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Wednesday, December 20, 2006

Strategic Food Cost Issues

Many companies take a serious look at central production. The prospect of better consistency and the opportunity to run larger batches lure too many of these companies into a trap. Recently, I observed the final meetings for a single unit operator expanding to a new commissary with capacity to handle production for 5 additional units. The owner wanted a new control system to handle the increased demands of his expanding business.

Unfortunately, it was far too late to offer my views on commissary construction. The long term lease was signed, construction was nearing completion and heavy equipment installations were in progress.

The new commissary opened and the organization is bleeding red on the bottom line. With the commissary draining funds each month, the chance of starting any of the new units is remote. Break even sales volume seems out of reach despite strong growth. So what went wrong? This was a successful single unit operator enjoying better than average unit volume for the region and decent sales growth.

The strategy here is flawed.

Creating the capacity to handle production for 6 units with only one unit operational is suicide. The new monthly fixed costs are too high, production workers spend too much time walking around the mammoth kitchen. Freezers and walkins designed to handle five times the current volume have raised the monthly utility bills. The fleet of vans has increased to handle movement between locations. Sales barely cover the fixed costs and wages.

Rather than wasting the owner's precious time (he works 16 hour days - 7 days a week), I told him he needs to focus on volume rather than food cost control. His sales are too far below break even to worry about incremental food cost improvement.

I'll be working with a different company in the same region. They just opened a new unit in this hot growth area. Sales are double their average unit volume and the operators are feeling the strain. Fortunately, profits and cash flow are robust.

Saturday, December 09, 2006

Food Cost Control - Alphabetic Approach

Manufacturing companies often segregate their parts inventories into A, B and C groups. The parts in Group A are used in high volume and are expensive. Group B has two types of parts. The high volume, less costly parts would fall into the B group. Also, expensive parts used in lower volume would be in Group B. Finally, Group C parts would include the largest number of members. These parts are inexpensive and used in low volume.

Why stop with only three letters?

I'd recommend segments for product shelf life and I wouldn't use Group B for two profiles. Let's use Group A to include highly perishable, costly, high volume items. If a costly, high volume item is purchased frozen, we'll use group B. Group C will include all costly, high volume items which are shelf stable.

Following this approach, we'd use groups D, E and F to handle moderate volume items. The perishables would be coded to Group D. Frozen would fit the E profile and the shelf stable would go to Group F.

Since the 80/20 principle is in play in most kitchens, you'll be left with lots of items in groups G, H and I. Use the perishable/frozen/shelf stable structure to complete the grouping exercise.

A 1,000 item inventory will contain about 200 items in the first three groups. The next three groups will have from 150 to 200 items. All the other items will fall into the last three groups. You'll find very few items in Group C vs. Group I. Perhaps coffee and oils will be in the C group and the spices down in Group I.

When you are finished with this exercise, start to spend more time and energy with the first 5 groups. The last four groups will have the majority of items and the least amount of opportunity to favorably impact your food cost percentage.

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