Most restaurants have an automated ordering system (POS) which can be queried for menu item counts for any given data range. This data is quite helpful for the forecasting team in restaurants using a limited menu or a menu with a central focus (either by cuisine or main ingredient). Unwieldy menus do not allow a quick menu item count forecast (using historic POS data) to effectively buy most key items.
At the core, most forecasts begin with the cover count or number of guests expected to arrive in a given time period. Adding the check average to this cover forecast will provide the people designing a shift schedule with a target. Simply take the covers times the check average times the target labor percentage. This is the budget for the period.
Food cost control is not a percentage game in the planning phase. Although most use food cost percentage to measure results, the number won't help you predict what food to order, store, prep and bring to the line for any given period. Cover counts and check averages will provide a broad target. Making the target work is a tougher task.
For many raw ingredients, the ability to use unsold product in future meal periods has a significant impact on your food cost results. Limited menus put a short list of ingredients in play every single day. They don't need to worry how to use any leftover cheese at Domino's Pizza. Pizza is on the menu tomorrow. In contrast, operators using menus relying on daily specials for a major share of sales will have a much more demanding job to use up leftover stock.
The purchasing forecast depends on par stock targets for many shelf stable items. In a typical kitchen, a much greater share of the food cost dollar is spent on perishable meat, fish and produce. The error penalty for over ordering a shelf stable condiment is minimal when compared to fresh white fleshed fish. You will often see seafood specialists with chalkboards. Late in the dinner shift on a busy night, they want to run out of fish if the next day's forecast is for a slow Sunday or Monday.
My favorite Italian restaurant in New York does not offer fish on days when the fish market is closed (Saturday and Sunday). Some chefs pay air freight to get fresh fish in the door as fresh as possible. You want to avoid over buying any highly perishable raw ingredient. Just ask your self a simple question: "If I order more than I can use today, will I be able to sell the leftovers tomorrow?"
Once you move away from fresh fish and poultry, dairy and produce are highly perishable and are frequently purchased by specialists. If your operation doesn't justify hiring a specialist, tracking produce waste can help you adjust your pars quickly. I favor either a two-tier or three-tier par stock model. Order more before busy days and less on slow days.
I believe using sophisticated software (with menu item counts, standard recipes, standard yields and other recipe model factors) are most useful for companies who have never explored these tools. Often, my clients tell me they wish they had analyzed their menu item costs years ago.
The knowledge gained from yield analysis really improves future forecast accuracy. If you learn to translate purchase units of measure into the number of standard portions, you will have a competitive advantage. Your forecast model can now go well beyond covers, check averages and percentages. Take your top 25 items and buy more precisely. The impact is huge.
Tuesday, November 23, 2010
Sunday, September 19, 2010
Production Food Cost
Most restaurants purchase raw ingredients and produce and sell finished menu items. Our management accounting should be structured in a manner similar to a manufacturing operation. The wait staff should be considered the sales force. They meet the customers and help them order a delicious meal.
We find a beehive of activity on or near the production line in most restaurants. The wait staff wants to rapidly fill orders and the production staff handles orders as efficiently as possible given the equipment constraints and staff levels.
Unlike most manufacturers, a majority of food service managers do not track work in progress and finished goods inventory. Our finished goods are immediately delivered to the dining room.
The terms batch recipe, sub-recipe or prep recipe are used to describe the items produced ahead of the meal period. These items are available to the line cooks and are used to produce more complex menu items. Common prep items are sauces, dressings, stocks, casseroles and other items which take longer than the typical meal cycle to produce. Butchering, produce cleaning and other prep activities convert raw ingredients into portioned items and salad mixes.
Food service operators need clear policies to handle these inventory valuation issues. Inventory valuation is important since the cost of goods sold depends on consistent treatment to determine beginning and ending inventory values.
There are many different accounting policies employed by major food service companies. One of the largest hotel management companies in the world does not use food inventory in their balance sheet and income statements. Food cost reflects all food received from their suppliers each period. Other companies do not value any work in progress inventory. These operators use a prep cooler and management's goal is to minimize the amount of food in this zone.
Due to the increase in report complexity, we often miss the opportunity to evaluate the true cost of batch recipe production. The key reason for tracking batch recipe production, including the cost of direct labor, is the ability to compare the total cost with the available packaged goods.
Salad mixes using romaine lettuce are very popular. For many companies, the value added by cleaning and trimming the vegetables and heads of lettuce does not justify the cost increase. The packaged salad mixes offer a high quality alternative with very low labor costs.
Operators are trying to manage relatively high production costs. Salad production involves many hidden costs: transportation of unusable trim, water used to clean vegetables (often left running during the prep), garbage removal to discard the unusual trim, and higher volatility in market costs. The direct labor is not completely hidden but may be cloudy when the workers handling prep also work in other stations.
So what? Why should anyone care about these issues?
The cost of meat and seafood requiring butchering and vegetables requiring prep may be over 50% of your cost of goods sold. You may have significant hidden profit buried in your operation. The amount of hidden profit may justify a quarterly study comparing prep vs. direct purchase on several key items. If you have a policy of producing everything from scratch, you need reports which allow you to monitor production.
We find a beehive of activity on or near the production line in most restaurants. The wait staff wants to rapidly fill orders and the production staff handles orders as efficiently as possible given the equipment constraints and staff levels.
Unlike most manufacturers, a majority of food service managers do not track work in progress and finished goods inventory. Our finished goods are immediately delivered to the dining room.
The terms batch recipe, sub-recipe or prep recipe are used to describe the items produced ahead of the meal period. These items are available to the line cooks and are used to produce more complex menu items. Common prep items are sauces, dressings, stocks, casseroles and other items which take longer than the typical meal cycle to produce. Butchering, produce cleaning and other prep activities convert raw ingredients into portioned items and salad mixes.
Food service operators need clear policies to handle these inventory valuation issues. Inventory valuation is important since the cost of goods sold depends on consistent treatment to determine beginning and ending inventory values.
There are many different accounting policies employed by major food service companies. One of the largest hotel management companies in the world does not use food inventory in their balance sheet and income statements. Food cost reflects all food received from their suppliers each period. Other companies do not value any work in progress inventory. These operators use a prep cooler and management's goal is to minimize the amount of food in this zone.
