Phone: (413) 727-8897 email:

Tuesday, August 29, 2006

Leave Labor Out Of Inventory

From time to time, my clients ask about the practice of including labor expenses in work in process inventory valuation. I am against this practice due to needless complexity. Those who decide to change their inventory policy always see a one period bump. However, in the long run, the impact of this policy change will be low.

The key issue in the decision is the perishable nature of food (both as purchased and prepped). Most food inventories run about 14 days of cost of sales or less. Within the total inventory value, at least 75% is typically stored as purchased. One fourth (about one half week) may be in the prep box. Adding another 20% to the value of the WIP items to account for labor cost will reduce cost of goods sold about 2.5% in month one (see calculation below).

Once you hit month two, the inventory change will be minimal. Now you have locked yourself into a needless monthly exercise. It is far more conservative to completely expense all labor in the month the hours were spent. Even seasonal operations should see very little benefit with adding labor to WIP.

The key to inventory valuation in our industry is proper tracking yields on the work in process items. A steak should be valued at a greater price per pound than the large cut of meat butchered to produce the steak. Divide the as purchased price per pound by the yield percentage. Go the extra step of adding a separate line item on your inventory sheets. Let the counters weigh the large untouched cuts and keep a separate count of the trimmed portions.

If you carefully track the entire butchering and prep process for yields, you will create enough data to properly determine standards for ideal usage calculations. Many operators fail to evaluate a large enough data set when creating these standards. Comparing week to week variances from solid standard yields will explain most of the differences in your food cost. Theft and spoilage is far more difficult to quantify. Employees rarely document waste and theft each period.

Calculation: (3.5 divided by 28) times 20% equals 2.5%.

Click Here For More Information

Wednesday, August 16, 2006

Navigating Through The Recipe Jungle

From time to time, certain issues surface when recipe standards are effected by seasonal shifts. The common high impact issue concerns produce yield and price as seasons change. For example, the Romaine lettuce you purchase in the off season may not only cost more. The yield will be far less than peak season. Often you will see a case price double and the yield decline.

These times of high priced, low yield purchases should trigger a menu shift. In winter, I'd recommend as the special each night a wonderful soup made from seasonal root vegetables. Steer the customers away from the popular Caesar Salad to Minestrone.

At this time, we in the Northeastern USA will see prices plummet on beautiful peppers. Menu items with roasted peppers, stuffed peppers and sauteed peppers will fully utilize the high yield, low price cases. On the other hand, this may be the absolute worst time of year to buy apples. With a few weeks to go until the apple harvest begins, current offerings are often of poor quality and from 50% to 70% above prices you can expect to pay in one month.

If your menu is inflexible and some highly popular items must be produced from ingredients which are out of season, create a completely new recipe calling the
poor yield item at the inflated price. Save your main recipe for the peak season.
Now when your food cost percentage trends upward, you'll be able to quantify the impact of the limitation in your menu.

Click Here For More Information

Saturday, August 12, 2006

The Recipes Are Wrong!

Variance reports frequently identify huge differences between actual item usage and the calculated ideal usage. There are many reasons for these major red flags. To eliminate the obvious, you need to review the fundamental calculation of actual usage. Recheck your counts from the two inventories. Go over the invoices for the period. Check for very small and very large quantities. Make sure you did not miss an entire invoice. Pay strict attention to invoices near a cutoff date. Anything received after the ending inventory should be excluded.

Once you have adjusted your actual usage to reflect changes, take a second look at the variance. You need to switch your focus to the recipe model. If an item is butchered, trimmed, cleaned, processed or if the item increases in volume when cooked (e.g. rice, pasta, etc.), you need to check your standard yields. Make sure you haven't entered the reciprocal figure in a subrecipe yield.

The final check is in plate recipes and portion sizes. These quantities should be exact and at this phase allowances for tiny variation should be avoided. Your plate recipe model should not be soft. You need exact portion sizes to tie to POS counts.
Whenever possible, line cooks should use pre-portioned items in the final production.

If you finish your review and find the inventories were accurate, purchases were all in order and the recipe model is accurate, you have an operational problem. There are certain problems which persist in our industry.

Employee consumption of food and beverage items has a bigger impact in slow periods. During the off-season or slow days of the week, employee meal cost will be higher as a percentage of sales. Adjust your expectations to this reality and move on to much greater concerns.

Collusion with vendor delivery staff is the first possible problem. You need to only pay for food actually received. Make sure receiving controls are rock solid. Limit your testing to invoices with large variance items. Problems may occur on certain shifts or on a specific day of the week. Check each invoice for the delivery person and your receiving person. Look for patterns.

Chronic, unintentional food overuse needs to be identified and halted. Training will correct future overuse. Portions of salads, starches (including french fries), garnishes, soups, sauces and all other discretionary prep items need to be clear. If the operation uses forecasts to prepare for a busy period and perishable items need to be discarded, fill out waste sheets and record the reason as bad forecast.

