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Monday, May 22, 2006

Food Purchasing - Decomposed

Your purchasing decisions have the greatest impact on the food cost percentage. When I refer to purchasing, I do not mean expediting vendor orders. Often, poor forecasting can turn the purchasing function into a frenzied group of expeditors. The more time the purchasing team spends on follow up calls, the less time is available for vendor analysis, material standardization and negotiation.

Your purchasing director should have the time and resources necessary to perform the critical tasks of this function. The best purchasing directors are market savvy and have standard costs for all major items. These pros focus on tiny windows of market opportunity and make larger purchases when the conditions are favorable. Due to the perishable nature of many food items, they need to be completely aware of usage trends and near term forecasts.

I find the purchasing directors often have either a poor relationship with the executive chef or a phenomenal relationship. The great relationships produce the best results. These teams discuss upcoming demand and alternate specifications. The purchasing pros handle the supplier negotiations. The chef handles the menu and demand forecasts for key items.

In the manufacturing environment it is common to use an ABC stratification system. The "A" parts represent 10 to 15% of items and 70 to 75% of purchase volume. The "C" parts represent 70 to 75% of items and less than 10% of purchase volume. In the middle are the "B" parts. Typically, purchasing agents focus on the "A" parts and setup long term contracts with suppliers and manufacturers. A greater planning effort is devoted to the "A" parts.

Switching to our industry, I've found the top 25% of items will encompass a very large percentage of purchase volume. Depending on menu focus, their coverage varies from 60% to 90% of total purchases. If you study these items carefully, you will see three conditions develop.

The first condition will include items which seldom vary in price per pound or case. These items are plentiful, shelf stable and easier to monitor. Some items will vary depending on season and temporary weather conditions. Volatility is high when moving in and out of season. Finally, some items change in price constantly due to a variety of variables.

Within the top tier of items, often further stratification may be performed to isolate the top 10 or top 25 items. I would make an additional recommendation. Spend slightly less time on the items with steady price trends. Focus more efforts on the volatile items. Secondly, spend significant efforts on forecasts for items with very low shelf lives. Overstock of highly perishable items is to be avoided if at all possible.

A solid purchasing team with proper resources can make a major impact on your overall food cost percentage. It is possible to buy 10% less food for the same menu and sales level. For example, I have seen a company without a well managed purchase function drop from a 40% food cost percentage to a 36% figure. Similar results have been achieved by operators across industry segments.

A big question always comes up regarding the cost of such and effort. Most multi-unit groups have a well developed purchasing function since the numbers speak for themselves. Find the balance between the cost of improving purchasing results and the benefit using a simple formula.

Multiply your most recent 12 months of purchases by 10%. This result is the break even budget for a qualified purchasing director. Compare your result against HR market studies in your region.

A $3,000,000 volume of food sales with a 40% food cost percentage would justify an annual expenditure of $120,000 at break even. If you could hire a competent professional for $75,000, you would see a $45,000 benefit. That's a net benefit of 1.5% of sales. If your growing the concept, the return on investment will increase as your units increase since the benefit of purchasing efforts is multiplied by the group volume.

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