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.
Showing posts with label inventory. Show all posts
Showing posts with label inventory. Show all posts
Sunday, September 19, 2010
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.
Tuesday, April 28, 2009
Food Cost Techniques - Counts
Most food service people are out in their storage areas each and every day. If they stopped to keep a record of their observations, they would have an incredible tool for solving the usage riddles each week. The normal tendency is to check the stock level of the highest volume items frequently. These same items make up a major portion of the cost of goods sold.
Production teams communicate with clipboard lists. The current shift needs to leave a sufficient stock of batch recipe items for the next shift. These clipboard sheets document the movement of major production items. Don't let the data go to waste.
So how do you make the data come alive? Match it with sales activity. Test your forecasts against the actual demand. Did you over produce? under produce? or were you in the zone? Keeping records will help you get in the zone and stay in the zone.
The keys to turning your walk around spot counts into an effective tool are record keeping, feedback and adjustments.
Production teams communicate with clipboard lists. The current shift needs to leave a sufficient stock of batch recipe items for the next shift. These clipboard sheets document the movement of major production items. Don't let the data go to waste.
So how do you make the data come alive? Match it with sales activity. Test your forecasts against the actual demand. Did you over produce? under produce? or were you in the zone? Keeping records will help you get in the zone and stay in the zone.
The keys to turning your walk around spot counts into an effective tool are record keeping, feedback and adjustments.
Thursday, July 19, 2007
Food Inventory Levels
One of the quickest ways to lower your food cost is to reduce the amount of food stored in the freezers and coolers. Since a lower food cost percentage is associated with a higher ending inventory value, it may not seem logical. However, a high inventory only helps out for one period. In the long run, you want as low an inventory level as possible.
With less food on the shelves, you'll reduce your spoilage cost. I'm often asked for benchmark information. With regard to inventory turns, I prefer at least 24 turns per year. I've seen operators with limited storage turn inventory 3 times a month. If you have over 3 weeks of cost of goods sold on the shelf, you have a problem.
If you run a restaurant with $3,000,000 in annual sales volume and a 33% food cost target, purchases would run $1,000,000. You should avoid ending inventories of $50,000 or higher. If you reduce the value to $40,000, you'll be in the zone. On the other hand, dropping to $25,000 may stress the ordering and receiving teams too much. Adjust the level over time and observe the impact on both food cost percentage and in stock outs.
Holding large quantities of perishable foods will tie up cash and increase the probability of "blowout specials" at dinner. I have had many disappointing meals during my travels which were highly recommended by the wait person. These employees were told to push items which were in danger of spoilage. I never return to restaurants after a disappointing experience with a highly promoted special.
Click Here For More Information
With less food on the shelves, you'll reduce your spoilage cost. I'm often asked for benchmark information. With regard to inventory turns, I prefer at least 24 turns per year. I've seen operators with limited storage turn inventory 3 times a month. If you have over 3 weeks of cost of goods sold on the shelf, you have a problem.
If you run a restaurant with $3,000,000 in annual sales volume and a 33% food cost target, purchases would run $1,000,000. You should avoid ending inventories of $50,000 or higher. If you reduce the value to $40,000, you'll be in the zone. On the other hand, dropping to $25,000 may stress the ordering and receiving teams too much. Adjust the level over time and observe the impact on both food cost percentage and in stock outs.
Holding large quantities of perishable foods will tie up cash and increase the probability of "blowout specials" at dinner. I have had many disappointing meals during my travels which were highly recommended by the wait person. These employees were told to push items which were in danger of spoilage. I never return to restaurants after a disappointing experience with a highly promoted special.
Click Here For More Information
Tuesday, August 29, 2006
Leave Labor Out Of Inventory
From time to time, my clients ask about the practice of including labor expenses in work in process inventory valuation. I am against this practice due to needless complexity. Those who decide to change their inventory policy always see a one period bump. However, in the long run, the impact of this policy change will be low.
The key issue in the decision is the perishable nature of food (both as purchased and prepped). Most food inventories run about 14 days of cost of sales or less. Within the total inventory value, at least 75% is typically stored as purchased. One fourth (about one half week) may be in the prep box. Adding another 20% to the value of the WIP items to account for labor cost will reduce cost of goods sold about 2.5% in month one (see calculation below).
