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Saturday, June 03, 2006

Ideal Cost of Sales - Decomposed

In the last 15 years, I have worked on over 200 projects to determine ideal usage and ideal menu item prices. In candor, most firms lack the proper operations information to explore the ideal cost issue. While the technology has completely transformed the reporting environment, the lack of standard recipes, standard yields and standard production information is widespread.

At the very least, every operator should know the portion sizes for all top menu items. I always say: "Pretend you just hired me as a line cook. Where do I go to study the portion guidelines for the really popular stuff?" A surprising number of managers answer: "You need to ask the people your working with for the guidelines." Leaving key portion size information to informal word-of-mouth communication is a mistake.

Take your top 25 purchased items. For each item, create a yield sheet as follows:

Cost of purchased weight:
As purchased weight:
Primary purpose yield:
Secondary purpose yield:
Trim yield:
Bones yield:
Unusable weight:

The cost for both the primary purpose yield and secondary purpose yield depends on your ability to make use of the trim and bones. If you have no use for either trim or bones, do not give a dollar credit in the analysis. A conservative model would also give a zero credit for these weights. A more aggressive model would assign a credit for the trim and bones based on the actual cost of buying each from the butcher. Do not assign a credit for trim and bones using straight weight calculations.

Costing the primary purpose yield and the secondary purpose yield is at the heart of this analysis.

I was in the local Costco today and boneless ribsteaks were selling for $7.49 per pound. Recently, I had purchased a bonein rib roast for $4.99 per pound. My best guess on the trim level of both cuts made me happy I had made the buy at $4.99. The bonein roast looked like it was cut from a 109C and the boneless steaks looked like they were cut from a 110. The difference in weight is a ratio of 80% usable on the bonein. If you want a perfect 112 ribeye, 50% loss from a 110 is possible and you would pay up to $9.98 in my example.

Since I paid $21 for my 3-rib roast and I cut three thick rib steaks, my cost of $7 per steak was a second check. In deed, the steaks at Costco would have cost me $8.25 each.

Early in my consulting practice, I worked with a fantastic person with formal butcher training and lots of experience. He bought beef rib after carefully studying the various market options from 3 suppliers. His typical spec was 109D or "exports" as they are called. Occasionally, he would buy the 109 or 110. In his operation, he served both prime rib and rib steaks so he often purchased more than one cut. His butcher shop had all the proper equipment.

Some of the decisions he made would produce a savings of 10% to 12% for the same menu item during the same week. Since these menu items accounted for over 20% of his weekend business, these decisions put him at a big advantage to his competition. He always passed along the savings to his customers in the prime rib since this was a market priced special on his menu (offered only on the busiest nights).

In the years following this project, I observed many restaurants offering prime rib and rib steaks. Many operators offered prime rib on slow nights, bought the meat from a single supplier and always bought the same cut. Seeing the unserved leftovers in their walkins was my first red flag. The lack of serious yield analysis was the second red flag. Finally, the majority had no clue what the gross margin was on these very high cost menu items. It was no wonder they called for help.

An operation with poor forecasts, no formal yield data and a complete lack of competitive bidding in place can easily pay twice as much to serve the same menu item. The great reports now available show the variances clearly. Ironically, the majority of operators using an ideal usage report look at super high variance ingredients with suspicion. "This can't be right!" "What is this telling me?" and "How can you believe this stuff?" are common replies.

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