Due to the increase in report complexity, we often miss the opportunity to evaluate the true cost of batch recipe production. The key reason for tracking batch recipe production, including the cost of direct labor, is the ability to compare the total cost with the available packaged goods.
Salad mixes using romaine lettuce are very popular. For many companies, the value added by cleaning and trimming the vegetables and heads of lettuce does not justify the cost increase. The packaged salad mixes offer a high quality alternative with very low labor costs.
Operators are trying to manage relatively high production costs. Salad production involves many hidden costs: transportation of unusable trim, water used to clean vegetables (often left running during the prep), garbage removal to discard the unusual trim, and higher volatility in market costs. The direct labor is not completely hidden but may be cloudy when the workers handling prep also work in other stations.
So what? Why should anyone care about these issues?
The cost of meat and seafood requiring butchering and vegetables requiring prep may be over 50% of your cost of goods sold. You may have significant hidden profit buried in your operation. The amount of hidden profit may justify a quarterly study comparing prep vs. direct purchase on several key items. If you have a policy of producing everything from scratch, you need reports which allow you to monitor production.
Friday, August 27, 2010
Menu Engineering Using Excel
During the month, three fellow restaurant consultants have contacted me about menu engineering and recipe costing with specific questions regarding Excel. Excel charts do not automatically create the popular four quadrant chart with Stars, Plowhorses, Puzzles and Dogs (or any of the other 4 quadrant variations). I have accomplished this task using a few third party utilities. In my analysis, recipe costing is accomplished using software specifically designed for this purpose.
I consider the POS system Product Mix report the source of the key data. Since menu engineering is concerned with selling price fluctuations, the PMIX report has all essential data (number sold and selling price) except the cost to produce each item. Most POS systems have Excel file export capability. If you are adept at the table look-up formula, you can place the exported data exactly where you need it in your model.
Generally, I use good old data entry to update the recipe costs using the numbers from the software. Once I have the number sold, selling price and recipe cost, the sophisticated menu engineering and analysis reports flow from Excel. The four quadrant chart is not the only report produced. You can use sorts and filters to generate a tremendous amount of valuable information.
Anyone who wants an all-in-one solution for inventory, recipe costing, purchasing, menu engineering and requisitions really needs to invest in a proper solution. Excel tables are famous for errors in formulas and there is no audit trail for your purchases (which feed all cost calculations).
Many people have asked me for a recommendation. I do not own a restaurant and I do not have a laboratory in my office with 20 different recipe costing programs loaded and ready to test. In fact, many of the popular software solutions come out with substantial improvements each year. It would be a full-time effort for anyone to honestly provide this type of service.
Many of the popular solutions target a segment and do a terrific job. FoodTrak moved from a restaurant model to a hotel/resort model around 2000. They added transfers and requisitions to the essential restaurant reports already in the program. The reasons I tend to work mostly with FoodTrak: longevity and optional cost methods. They have been around since 1980 and I started my company in 1990. If you need FIFO cost numbers, you won't find a better solution for the investment. There are other programs in the six figures range which have true FIFO but I am assuming very few of my readers would invest $100,000 plus for a solution.
There are many programs capable of decent reporting using the last cost method. I encourage anyone on a tight budget to start with one of these solutions for recipe costing needs.
I consider the POS system Product Mix report the source of the key data. Since menu engineering is concerned with selling price fluctuations, the PMIX report has all essential data (number sold and selling price) except the cost to produce each item. Most POS systems have Excel file export capability. If you are adept at the table look-up formula, you can place the exported data exactly where you need it in your model.
Generally, I use good old data entry to update the recipe costs using the numbers from the software. Once I have the number sold, selling price and recipe cost, the sophisticated menu engineering and analysis reports flow from Excel. The four quadrant chart is not the only report produced. You can use sorts and filters to generate a tremendous amount of valuable information.
Anyone who wants an all-in-one solution for inventory, recipe costing, purchasing, menu engineering and requisitions really needs to invest in a proper solution. Excel tables are famous for errors in formulas and there is no audit trail for your purchases (which feed all cost calculations).
Many people have asked me for a recommendation. I do not own a restaurant and I do not have a laboratory in my office with 20 different recipe costing programs loaded and ready to test. In fact, many of the popular software solutions come out with substantial improvements each year. It would be a full-time effort for anyone to honestly provide this type of service.
Many of the popular solutions target a segment and do a terrific job. FoodTrak moved from a restaurant model to a hotel/resort model around 2000. They added transfers and requisitions to the essential restaurant reports already in the program. The reasons I tend to work mostly with FoodTrak: longevity and optional cost methods. They have been around since 1980 and I started my company in 1990. If you need FIFO cost numbers, you won't find a better solution for the investment. There are other programs in the six figures range which have true FIFO but I am assuming very few of my readers would invest $100,000 plus for a solution.
There are many programs capable of decent reporting using the last cost method. I encourage anyone on a tight budget to start with one of these solutions for recipe costing needs.
Sunday, August 22, 2010
Putting Excel to Use in Food Cost Control
I mentioned my love of Excel in last week's post about software. Excel is ideal for 3 aspects of the food cost control environment: organization, complex calculations, and custom reports.
ORGANIZATION:
Most of the food cost control software assumes you have your entire database conceptualized and you simply need to tap enough keys to create the ideal starting point.
Newbies will find plenty of challenges ahead.
Inventory locations, vendors, item categories and inventory sequence are database requirements for phase one. You initially build the item database to aid you in purchase order and invoice entry (the areas requiring 80% of the time once you go live). At the same time, inventory count sheets need to flow from the item database (along with any batch recipe production items).
Excel is a great tool for getting organized. Build columns for the item description, primary vendor, vendor codes, bar codes, category (produce, meat, fish, etc.), storage method (frozen, refrigerated, dry), primary inventory location (where you look to decide when and how much to order), unit of measure data with conversion factors to allow purchases, storage and recipe usage, par levels, alternate item codes (the vendor code for the item you would purchase if there was a stock out).
COMPLEX CALCULATIONS:
Food cost control involves using scalable recipes to forecast production requirements, purchase requirements, and line setup requirements. In addition, plate recipes help you forecast profits, calculate usage variances, and price menu items. The top software will provide plenty of excellent information. Excel can provide you with customer profiles, sensitivity analysis (what-if?), and many other advanced concepts.
