Production Operations Management

Joe
I am a big fan of your food cost control blog and was wondering if you would be able to help me with 3 questions.

How do you account for the difference in cost come inventory time for product pre-yield and post-yield. For example, you have to account for the cost of uncooked rib roast which costs you lets say $5/Pound. So in your freezer you have 1# of precooked rib roast or $5 worth of product. You also have 1# of cooked rib roast. The cooked rib roast is obviously the product of the uncooked rib roast after a 20% shrink. Therefore, 1# of cooked rib roast really costs you $6.25.

How do you account for the difference in cost on your inventory sheets to get an accurate ending inventory value. Do you have 2 line items, precooked rib roast at a value of $5 per pound and cooked rib roast at a cost of $6.25 per pound?

Also, with the large number of items that you do not get a 100% yield on such as rib roast, how do you know the sum of the legitimate shrink? For example, you take all of your recipe costs times your product mix sales report and you theoretically ran a 28% food cost, but your physical inventories show a 31% food cost. How do you know how much of the 3 % difference was legitimate shrink?

Commissary? When you have 7 restaurants running a commissary where 90% of the food is made out of one location, what is the best way to set it up? Do you set it up as a separate business and sell each restaurant the product with the labor and other expenses wrapped in to the product to cover your overhead and break even or do you sell the restaurants the product at its actual cost and then divide the entire overhead of the commissary operation between all of the units equally? Or is there another way that a commissary should be run?

Does this all make sense? I have scoured the web and have come up empty.

Thanks,
Josh

Question 1 - My preference is to use two line items for the rib roast inventory. In some examples, I'd value the cooked item exactly as you suggested in your example. I would definitely value an item with an 80% butcher yield in this manner. However, I would value cooked prime rib less than the $6.25 in the example. Since the cooked meat can't be served as a fresh from the oven prime rib, the inventory value should reflect the value reduction.

Some typical uses for cooked prime rib are French Dip sandwiches, stews, soups and many other menu items. These secondary uses are often sold for half the price of a prime rib portion. The lower of cost or market principle applies. This meat has a market value of about $3.00 to $3.50.

Question 2 - Rather than treating normal production activities as a shrink exercise, I prefer to know every use of the raw, untrimmed item under analysis. For each menu item, I want to know the number of portions produced if 100# as purchased (A.P.) were fabricated. This information would form our standard yield. Normal butcher variances are common. The answer to your legitimate shrink question requires accurate records of the fabrication process.

The variances in yield due to fabrication can be determined by a review of the butcher sheets. There are many sources of variances including customer returns, over-production, spoilage, over-portioning and theft. A well documented butcher process with the actual number of steaks, chops, etc. will help eliminate one source. Production records, POS reports of sales and returns, and waste sheets help to complete the picture.

Question 3 - I'm not a big fan of commissaries. I have helped lots of commissary operators lower their cost of goods sold. The initial goals of big drops, product consistency and shared resources may be offset by fleet maintenance expenses, delivery labor, additional administration costs, equipment depreciation, maintenance and other costs.

If some of your 7 locations have a lower unit volume, you could keep the kitchen properly staffed by producing sauces and prepped items for other units. This approach produces the shared labor result without an investment in another property.

Regarding cost allocation, the delivery cost allocation should be based on the number of deliveries. A volume allocation fails to make store managers accountable for the frequency of deliveries. Production labor and overhead may be allocated based on the volume transferred.

These are just a few examples of commissary allocation issues.