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Thursday, February 18, 2010

Is Your Ideal Food Cost Number Real?

A veteran restaurateur asked me to check out his numbers to see if I could see a problem. Initially, he assumed the program he purchased was defective. As I started asking questions, my focus turned to yield data from his butchering department.

In addition to a very ambitious menu, this restaurant offers a top cuts of beef in a small retail shop. Along with T-Shirts and ball caps, customers can take home a filet mignon or porterhouse steak. The butchering department produces cuts of meat for both the restaurant and the retail shop.

The retail shop has a consistent cost of goods sold percentage.

After tracing the food cost percentage backwards, it became clear the restaurant suffered from butchering yield volatility. The accounting method utilized by the owner treats the butchering operation as part of the restaurant. Steaks are "sold" to the retail shop at cost. This cost is determined using a formula which has a standard yield and only varies with market price fluctuations.

The main issue is the normal volatility in yield (i.e. edible pounds as a function of as purchased pounds) is borne by the restaurant. The owner is using ideal cost data which assumes the yield is constant. One of the most popular large cuts has a "typical" yield of 61%. The actual results vary between 57% and 64%. The 61% standard occurs about 18% of the time. The rest of the time (82%), the butchering operation has a variance from the standard.

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When the yield is on the high side, the restaurant has a good week. The rest of the time, the restaurateur is scratching his head. The number one point to take from this story: he keeps tremendous records. I would never be able to explain this situation with clarity without his butchering archive. He keeps a three ring binder with a butcher yield sheet for each batch.

After I helped him tie the butchering yield data to his ideal usage model, the variance due to butcher yield declined and the problem was solved. Should we be happy with the virtual elimination of the variance? Probably not.

The previous uncertainty produced plenty of heated discussions between the production team members. These interactions produced a decent number of innovations over time. Now the calm waters have caused a level of indifference which never existed before the model was tweaked.

I personally enjoy variances. Many operators hate any variance from the ideal. They build recipe models which are designed to hide normal variances. When deciding on a yield, these people imagine the worst case scenario (57% in the operation above). By the time a variance is recognized using these reports, there is a huge problem.

The range between 57% and 64% is 7%. When expressed as a function of the low yield figure, this range is nearly one eighth. If the butcher was crooked, he could grab a box of meat for every eight when the yields are good. His theft would go completely undetected. The same restaurant may never get on the phone with the meat supplier and complain about the substandard yields. Inconsistent portion sizes would stay hidden as well.

So what is the best way to approach this situation? The restaurant needs to treat the butchering operation as a separate entity. In this entity, yield variances need to be front page news. Daily variance should be dealt with decisively and quickly. This butcher should "sell" portions to both the restaurant and the retail shop. These portions should be closely monitored using a POS system.


Elizabeth said...

I like the post with such a nice material which is much informative. Thanks.

Joe Dunbar said...

You are very welcome Elizabeth. Feel free to join in the conversation here about food cost control.


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