Once you hit month two, the inventory change will be minimal. Now you have locked yourself into a needless monthly exercise. It is far more conservative to completely expense all labor in the month the hours were spent. Even seasonal operations should see very little benefit with adding labor to WIP.
The key to inventory valuation in our industry is proper tracking yields on the work in process items. A steak should be valued at a greater price per pound than the large cut of meat butchered to produce the steak. Divide the as purchased price per pound by the yield percentage. Go the extra step of adding a separate line item on your inventory sheets. Let the counters weigh the large untouched cuts and keep a separate count of the trimmed portions.
If you carefully track the entire butchering and prep process for yields, you will create enough data to properly determine standards for ideal usage calculations. Many operators fail to evaluate a large enough data set when creating these standards. Comparing week to week variances from solid standard yields will explain most of the differences in your food cost. Theft and spoilage is far more difficult to quantify. Employees rarely document waste and theft each period.
Calculation: (3.5 divided by 28) times 20% equals 2.5%.
Click Here For More Information
The key issue in the decision is the perishable nature of food (both as purchased and prepped). Most food inventories run about 14 days of cost of sales or less. Within the total inventory value, at least 75% is typically stored as purchased. One fourth (about one half week) may be in the prep box. Adding another 20% to the value of the WIP items to account for labor cost will reduce cost of goods sold about 2.5% in month one (see calculation below).
Once you hit month two, the inventory change will be minimal. Now you have locked yourself into a needless monthly exercise. It is far more conservative to completely expense all labor in the month the hours were spent. Even seasonal operations should see very little benefit with adding labor to WIP.
The key to inventory valuation in our industry is proper tracking yields on the work in process items. A steak should be valued at a greater price per pound than the large cut of meat butchered to produce the steak. Divide the as purchased price per pound by the yield percentage. Go the extra step of adding a separate line item on your inventory sheets. Let the counters weigh the large untouched cuts and keep a separate count of the trimmed portions.
If you carefully track the entire butchering and prep process for yields, you will create enough data to properly determine standards for ideal usage calculations. Many operators fail to evaluate a large enough data set when creating these standards. Comparing week to week variances from solid standard yields will explain most of the differences in your food cost. Theft and spoilage is far more difficult to quantify. Employees rarely document waste and theft each period.
Calculation: (3.5 divided by 28) times 20% equals 2.5%.
Click Here For More Information
Tuesday, June 20, 2006
Perpetual Inventory-Stratified Random Sampling
My final review with the RCA Corporate Audit staff involved the Accounts Receivable sub-ledger at the global telecommunications subsidiary. By the time I was asked to help, the job was already over the budgeted time and everyone was under the gun to get the report to management. To keep costs at a minimum, I requested interns from Rutgers Graduate School of Business.
During training conducted by the Arthur Young CPA firm, I became the statistical sampling "expert" when I corrected the instructor on the final day. Arthur Young had an excellent sampling tool and I asked my boss if we could try stratified random sampling to help with the project deadline.
Basically, a stratified sample focuses more attention on higher impact accounts (in this case customer records). We examined the printout of sample selections and found we were to examine the top 5 customers and a representative sample from each of the other strata. I won't discuss our results but I was promoted based on the report findings and the relative speed in which we concluded the review.
Many of the benefits of stratified sampling may be utilized in operations where a strong reliance is placed on perpetual inventory calculations. People using perpetual counts often need to make spot checks to verify the results of the ideal usage formula. So what items should you spot check?
I would recommend checking every item in your top 25 purchased goods list. Since you won't be scrutinized by Arthur Young accountants, it's up to you to decide how many additional items need checking between physical counts. To give you an idea of the power of sampling, we used around 350 accounts in a universe with tens of thousands. Our limited review located critical control issues and we brought them to management's attention in a timely manner.
If you have 1,000 items in stock, check 5 or less shelf stable dry goods. With your top 25, this will make 30 items. Try to randomly check another 25 to 50 (depending on time required). Now the fun begins as you try to reconcile the perpetual inventory level calculated vs. the actual amount on the shelf. The first five or six spot checks will point out obvious recipe errors and yield issues. Since you're sampling you should expect problems found for a particular class of items (for example produce) may require more intensive work on the entire class.
