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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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Anonymous said...

Are you just saying that buying 10% less will solve issues? I understand that if you don't actually forcast what you are going to use, but really make sure the place is FULL, you will overproduce. Working in a restaurant and looking at sales trends or menu engineering will help. It may be ok to run out of something in this type of operation, but I am in country clubs and that is not an option.
I do agree with you about overprodtion and know it can be reduced, but not having product inhouse sounds dangerous.

Joe Dunbar said...

My thanks to you for taking the time to comment!

I want to buy 10% less food by concentrating efforts on eliminating poor forecasting and improving controls.

A good place to start is to define very wasteful practices. If you see certain items at the club which are routinely served as "blowouts" (or worse go bad on the shelf), it is quite possible you could buy 25% less.

My 10% is an overall target. Say annual volume is $1,000,000 and I buy $400,000. We're looking for opportunities to serve the same meals with purchases of $360,000.

Going back to the post, The same $40,000 improvement represents 4% of sales but 10% of prior year's purchases.

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