important to note how trustworthy this salesman is and how they would never allow ALL salesman to have the same access. OK?

NO. Regardless of the long term relationship involved with this particular salesman, I could not OK this style of ordering/receiving control. Generally, you should not allow delivery personnel in your storage areas. They should not be filling out purchase orders. This relationship represents a complete breakdown in the internal control system.

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Thursday, March 09, 2006

Constructive Exaggeration

I started out with an idea for quantifying when to pull the trigger on a quantity discount offer. Three observations help to illustrate this decision process.

The first instance is a restaurateur who phones a major packer in Chicago at precisely the right time. He contacts a shipper with freezer trucks. Two days later, a full truckload of meat gets delivered to his freezers.

Following the full truckload focus, I have seen an entire truckload of individual packets of hot chocolate arrive at a major ski resort. They have a large warehouse and the truck drops everything once.

Finally, my mind wanders to the highly constrained inventory storage locations found in urban areas. Specifically, New York's Greenwich Village comes to mind. Not far from the Waverly Theater (now the IFC Center), trucks come and go from a commissary setup to supply a small chain of burrito shops. With a strong focus on fresh ingredients and lots of natural food options, you never see a truckload of salsa (boxed 6 - #10 cans to a case) at the loading dock. In fact, it's difficult to see any opportunities for a large price discount. Lots of fresh produce, dairy, meat and tortillas are received and dispatched to units daily.

When a supplier offers a price break for a mammoth order, you can rapidly calculate the savings per case, pound or can. This savings can be increased if you avoid overtime pay for management to observe deliveries. Fewer deliveries mean less hours at the loading dock. Offsetting the savings is the cost of storing all those cases, cans and pounds. If it's frozen, you need outside freezer space and power generators. It takes many dollars of discounted cases to justify the investment in a large outdoor freezer, locks, power usage, control needed to prevent loss, etc.

My fellow race track fans use a tool called Beyer speed ratings to handicap a horse's probability of winning a race. In this tool, Beyer has blown up tiny differences in time and distance into integers. A horse who placed a nose in front of another horse at the end of a mile long race could be rated 100 vs. 99 (for the second place horse). If you divide 3 inches by 63,360 inches, the result is .0000473 not 1. Beyer exaggerates the difference to assist handicappers. The horse finishing second costs the entire wager for a win bettor.

Pretend you are in Manhattan and have no more land available before you buy a huge outdoor freezer. Look at renting space or land. Perhaps you could locate the freezer in another borough or New Jersey. Take a look at the cost of a delivery truck with freezer capacity. If you can save enough to justify the cost, do it.

My customer with the large freezer began to adjust his thinking slightly. He started to see the annual utility charges, cost of two extra staff with FICA and vacation pay, repair costs and many other costly surprises involved in storing frozen meat. Today, he still watches the market intently. When he sees a major opportunity, he calls his full line supplier. They in turn order the truckload and have it shipped to their huge warehouse. They pass the savings along to my customer with each week's delivery. Now the freezer is used to store portion control items which are sent to his other outlets.

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Monday, March 06, 2006

JIT vs. Too Many Deliveries

Since food products are quite perishable, over ordering should be avoided at all times. Certainly, I strongly recommend daily deliveries of fresh seafood, bread and pastries. It's possible in most markets to receive deliveries daily from most suppliers. This unlimited access to supply may be costly.

The classic optimization technique for reorder frequency, EOQ, is often ignored by most operators in our industry. This technique establishes the optimal reorder point as the inventory level that equalizes carrying cost and order cost. One of the most useful variations of the straight EOQ model is the S,s model.

The S,s model requires a perpetual inventory system and establishes a maximum inventory level(S) and a lower level(s) which triggers an order. If you have greater than s in stock, no order. If you are below s, you order S-current stock level.

Now let's examine a typical food service stock with hundreds items. Would you save by running a perpetual S,s style ordering system? Absolutely! Just don't do it for every item. Locate your top 100 items. Make a short list of the suppliers needed to supply these items. This list will handle the bulk of your ordering since these high consumption items are often perishable.

Pretend you are a remote site feeder and every delivery requires a trip up a snowy haul road. The truck will be sent exclusively to your operation. Imagine a really expensive delivery cost (high energy costs, union driver and lots of tolls).

It is very likely you could find some innovative ways to schedule deliveries if you were subjected to these conditions. These innovations could be jointly identified by you and your best suppliers. Pick suppliers interested in passing along part of the savings to concerned customers.

With today's higher energy costs, this might be a great opportunity to call key suppliers and find out how you could be a better customer. Also, find out what's in it for you. You need a win/win scenario. A 50/50 cost split is a good starting point.

Partner with the suppliers you buy these top 100 items from each week. Discuss market fluctuations, delivery, payment terms and the days their trucks are carrying less product. Optimizing your supplier's costs could save you big money.

I have mentioned our contract at Syncrude before. We partnered with a second tier meat supplier with great quality and some empty trucks. He allowed our other suppliers to drop their pallets at his dock rather than drive up the haul road. By synchronizing orders and signing a solid, market-based price agreement, we allowed this supplier to deliver FREE to our account. We asked our other suppliers to deduct all haul road costs from our pricing. We used the savings to completely cover our meat supplier(gas, driver, fleet depreciation, etc.).

Whether you are located in the mountains or in a city with loads of small delivery trucks, rising gas prices are now built into your invoices. Suppliers do appreciate customers watching their backs.

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Friday, March 03, 2006

Some Things Just Don't Work Well

When I first started reporting how great remote site feeding was to my best friend, The Murph, we got into long discussions regarding the various techniques we could use to analyze operating data. One of the top of the line MBA analytical techniques is multiple regression. Since some contracts required prices per manday with extra charges for special meals, we thought MR was the way to go. You could never get the general managers and operations directors too much food cost data. Serious craving!

Armed with our APL keyboards and an IBM mainframe, we started loading meal statistics into tables. I had weekly food cost numbers available by category and summary. A typical record would include weekly data as follows: Week, Breakfasts, Lunches, Dinners, Midnight Meals, Take Out Lunches, Mandays, Food Cost (in dollars). We included employee meal counts in the details and totals.

After many attempts to get a better fit using multiple regression analyses, I found simple linear regression always worked better. Food cost is highly variable. If you find a large fixed component, it is often a danger sign.

I recently ran regression statistics on some quarterly data available at the SEC's Edgar site. One steak house concept with predominantly company-owned units runs a 36% food cost. The regression line is actually 40% variable with a negative fixed component. Try to figure that out!

The notes to their financial statements are very clear and open. However, they do not address menu pricing strategy.

My best guess is they have a menu pricing strategy which adds a fixed dollar profit into every menu item to cover overhead. So to calculate a menu price, they multiply the standard recipe cost by 2.5 and add a factor to cover the overhead costs. Maybe this was a reaction to the increase in oil prices.

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