CUSTOM REPORTS:
I use a data mining tool to create custom reports for my clients. Typically, the client will send me their favorite report and ask a question: "Can we get all this exactly the way it is AND add a column on the end which....?"
The data mining software creates the calculation field missing in the source report. Mining software always offers several output options including text, CSV, PDF and Excel formats. I often choose Excel since the analyst can take the analysis further if necessary. Excel offers all of the formats mentioned for the final presentation.
ORGANIZATION:
Most of the food cost control software assumes you have your entire database conceptualized and you simply need to tap enough keys to create the ideal starting point.
Newbies will find plenty of challenges ahead.
Inventory locations, vendors, item categories and inventory sequence are database requirements for phase one. You initially build the item database to aid you in purchase order and invoice entry (the areas requiring 80% of the time once you go live). At the same time, inventory count sheets need to flow from the item database (along with any batch recipe production items).
Excel is a great tool for getting organized. Build columns for the item description, primary vendor, vendor codes, bar codes, category (produce, meat, fish, etc.), storage method (frozen, refrigerated, dry), primary inventory location (where you look to decide when and how much to order), unit of measure data with conversion factors to allow purchases, storage and recipe usage, par levels, alternate item codes (the vendor code for the item you would purchase if there was a stock out).
COMPLEX CALCULATIONS:
Food cost control involves using scalable recipes to forecast production requirements, purchase requirements, and line setup requirements. In addition, plate recipes help you forecast profits, calculate usage variances, and price menu items. The top software will provide plenty of excellent information. Excel can provide you with customer profiles, sensitivity analysis (what-if?), and many other advanced concepts.
CUSTOM REPORTS:
I use a data mining tool to create custom reports for my clients. Typically, the client will send me their favorite report and ask a question: "Can we get all this exactly the way it is AND add a column on the end which....?"
The data mining software creates the calculation field missing in the source report. Mining software always offers several output options including text, CSV, PDF and Excel formats. I often choose Excel since the analyst can take the analysis further if necessary. Excel offers all of the formats mentioned for the final presentation.
Thursday, June 10, 2010
Should You Cherry Pick Spot Prices?
The quotes come in via fax and the internet. You load them into your recipe costing/inventory software. Next, you feed a shopping list to the program and you print the suggested orders. After some minor changes, you send the orders out to as many as 10 vendors. Is this a smart way to buy?
Yesterday, my client and I were on a conference call with a sales rep from Gordon Food Service in Michigan. Our objective is to eliminate waste in the restaurants. I have always recommended weekly inventories but the salesman's advice was twice a week. He wanted us to feed the online ordering system with the inventory counts on Monday and Thursday. Rather than going through the storage areas with a shopping list and jotting down order quantities for under-stocked items, he encouraged my client to take a full inventory.
If you have never been good at inventory control, the journey to tight control absolutely requires a tremendous change in the normal routine.
You may be unwilling to take twice a week inventories for the entire restaurant. Consider phasing in inventories by category starting with protein. In addition, carefully monitor all waste due to spoilage. If you have a sophisticated database loaded with over 100 count values per year, your entire purchasing history and details of your waste, par values will stare you in the face (with seasonal variations).
More importantly, we want to eliminate waste. Ordering too much of a perishable item with a high cost per pound and a major change in taste and texture profile when frozen has to be avoided. As you begin to order the appropriate quantities, your supplier can work with you on the proper pack/size for each item in the non-perishable goods section. They can help you find labor saving alternatives.
I believe it is highly advisable to stay aware of market trends. Whether I would go the cherry picking route in today's marketplace is the question. It's typically a mistake.
As far back as 1981, Tom Noble from Denver (eventually sold his business to Sysco) sent his rep out to our construction site in Parachute Creek. We setup a ordering guide for our comprehensive 4-week cycle menu. Scott, our Noble rep, went through the stockrooms, walk-ins and outside freezer. He designed a storage sequence for each room. We bought almost everything from this company. Our contract allowed us quarterly audit access and we had a Denver office. Once in a great while we would complain about meat yields. Overall, we enjoyed a very low cost per man per day and waste was non-existent.
Until you work with a competent supplier armed with an excellent database, it's tough to see the way to single source. Go ahead and take the plunge. The potential is huge.
Yesterday, my client and I were on a conference call with a sales rep from Gordon Food Service in Michigan. Our objective is to eliminate waste in the restaurants. I have always recommended weekly inventories but the salesman's advice was twice a week. He wanted us to feed the online ordering system with the inventory counts on Monday and Thursday. Rather than going through the storage areas with a shopping list and jotting down order quantities for under-stocked items, he encouraged my client to take a full inventory.
If you have never been good at inventory control, the journey to tight control absolutely requires a tremendous change in the normal routine.
You may be unwilling to take twice a week inventories for the entire restaurant. Consider phasing in inventories by category starting with protein. In addition, carefully monitor all waste due to spoilage. If you have a sophisticated database loaded with over 100 count values per year, your entire purchasing history and details of your waste, par values will stare you in the face (with seasonal variations).
More importantly, we want to eliminate waste. Ordering too much of a perishable item with a high cost per pound and a major change in taste and texture profile when frozen has to be avoided. As you begin to order the appropriate quantities, your supplier can work with you on the proper pack/size for each item in the non-perishable goods section. They can help you find labor saving alternatives.
I believe it is highly advisable to stay aware of market trends. Whether I would go the cherry picking route in today's marketplace is the question. It's typically a mistake.
As far back as 1981, Tom Noble from Denver (eventually sold his business to Sysco) sent his rep out to our construction site in Parachute Creek. We setup a ordering guide for our comprehensive 4-week cycle menu. Scott, our Noble rep, went through the stockrooms, walk-ins and outside freezer. He designed a storage sequence for each room. We bought almost everything from this company. Our contract allowed us quarterly audit access and we had a Denver office. Once in a great while we would complain about meat yields. Overall, we enjoyed a very low cost per man per day and waste was non-existent.
Until you work with a competent supplier armed with an excellent database, it's tough to see the way to single source. Go ahead and take the plunge. The potential is huge.
Sunday, June 06, 2010
Historic Costs vs. Future Costs
The role of a food cost controller is much different from the menu analyst. Cost control relies entirely on historic data to prepare reports which quantify results and alert management to possible problems or opportunities. On the other hand, the menu analyst needs to look to the future.
