Phone: (413) 727-8897 email:

Monday, November 06, 2006

Cost Benefit Analysis

Every business decision has a cost associated with the execution. If the strategy was sound, the benefit derived from the action will exceed the cost incurred executing the tasks. Cost benefit analysis involves the study of results in relationship to the cost of the activity.

The absolute rule (applicable in all cases) is the cost of information may not exceed the expected gain. Any decision which will produce a benefit less than the cost to make the decision, execute the strategy and monitor results is a waste of time. Most decision makers try to filter out the minutiae in order to focus their attention on high impact activities.

As you start any campaign to improve profits through improved food cost control, it is imperative to discover areas which will have the greatest impact for the time and resources required. Try to locate activities which are performed over and over again. Isolate activities which are not consistently performed and activities which have a major impact on the client experience.

A second rule is to avoid destructive cost cutting activities. For example, you may discover the most popular menu item has been chronically over-portioned by the production staff. It would be quite dangerous to dramatically cut the portion size back to the standard in this case. Customers have come to expect the bigger portion and will immediately notice severe reductions. It is wiser to acknowledge the true portion size and develop a less obvious strategy to deal with the issue.

Opportunity cost looks at both missed opportunities and the risks avoided. You have some extra capital to put in play. Do you use it as a down payment on a new location? Would a new advance in POS technology offer a big opportunity? Would an advertising campaign bring more covers to existing locations? These decisions all involve risks and they also involve opportunity costs.

If you do nothing, the money goes into a bank account and earns 2 to 5% interest. This simple activity produces a key decision variable - the risk free value of money. All decisions should be weighed against this risk free return.

Every decision you make needs to be one you are authorized to complete. The organization does not need the wait staff fretting over the selection of a vendor for a new phone system. If you stick to your area of control, you'll have a better chance to make great decisions. If you begin to look at your operation through the CBA lens, you will begin to overlook insignificant issues and focus on real problems and opportunities.

Click Here For More Information


Rajiv Finn said...

interesting post. will use the opportunity cost idea it for my supply management exam tommorow! thanks!

2nd year food science
uni of nottingham

Joe Dunbar said...

Thanks for the comment! Best of luck on your exam.

Restaurant Data Pros

web counter