When you find a problem with portion control items and the recipes are solid, note the dates of the last physical count and the spot check date. Mark any of these problem items for increased scrutiny. You may consider control sheets located near the walkin coolers and freezers.
The use of spot checks and sampling techniques will greatly improve results in operations where physical counts are required monthly. If you count everything each week, your mid-week spot counts may be very brief and focused. Some operators count the top 25 daily. This should suffice for most weekly count operators.
An excellent additional benefit of perpetual inventory spot checks is the refinement of recipes used in the calculations. Accurate recipe costs and ingredient yields are requirements in more sophisticated menu engineering calculations.
Click Here For More Information
During training conducted by the Arthur Young CPA firm, I became the statistical sampling "expert" when I corrected the instructor on the final day. Arthur Young had an excellent sampling tool and I asked my boss if we could try stratified random sampling to help with the project deadline.
Basically, a stratified sample focuses more attention on higher impact accounts (in this case customer records). We examined the printout of sample selections and found we were to examine the top 5 customers and a representative sample from each of the other strata. I won't discuss our results but I was promoted based on the report findings and the relative speed in which we concluded the review.
Many of the benefits of stratified sampling may be utilized in operations where a strong reliance is placed on perpetual inventory calculations. People using perpetual counts often need to make spot checks to verify the results of the ideal usage formula. So what items should you spot check?
I would recommend checking every item in your top 25 purchased goods list. Since you won't be scrutinized by Arthur Young accountants, it's up to you to decide how many additional items need checking between physical counts. To give you an idea of the power of sampling, we used around 350 accounts in a universe with tens of thousands. Our limited review located critical control issues and we brought them to management's attention in a timely manner.
If you have 1,000 items in stock, check 5 or less shelf stable dry goods. With your top 25, this will make 30 items. Try to randomly check another 25 to 50 (depending on time required). Now the fun begins as you try to reconcile the perpetual inventory level calculated vs. the actual amount on the shelf. The first five or six spot checks will point out obvious recipe errors and yield issues. Since you're sampling you should expect problems found for a particular class of items (for example produce) may require more intensive work on the entire class.
When you find a problem with portion control items and the recipes are solid, note the dates of the last physical count and the spot check date. Mark any of these problem items for increased scrutiny. You may consider control sheets located near the walkin coolers and freezers.
The use of spot checks and sampling techniques will greatly improve results in operations where physical counts are required monthly. If you count everything each week, your mid-week spot counts may be very brief and focused. Some operators count the top 25 daily. This should suffice for most weekly count operators.
An excellent additional benefit of perpetual inventory spot checks is the refinement of recipes used in the calculations. Accurate recipe costs and ingredient yields are requirements in more sophisticated menu engineering calculations.
Click Here For More Information
Saturday, May 06, 2006
Inventory Control - Decomposed
A decade before spreadsheets, inventory forms would be produced from copiers each count period. The count team would often take their counts with no knowledge of the previous count or the current replacement cost. Once the sheets were turned in to the office, a team of accountants would update the unit costs and extend the counts to reach a value.
This costing method is a hybrid of the FIFO method. Since the staff would pull recent invoices for pricing information, they were closely approximating the pure FIFO value. Most inventories were rapidly calculated with calculators and streams of tape could be found on the floor and in waste baskets.
Today, many operators use spreadsheets in place of the copied forms and adding machine calculations. Where do the current operators go to find the prices to use in extensions? I always ask how people get their numbers and the responses are quite varied. Some people use the most recent costs much like the way mentioned above (last cost method or FIFO hybrid). Others don't bother to look up new prices. They use the same numbers from the previous inventory (old cost method or hybrid LIFO). A few ambitious souls go to the trouble of looking up all prices from a two week period. They use average prices (average cost method or hybrid FIFO).
On some spreadsheets, the analysts enter count numbers in columns with beginning inventory, received (often by day of week) and ending inventory. The net counts (i.e. BI+R-EI) are multiplied by a single number. The source of the numbers vary by operation.
I'm not a fan of this method. When I passed the CPA test in 1981, inventory valuation issues dominated the theory section of the test. It would be difficult for even the most aggressive CPA firm to allow the period-end purchases to be ignored in determining inventory valuation. There is currently a big discussion involving elimination of LIFO valuations. LIFO is effectively banned in England for inventory valuation.