When a menu price revision takes place, the prices need to cover the future costs and provide a reasonable profit. Knowledge of commodity trends, economic forecasts, unique events in the coming year and other future oriented information is helpful. The costs used to arrive at theoretical menu item costs should use these expected prices.
The food cost controller studies purchase data to understand the previous period. Use of theoretical food cost data may help the controller discover a usage problem. Usage problems involve units rather than dollars. There is concern regarding missing steaks or shrimp or perhaps an entire case is gone. Purchase costs are important only when there is a big swing in price on one or more high volume items.
Using the same price data for both menu planning and food cost control is a mistake. The portion sizes for all key items should be 100% exact. It is the prices which need to vary. Many operators simply take an educated guess on overall inflation and raise menu prices across the board with the same % increase.
Ideally, the menu analyst benefits from the ongoing work of the food cost controller. Portion control tests, relative price volatility and other information the controller has at their fingertips is valuable to their counterpart. They should work together to discover how the current menu has performed.
In a highly collaborative organization, the cost control team could utilize information from the menu analysis team (e.g. future menu price revision strategy) to create better budgets.
When a menu price revision takes place, the prices need to cover the future costs and provide a reasonable profit. Knowledge of commodity trends, economic forecasts, unique events in the coming year and other future oriented information is helpful. The costs used to arrive at theoretical menu item costs should use these expected prices.
The food cost controller studies purchase data to understand the previous period. Use of theoretical food cost data may help the controller discover a usage problem. Usage problems involve units rather than dollars. There is concern regarding missing steaks or shrimp or perhaps an entire case is gone. Purchase costs are important only when there is a big swing in price on one or more high volume items.
Using the same price data for both menu planning and food cost control is a mistake. The portion sizes for all key items should be 100% exact. It is the prices which need to vary. Many operators simply take an educated guess on overall inflation and raise menu prices across the board with the same % increase.
Ideally, the menu analyst benefits from the ongoing work of the food cost controller. Portion control tests, relative price volatility and other information the controller has at their fingertips is valuable to their counterpart. They should work together to discover how the current menu has performed.
In a highly collaborative organization, the cost control team could utilize information from the menu analysis team (e.g. future menu price revision strategy) to create better budgets.
Thursday, May 27, 2010
Spotting A Problem Early
We had a rather difficult winter here in the Washington, DC metro area. With a mild winter snow removal budget, we got hit with a severe winter snow fall during the key month of February. Just as the New Year's resolutions relaxed for Super Bowl Sunday, the snow took away the weekend. Local super markets were out-of-stock on milk, bread, orange juice, bacon, ground beef, and many other staples. Restaurant parking lots were empty.
This rough weekend repeated itself for Valentine's Day and President's Day weekends. I spoke with one operator who said his February food cost percentage hit 45%. This is a common trend - high cost of goods sold % in a low volume month.
I like to chart a month like this vs. a high volume month. The key to using this type of analysis is dollars vs. percentages. If you have a bad month with $200,000 in sales and $90,000 in cost of sales, you'll be close to the person I spoke with in February. Contrast this poor performance with a busy month's $800,000 sales figure and a cost of sales equal to $240,000 or 30%.
The change in sales volume is $600,000 ($800,000 - $200,000). Cost of goods sold had a change of $150,000 ($240,000 - $90,000). The slope is 25%. This is the variable component of the food cost. The fixed component is $40,000.
We'd expect a food cost of 29% if we hit $1,000,000 in monthly sales. On the other hand, we would expect to see a $65,000 cost of goods sold if we only manage a sales figure of $100,000. That's 65%!
If these numbers seem completely off the wall, they are not at all unusual for out-of-control operations. The bad months are explained away with stories of blizzards, rainy days, traffic jams, competitor discounts, etc.
Your cost of sales should be almost completely variable. Food should not be consumed if there is no sale. Why do you use more food when you're slow?
Employee meals have a bigger impact. The fixed staff eats the same meal whether you are slow or busy. This should be minimal and measurable. Chronic waste due to over-ordering is a bigger cause. Reduce your "safety factor" when ordering during slower periods. Sometimes the weekday counts are too low to absorb food left from the busy weekend. If the weekend is a complete bust, freeze everything you can and value any perishables which can't be saved.
You may have a major theft problem. If you're not finding many dollars in the research above, you may have discovered a persistent loss due to theft. If the 45% month had $10,000 in theft and you eliminated this problem, the result would be 40% in an otherwise terrible month. The bad month would have allowed you a chance to discover a $120,000 annual loss.
This rough weekend repeated itself for Valentine's Day and President's Day weekends. I spoke with one operator who said his February food cost percentage hit 45%. This is a common trend - high cost of goods sold % in a low volume month.
I like to chart a month like this vs. a high volume month. The key to using this type of analysis is dollars vs. percentages. If you have a bad month with $200,000 in sales and $90,000 in cost of sales, you'll be close to the person I spoke with in February. Contrast this poor performance with a busy month's $800,000 sales figure and a cost of sales equal to $240,000 or 30%.
The change in sales volume is $600,000 ($800,000 - $200,000). Cost of goods sold had a change of $150,000 ($240,000 - $90,000). The slope is 25%. This is the variable component of the food cost. The fixed component is $40,000.
We'd expect a food cost of 29% if we hit $1,000,000 in monthly sales. On the other hand, we would expect to see a $65,000 cost of goods sold if we only manage a sales figure of $100,000. That's 65%!
If these numbers seem completely off the wall, they are not at all unusual for out-of-control operations. The bad months are explained away with stories of blizzards, rainy days, traffic jams, competitor discounts, etc.
Your cost of sales should be almost completely variable. Food should not be consumed if there is no sale. Why do you use more food when you're slow?
Employee meals have a bigger impact. The fixed staff eats the same meal whether you are slow or busy. This should be minimal and measurable. Chronic waste due to over-ordering is a bigger cause. Reduce your "safety factor" when ordering during slower periods. Sometimes the weekday counts are too low to absorb food left from the busy weekend. If the weekend is a complete bust, freeze everything you can and value any perishables which can't be saved.
You may have a major theft problem. If you're not finding many dollars in the research above, you may have discovered a persistent loss due to theft. If the 45% month had $10,000 in theft and you eliminated this problem, the result would be 40% in an otherwise terrible month. The bad month would have allowed you a chance to discover a $120,000 annual loss.