Your storage areas should be easy to count and high cost items should be difficult to steal. Small portions of tenderloin, shrimp, lobster tails and crab may require additional controls. Pull sheets are helpful. Sheets should be completed with initials and checked by the manager each shift change.

Late night and early morning are the times of greatest probability of theft. Delivery times are just as bad as the close. If you have surveillance systems in place, these periods should be highly scrutinized. We have found brazen thieves taking full cases of food to the dumpsters, trunks of their car, etc. It's best to terminate these people at once.

When I first started my consulting practice, there were two excellent articles on theft. The Wall Street Journal had a survey conducted by F.W. Dodge in which they interviewed food service employees. Of the respondents, 44% admitted to theft. I went to see if there was any other sources on employee theft. I found a general psychology article (source unknown) which stated about 20% of workers are very honest and 20% of workers are very dishonest. The middle 60% tend to follow the herd. If they are working with a completely honest person, theft is minimal. However, when they work with thieves, they will often steal to the same extent as their dishonest co-worker.

Over the years, I have seen major mistakes made by honest workers. One person left spare ribs unattended on a grill to check a delivery and they were inedible. Another person decided to pre-cook a huge number of rotisserie chickens for a special promotion on a low traffic day. In both cases, the employees made mistakes which were one time events. Both of my clients said nothing to the employees. They both realized their mistakes and brought them to management's attention in the first place. Keeping records on simple waste sheets encourages this honest loss activity to be quantified and archived for future period comparisons.

It's difficult for me to leave the theft issue hanging and management often can't see how major theft is possible. However, over the years we have found managers with relatives in the pizza business filling a van with flour, cheese and canned tomatoes. A multi-unit chain in New York tracked a vendor delivery person who visited five of their stores trying to sell cases of shrimp as a "cash only" special. Someone lost the shrimp due to poor receiving controls. My first consulting client ever couldn't believe the long time chef was a thief until the employee admitted he stole two blocks of 16-20 shrimp a week.

If you believe you have reviewed and corrected all the items mentioned above and your variances still don't make sense. Review the POS setup for all menu items which call for the variance item. Look for specials, the OPEN FOOD key and buffets. You may even find the item is wrong in the system. Some companies allow managers to overwrite the menu item names on the POS. I'm not a fan of this method. The entire history is ruined with one small change.

If the operation has no issues at all, check the recipe. Maybe it really isn't correct. Sometimes the wizards make mistakes.

Friday, August 04, 2006

100% Cost Percentage?

As I entered the professionally designed coffee shop on Madison and 49th Street, my first observation was the herd of Wall Street types sipping espresso. The grand opening was in full swing. The press had done a fantastic job of getting the word out. Sales were brisk and it was difficult for my clients to hide their emotions.

As the jubilation of the busy opening faded, the reports began to show a huge cost problem in the premium bottled drinks category. These refrigerated products were available on a help yourself basis. The general manager and the vice president asked me: "Is it possible to run a 100% cost of sales?" My answer was a simple yes. They looked at me incredulously and demanded to know how items priced to yield a 30% cost of sales could possibly have a 100% figure. My answer was "Massive theft!" They agreed there might be a bottle or two taken every day by "customers" but there's no way theft could explain this level of variance.

We continued to debate the theft issue and I explained the true yield was 100% which would rule out portion issues. The items were all shelf stable which would rule out spoilage. Breakage was possible but they explained the new store had yet to suffer a broken bottle incident. So where do we find the 70% variance? I held my ground with the massive theft theory.

The offices were upstairs and we took the elevator to continue our meeting away from the operation. During our meeting I asked for the complete path a bottle would take from delivery to sale. The deliveries were approved by the morning manager and full cases were stored in a first floor storeroom near the sandwich production area. Bottles were restocked three times a day by general helpers (morning, pre-lunch and post-lunch). As our meeting broke up, I asked to visit the first floor storage area to check for locks and other security features.

As we entered the sandwich area, I noticed the four prep workers were all drinking premium bottled beverages. I asked them how they account for employee beverage consumption. The general manager told me they were allowed unlimited coffee and fountain drinks. I asked for clarification on the premium bottled beverages. The answer was the employees would have to pay for these drinks.

Indeed we found the extra 70% cost. The specialty iced teas in assorted flavors were the most popular drinks for the workers in the hot production areas. The opening was in July and the weather was sweltering and the prep area had no air conditioning unit. These workers were drinking these bottles by the case while the paying customers out front barely noticed the premium drinks cooler. Everyone was drinking barista specialties.

For those who want to know how the cost percentage could be 100%: Take a $0.45 bottle and sell 3 at $1.50 each. That's $4.50 in sales. Now subtract 7 bottles due to employee thirst. That's 10 bottles (3 sold plus 7 unsold) at $0.45 or the very same $4.50.

Restaurant Data Pros

web counter