Saturday, May 22, 2010
Accounting Impact on Cost Control
There are significant differences between financial accounting and management accounting goals. Financial accounting depends on accurate and consistent inventory valuations. Both methods require perfect purchase cutoffs. I consider the cutoff of purchasing activity to be the highest priority.
I am amused at operators who go to great lengths in valuing inventory items (3 places to the right of the decimal point) and also allow deliveries during the inventory count. My early career inventory work involved an inventory count during an active delivery time of day. The food cost percentage was sky high. An entire shipment of meat was included in purchases and excluded in the inventory counts.
Since the operation had shifted into meal service, the recently received meat was being consumed in meal production. The solution used by management involved adding the meat purchases to the inventory counts on the sheets. OK So why bother with increased accuracy on the average purchase price of a case or pound when you are careless with the actual count you use in your valuation? This is more common than many people realize.
A liquor thief used to begin his counts early in his shift while the dinner meal was in progress. All he had left at the end of the meal was the partial bottles in the main bar area. His Excel sheets were a complete joke. He had a count of 30 bottles on an item. I asked where the cases were and he said he meant to put 3 bottles. Since the company paid no attention to specific bottles, an error like this would allow him to steal 2 full cases undetected by the "inventory control" report.
At some time, usually once a year at year end, the higher ranking accountants enter the inventory fray and beat up the team on average purchase costs and a selection of inventory counts. They recommend 2 people on every month end count and careful price look-ups for average purchase prices.
Most theft occurs in central storage and in the top consumption areas: kitchen and main bar. In operations where the menu items are placed in service area storage for self-service, late shift over production is a often undetected form of theft. Good managers should take a count one hour before closing and a second count 10 minutes before closing time. If your count went up, you have a possible theft problem.
If your operation takes a truly accurate inventory only once a year, you are possibly burning 3 to 5 percent of sales in theft and waste (conservative estimate).
Some people purchase software systems to track perpetual inventory. Accurate beginning inventory counts are required in any perpetual calculation. Purchases must be entered immediately upon receipt if you need shift based reports.
A powerful cost accounting report may be produced weekly. Accurate counts taken during periods when deliveries are prohibited and the kitchen is closed are the key. Valuing these accurate counts should be consistent. If you use the last price paid, look up this cost. Software solutions may automatically use the last cost. Some of the more sophisticated solutions use average cost or FIFO.
If you follow this straight forward approach, your annual financial inventory valuation will be a snap.
I am amused at operators who go to great lengths in valuing inventory items (3 places to the right of the decimal point) and also allow deliveries during the inventory count. My early career inventory work involved an inventory count during an active delivery time of day. The food cost percentage was sky high. An entire shipment of meat was included in purchases and excluded in the inventory counts.
Since the operation had shifted into meal service, the recently received meat was being consumed in meal production. The solution used by management involved adding the meat purchases to the inventory counts on the sheets. OK So why bother with increased accuracy on the average purchase price of a case or pound when you are careless with the actual count you use in your valuation? This is more common than many people realize.
A liquor thief used to begin his counts early in his shift while the dinner meal was in progress. All he had left at the end of the meal was the partial bottles in the main bar area. His Excel sheets were a complete joke. He had a count of 30 bottles on an item. I asked where the cases were and he said he meant to put 3 bottles. Since the company paid no attention to specific bottles, an error like this would allow him to steal 2 full cases undetected by the "inventory control" report.
At some time, usually once a year at year end, the higher ranking accountants enter the inventory fray and beat up the team on average purchase costs and a selection of inventory counts. They recommend 2 people on every month end count and careful price look-ups for average purchase prices.
Most theft occurs in central storage and in the top consumption areas: kitchen and main bar. In operations where the menu items are placed in service area storage for self-service, late shift over production is a often undetected form of theft. Good managers should take a count one hour before closing and a second count 10 minutes before closing time. If your count went up, you have a possible theft problem.
If your operation takes a truly accurate inventory only once a year, you are possibly burning 3 to 5 percent of sales in theft and waste (conservative estimate).
Some people purchase software systems to track perpetual inventory. Accurate beginning inventory counts are required in any perpetual calculation. Purchases must be entered immediately upon receipt if you need shift based reports.
A powerful cost accounting report may be produced weekly. Accurate counts taken during periods when deliveries are prohibited and the kitchen is closed are the key. Valuing these accurate counts should be consistent. If you use the last price paid, look up this cost. Software solutions may automatically use the last cost. Some of the more sophisticated solutions use average cost or FIFO.
If you follow this straight forward approach, your annual financial inventory valuation will be a snap.
Friday, April 23, 2010
A Bigger Divisor Helps Your FC %
Don't overlook sales when reviewing your food cost results. There are several important reasons to scrutinize the divisor in the formula as much as the net purchases total. Your sales figure depends on covers, check average, promotions, coupons, discounts and lost revenue.
Lost revenue is related to menu items your service staff can serve a guest with no order entered in your POS system. Typical examples include slices of cake or pie, small pastries, coffee, tea, cocoa, soup, rolls and ice cream. Less common items include modifiers normally ordered through the POS system which have a small charge to the guest.
A second source of lost revenue involves unauthorized voids and price adjustments. I remember working with a family restaurant with a special price for ice cream sundaes for dinner patrons. Anyone visiting the restaurant for dinner was offered a sundae for 99 cents. After reviewing several POS data tables, I noticed late shift changes on many $3.99 items to $0.99. These patrons did not have dinner. They all paid cash. Their orders were changed from the full charge for the sundae to the dinner special price.
My annual estimate for this activity was $10,000. As you can imagine, these changes had to be made by a manager. The wait staff did not have the authority to amend closed checks. If the managers on shift were pocketing cash, you can be 100% confident the wait staff felt comfortable serving items not ordered through the POS system.
Chronic lost revenue won't show up in check averages. If this theft has been going on for years, the check averages will be consistent.
Lost revenue is related to menu items your service staff can serve a guest with no order entered in your POS system. Typical examples include slices of cake or pie, small pastries, coffee, tea, cocoa, soup, rolls and ice cream. Less common items include modifiers normally ordered through the POS system which have a small charge to the guest.
A second source of lost revenue involves unauthorized voids and price adjustments. I remember working with a family restaurant with a special price for ice cream sundaes for dinner patrons. Anyone visiting the restaurant for dinner was offered a sundae for 99 cents. After reviewing several POS data tables, I noticed late shift changes on many $3.99 items to $0.99. These patrons did not have dinner. They all paid cash. Their orders were changed from the full charge for the sundae to the dinner special price.
My annual estimate for this activity was $10,000. As you can imagine, these changes had to be made by a manager. The wait staff did not have the authority to amend closed checks. If the managers on shift were pocketing cash, you can be 100% confident the wait staff felt comfortable serving items not ordered through the POS system.
Chronic lost revenue won't show up in check averages. If this theft has been going on for years, the check averages will be consistent.
Wednesday, April 21, 2010
How Much Do We Need To Charge?
I received an email from a company with a large buyer of their tamales. The buyer pays $1.50 and they want to price the tamales to have a 30% cost of sales. Currently, they charge less than $3.00 for the tamales.
At $3.00, the cost of sales is 50%. If they could sell the $1.50 tamales for $5.00, they would hit their target. This is a 67% increase in selling price.
The tamale manufacturer could re-engineer the tamale at a $1.20 price point. If the seller raised the price to $3.60, they would be close to the target 30%. Do you think the customers would stand for 20% decrease in portion size and a 20% price increase?
The tamale manufacturer could offer a volume incentive. If the buyer hits a volume target, they could offer a discount. This discount could be paid monthly or quarterly. They could continue selling the tamales at $3.00. If the manufacturer produces the smaller portion for $1.20, they would have a 40% cost of sales.
Let's use a 20 cents incentive as an example. The buyer would achieve a 33% cost of sales if they hit the volume target ($1.20 minus $0.20).
At $3.00, the cost of sales is 50%. If they could sell the $1.50 tamales for $5.00, they would hit their target. This is a 67% increase in selling price.
The tamale manufacturer could re-engineer the tamale at a $1.20 price point. If the seller raised the price to $3.60, they would be close to the target 30%. Do you think the customers would stand for 20% decrease in portion size and a 20% price increase?
The tamale manufacturer could offer a volume incentive. If the buyer hits a volume target, they could offer a discount. This discount could be paid monthly or quarterly. They could continue selling the tamales at $3.00. If the manufacturer produces the smaller portion for $1.20, they would have a 40% cost of sales.
Let's use a 20 cents incentive as an example. The buyer would achieve a 33% cost of sales if they hit the volume target ($1.20 minus $0.20).
Thursday, April 01, 2010
Impact of Beverages
Most of my clients love to see the cost of their entrees, appetizers and sides come to light as we build the database. After completing the entrees, it is common to hear the managers state: "So our food cost % is in line."
The ideal cost of the entrees tend to be equal or slightly higher than the actual food cost %. Actual food cost % should be higher than ideal food cost % since no operation is perfect. If your actual food cost is below your ideal cost, your recipes need work.
Before answering the benchmark question, I like to ask whether non-alcoholic beverages are included in food sales or beverage sales. If the coffee, tea and soft drinks are included in the calculation of food cost %, the ideal food cost % will be much lower. As an example, a steak house with an overall food cost of 38% actually had an ideal entree food cost of 41%. The wait staff did a terrific job selling a low cost dessert course with pastries and hot beverages.
The overall ideal food cost was 35%.
Entrees tend to have a much higher ideal food cost % since they bear the cost of complimentary items like rolls and butter and they use large portions of the expensive protein items. Non-alcoholic beverages typically produce a favorable impact on food cost % when they are included in the calculation.
The answer to the "in line" question in the example was NO. Their 38% actual was lower than the 41% ideal entree cost. They should have been closer to the overall 35% target. Any number above 36.4% would mean a 4% variance or higher.
Should you eliminate non-alcoholic beverage sales from the calculation of food cost % each period? This will require some extra time evaluating use of milk, cream, sweeteners, lemons, etc. I find it is worth the effort. There are 2 benefits. You'll find some lost revenue in the non-alcoholic beverages category due to unauthorized comps. Food cost variances in the critical entrees won't be hidden by the impact of non-alcoholic beverages.
The ideal cost of the entrees tend to be equal or slightly higher than the actual food cost %. Actual food cost % should be higher than ideal food cost % since no operation is perfect. If your actual food cost is below your ideal cost, your recipes need work.
Before answering the benchmark question, I like to ask whether non-alcoholic beverages are included in food sales or beverage sales. If the coffee, tea and soft drinks are included in the calculation of food cost %, the ideal food cost % will be much lower. As an example, a steak house with an overall food cost of 38% actually had an ideal entree food cost of 41%. The wait staff did a terrific job selling a low cost dessert course with pastries and hot beverages.
The overall ideal food cost was 35%.
Entrees tend to have a much higher ideal food cost % since they bear the cost of complimentary items like rolls and butter and they use large portions of the expensive protein items. Non-alcoholic beverages typically produce a favorable impact on food cost % when they are included in the calculation.
The answer to the "in line" question in the example was NO. Their 38% actual was lower than the 41% ideal entree cost. They should have been closer to the overall 35% target. Any number above 36.4% would mean a 4% variance or higher.
Should you eliminate non-alcoholic beverage sales from the calculation of food cost % each period? This will require some extra time evaluating use of milk, cream, sweeteners, lemons, etc. I find it is worth the effort. There are 2 benefits. You'll find some lost revenue in the non-alcoholic beverages category due to unauthorized comps. Food cost variances in the critical entrees won't be hidden by the impact of non-alcoholic beverages.
Wednesday, February 24, 2010
Menu Analysis: Quick Checklist
Do you keep your old menus? If you have a stack somewhere in your office, try to locate the menu from 2004. I would suggest you put your current menu side-by-side and perform the following checklist:
1. Count the number of choices in each major category for both menus. Fewer is better in this environment. If your current menu has more selections in the appetizer and entree zones, make a list of the items added in the last 5 years.
2. How do the prices compare between the two menus? Normal inflation over the 5 year period was low but food commodity markets had tremendous volatility during the oil price boom and bust. Perhaps you have cut menu prices to encourage more customers. Look for the highest and lowest priced entrees and put this information in perspective.
In 2004, proper pricing of the highest priced entree was very important. Diners were spending more 5 years ago. Today, the lowest priced entree is quite important. Many diners are searching for value. You may not be charging enough for your budget selections.
3. Try to remember your previous pricing strategy. Look back 5 years ago and think of your game plan. Were you raising menu prices 10% each year? Maybe 5%. A 10% annual increase will add up to 60% over 5 years. The 5% annual increases amount to 28% over the same 5 years.
If your current prices are looking similar to 5 years ago, your average increase for the 10 year period is about half of the number from the 2004 strategy. Should you bring your costs in line with this new reality? In the short run, most companies have been forced to make drastic cuts. Take a long term view and decide what the future holds for the next 5 years.
In summary, this is a great time to review your most recent 5 years. Sometimes people look at the future through an optimistic lens. Other times (like now), the pessimistic lens is used. By looking at the complete picture, you will see things as a realist.
1. Count the number of choices in each major category for both menus. Fewer is better in this environment. If your current menu has more selections in the appetizer and entree zones, make a list of the items added in the last 5 years.
2. How do the prices compare between the two menus? Normal inflation over the 5 year period was low but food commodity markets had tremendous volatility during the oil price boom and bust. Perhaps you have cut menu prices to encourage more customers. Look for the highest and lowest priced entrees and put this information in perspective.
In 2004, proper pricing of the highest priced entree was very important. Diners were spending more 5 years ago. Today, the lowest priced entree is quite important. Many diners are searching for value. You may not be charging enough for your budget selections.
3. Try to remember your previous pricing strategy. Look back 5 years ago and think of your game plan. Were you raising menu prices 10% each year? Maybe 5%. A 10% annual increase will add up to 60% over 5 years. The 5% annual increases amount to 28% over the same 5 years.
If your current prices are looking similar to 5 years ago, your average increase for the 10 year period is about half of the number from the 2004 strategy. Should you bring your costs in line with this new reality? In the short run, most companies have been forced to make drastic cuts. Take a long term view and decide what the future holds for the next 5 years.
In summary, this is a great time to review your most recent 5 years. Sometimes people look at the future through an optimistic lens. Other times (like now), the pessimistic lens is used. By looking at the complete picture, you will see things as a realist.
Tuesday, February 09, 2010
Three Classic Menu Engineering Approaches
There are 3 classic menu engineering models taught in hotel/restaurant management courses. These models produce much different results when applied to a restaurant with a large number of entree choices.
Many people are familiar with the Star, Plowhorses, Puzzles, and Dogs approach which was developed by Kasavana and Smith. This model uses popularity as a function of gross contribution to split entrees into 4 quadrants. The popularity cutoff is 70% of the average number sold. If you sold 1,000 entrees and had 10 choices, any entree with over 70 sold is either a Star or a Plowhorse. The contribution test uses the mean. If the average contribution per plate is $12, items with higher profit would be labeled as a Star or a Puzzle (depending on popularity).
The second popular method was developed by Miller. He uses a similar popularity test but focuses on food cost % instead of gross margin. His Winners are popular menu items with a low food cost %.
Finally, Pavesic's menu engineering approach uses weighted statistics and looks at profitability as a function of food cost %. There is no 70% applied to his figures since the numbers are weighted by their overall impact on results.
I used the 3 methods to evaluate the menu at a seafood and steak dinner house with 41 entree choices. Comparing the ratings to my initial recommendations to the owner, I find myself most in sync with the Pavesic method. I tend to focus on profitability improvement through tighter food cost control. Someone employing the Pavesic method with reliable recipe cost data would come to many of the same conclusions I reached without running the statistics.
Miller rated a block of popular menu items as Winners when the Kasavana/Smith approach rating was Plowhorse and the Pavesic rating was Standard. Although I like the Miller approach for the current recession, entrees with lower gross margins may not rate a Winner class unless they achieve a low food cost % figure.
[My test data came from work I did in 2008 and the recession was mostly an autumn event in this seashore restaurant. The summer figures were in line with previous boom years and this season dominates the annual sales volume results.]
If I were advising the same operator today, the Miller approach would factor heavily in my recommendations. Since there is a ceiling on menu item prices imposed by the thrifty diners of 2010, restaurants need to rely more heavily on tight food cost control to achieve profits. I would expect to see fewer sales of high ticket menu items with high gross margins and high food cost % figures since the high selling prices which would support this profile have declined in popularity. Fewer diners are trying to impress with their choices. More diners are looking for a lower check at the end of the meal.
Many people are familiar with the Star, Plowhorses, Puzzles, and Dogs approach which was developed by Kasavana and Smith. This model uses popularity as a function of gross contribution to split entrees into 4 quadrants. The popularity cutoff is 70% of the average number sold. If you sold 1,000 entrees and had 10 choices, any entree with over 70 sold is either a Star or a Plowhorse. The contribution test uses the mean. If the average contribution per plate is $12, items with higher profit would be labeled as a Star or a Puzzle (depending on popularity).
The second popular method was developed by Miller. He uses a similar popularity test but focuses on food cost % instead of gross margin. His Winners are popular menu items with a low food cost %.
Finally, Pavesic's menu engineering approach uses weighted statistics and looks at profitability as a function of food cost %. There is no 70% applied to his figures since the numbers are weighted by their overall impact on results.
I used the 3 methods to evaluate the menu at a seafood and steak dinner house with 41 entree choices. Comparing the ratings to my initial recommendations to the owner, I find myself most in sync with the Pavesic method. I tend to focus on profitability improvement through tighter food cost control. Someone employing the Pavesic method with reliable recipe cost data would come to many of the same conclusions I reached without running the statistics.
Miller rated a block of popular menu items as Winners when the Kasavana/Smith approach rating was Plowhorse and the Pavesic rating was Standard. Although I like the Miller approach for the current recession, entrees with lower gross margins may not rate a Winner class unless they achieve a low food cost % figure.
[My test data came from work I did in 2008 and the recession was mostly an autumn event in this seashore restaurant. The summer figures were in line with previous boom years and this season dominates the annual sales volume results.]
If I were advising the same operator today, the Miller approach would factor heavily in my recommendations. Since there is a ceiling on menu item prices imposed by the thrifty diners of 2010, restaurants need to rely more heavily on tight food cost control to achieve profits. I would expect to see fewer sales of high ticket menu items with high gross margins and high food cost % figures since the high selling prices which would support this profile have declined in popularity. Fewer diners are trying to impress with their choices. More diners are looking for a lower check at the end of the meal.
Tuesday, January 26, 2010
Get the Facts Straight Before Taking Action
I'm not exactly sure when this recession will hit bottom. Most likely, the bottom will not be remarkably different (economically speaking) than today. The rate of job losses has dropped dramatically from the peak but we are still shedding jobs. Many employers have frozen wages and some have asked employees to take more days off without pay.
All of this belt tightening has made the American consumer afraid to spend money. This is not a completely negative fact of life. When Americans do not spend as much money on non-essential goods and services, the loss of demand drives prices down in the short run. If you were waiting to purchase replacement equipment, furniture, china, glassware, silverware, and kitchen utensils, you should consider making a small investment in the future now.
If you never started a customer loyalty program in the past, you are probably looking at your base clientele in your dining room this month. Patrons who have shunned the bad economy, their New Year's resolutions, volatile weather patterns and the new frugal approach to life here in the states are your fans. Get out in the dining room and say: "Hi! Thanks for joining us tonight. Would you like to join our new frequent dining club?"
January in a recession will often produce a low sales number. If you take the sales figure at the end of January and multiply by 12, you will have an excellent figure for forecasts, budgets and business plans. Could you break even if every month this year looked like this January? If you answer yes, you will make money this year and beyond. If you answer no, you have work to do.
Pretend it is never going to get better than this month. What would you do differently?
By forcing your company to confront the possibility of 2010 staying at the current levels, you will drive your team to innovate. These innovations will provide the path to the future and will create positive cash flow now.
If you are swimming in excess cash, should you open a new location? Like any recession, the market will over correct on the downside. Better days are in the future. If you wanted to open a new location in 2006 and decided to wait, today may be your lucky day. Construction costs have dropped, existing restaurant space is everywhere and experienced professionals are looking for employment.
All of this belt tightening has made the American consumer afraid to spend money. This is not a completely negative fact of life. When Americans do not spend as much money on non-essential goods and services, the loss of demand drives prices down in the short run. If you were waiting to purchase replacement equipment, furniture, china, glassware, silverware, and kitchen utensils, you should consider making a small investment in the future now.
If you never started a customer loyalty program in the past, you are probably looking at your base clientele in your dining room this month. Patrons who have shunned the bad economy, their New Year's resolutions, volatile weather patterns and the new frugal approach to life here in the states are your fans. Get out in the dining room and say: "Hi! Thanks for joining us tonight. Would you like to join our new frequent dining club?"
January in a recession will often produce a low sales number. If you take the sales figure at the end of January and multiply by 12, you will have an excellent figure for forecasts, budgets and business plans. Could you break even if every month this year looked like this January? If you answer yes, you will make money this year and beyond. If you answer no, you have work to do.
Pretend it is never going to get better than this month. What would you do differently?
By forcing your company to confront the possibility of 2010 staying at the current levels, you will drive your team to innovate. These innovations will provide the path to the future and will create positive cash flow now.
If you are swimming in excess cash, should you open a new location? Like any recession, the market will over correct on the downside. Better days are in the future. If you wanted to open a new location in 2006 and decided to wait, today may be your lucky day. Construction costs have dropped, existing restaurant space is everywhere and experienced professionals are looking for employment.
Sunday, January 24, 2010
Alternative Food Cost Benchmarks
Certainly, most restaurants use food cost as a % of sales as a key performance indicator. This week, an anonymous reader asked about tracking food cost in a different environment - a health care facility. He asked if it was advisable to use cost per patient per day in lieu of a percentage. I strongly recommend using the cost per patient day over a percentage benchmark.
In the remote site feeding segment, we tracked all costs per person per day. The advantages to management are greater in labor cost analysis using this method. Food cost generally is variable while labor has both a fixed and a variable component. With long term sales prospects dampened by the recession, tight control has helped many companies survive and prosper.
Is it possible to effectively use per cover cost analysis in a restaurant environment? Many chefs prefer to track menu item performance using gross margin per plate. Since the aim is to make more dollars vs. a higher percentage, they need to take care when analyzing other costs. Direct labor, direct operating expenses and overhead costs should follow suit. If the operation sells higher priced items with relatively high food cost %, the use of cost per cover for non-food expenses is necessary.
Operators should not mix the percentage method with the cost per cover approach.
Consistent use of the per cover method would require a reasonable profit per cover. Use a forecast of covers for the entire year to spread all fixed overhead and profit. In tight economic conditions, it pays to track fixed cost coverage and profit by cover. In addition to cost control, you need to review menu item pricing policy. The popular factor method may not provide you with the edge needed to survive a price war.
The entrees are the best menu items to use for cost coverage. Your entree cost should cover the recipe cost of the item, per cover amounts for direct labor and operating expenses, fixed overhead and profit. If a competitor price war forced you to adjust prices, you would have a clear number for pricing decisions. You could calculate precisely the impact of a penny, dime or dollar move in entree prices.
In the remote site feeding segment, we tracked all costs per person per day. The advantages to management are greater in labor cost analysis using this method. Food cost generally is variable while labor has both a fixed and a variable component. With long term sales prospects dampened by the recession, tight control has helped many companies survive and prosper.
Is it possible to effectively use per cover cost analysis in a restaurant environment? Many chefs prefer to track menu item performance using gross margin per plate. Since the aim is to make more dollars vs. a higher percentage, they need to take care when analyzing other costs. Direct labor, direct operating expenses and overhead costs should follow suit. If the operation sells higher priced items with relatively high food cost %, the use of cost per cover for non-food expenses is necessary.
Operators should not mix the percentage method with the cost per cover approach.
Consistent use of the per cover method would require a reasonable profit per cover. Use a forecast of covers for the entire year to spread all fixed overhead and profit. In tight economic conditions, it pays to track fixed cost coverage and profit by cover. In addition to cost control, you need to review menu item pricing policy. The popular factor method may not provide you with the edge needed to survive a price war.
The entrees are the best menu items to use for cost coverage. Your entree cost should cover the recipe cost of the item, per cover amounts for direct labor and operating expenses, fixed overhead and profit. If a competitor price war forced you to adjust prices, you would have a clear number for pricing decisions. You could calculate precisely the impact of a penny, dime or dollar move in entree prices.
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