By presenting purchases according to GAAP, many restaurants will improve their food cost figures and present better reports to the executives. I recommend valuing ending inventory based on FIFO. In addition, a prudent reserve for spoilage should be calculated and used as an offset to the asset value on the balance sheet.
Your month end inventories should not be altered with WIP figures which can't be substantiated. A fully cooked prime rib roast which wasn't served the previous night should not be valued highly. Freezer burn could lower the value of lobster tails, shrimp, fin fish and meat. Don't value items which may only be used in a soup the same as those received fresh the same day.
Inventory valuation should be consistent from period to period. The value should be conservatively calculated. Counts should be accurate and the counting day should be delivery free if possible. It is best to use count personnel who have no role in purchasing and production.
Expensive items should be counted frequently. The month end accounting cutoff should produce few surprises on your top 25 items (often the top 25 items will account for over 50% of annual purchases). Daily counts on these key items will eliminate most inventory errors and will improve ordering and usage results.
Spend a lot of time designing count sheets for the freezers. No mathematical calculations should be performed while shivering count teams go through the shelves. The sheets should include every possible way to count the critical inventory items. Shrimp 16-20 may be on the sheet as case, box, pound, tray (for pre-portioned menu items) and portion. Just enter the counts and present the F&B controller with the sheets. Standard ratios should be used for portions.
Spend more time in the freezer than you do estimating the amount of dry spices in the containers. Some chefs expense spices and keep expensive saffron under lock and key. Check dates on any package with a date. Don't do this every month in the dry storage. Make a rotation schedule for these items. I've seen expiration dates more than a year past on some dry stock.
Count the stock early in the morning if possible. I am totally against the beer guzzling crew waiting for the door to close on the final customers before racing through the counts. Unfortunately, this happens too often.
Finally, if you want your inventory valuation to have more meaning you should count all stock weekly (on Monday morning). Consistently calculated weekly inventories will help you focus on chronic cost issues like over buying and over portioning and keep discussion of inventory errors from the management meetings.
This costing method is a hybrid of the FIFO method. Since the staff would pull recent invoices for pricing information, they were closely approximating the pure FIFO value. Most inventories were rapidly calculated with calculators and streams of tape could be found on the floor and in waste baskets.
Today, many operators use spreadsheets in place of the copied forms and adding machine calculations. Where do the current operators go to find the prices to use in extensions? I always ask how people get their numbers and the responses are quite varied. Some people use the most recent costs much like the way mentioned above (last cost method or FIFO hybrid). Others don't bother to look up new prices. They use the same numbers from the previous inventory (old cost method or hybrid LIFO). A few ambitious souls go to the trouble of looking up all prices from a two week period. They use average prices (average cost method or hybrid FIFO).
On some spreadsheets, the analysts enter count numbers in columns with beginning inventory, received (often by day of week) and ending inventory. The net counts (i.e. BI+R-EI) are multiplied by a single number. The source of the numbers vary by operation.
I'm not a fan of this method. When I passed the CPA test in 1981, inventory valuation issues dominated the theory section of the test. It would be difficult for even the most aggressive CPA firm to allow the period-end purchases to be ignored in determining inventory valuation. There is currently a big discussion involving elimination of LIFO valuations. LIFO is effectively banned in England for inventory valuation.
By presenting purchases according to GAAP, many restaurants will improve their food cost figures and present better reports to the executives. I recommend valuing ending inventory based on FIFO. In addition, a prudent reserve for spoilage should be calculated and used as an offset to the asset value on the balance sheet.
Your month end inventories should not be altered with WIP figures which can't be substantiated. A fully cooked prime rib roast which wasn't served the previous night should not be valued highly. Freezer burn could lower the value of lobster tails, shrimp, fin fish and meat. Don't value items which may only be used in a soup the same as those received fresh the same day.
Inventory valuation should be consistent from period to period. The value should be conservatively calculated. Counts should be accurate and the counting day should be delivery free if possible. It is best to use count personnel who have no role in purchasing and production.
Expensive items should be counted frequently. The month end accounting cutoff should produce few surprises on your top 25 items (often the top 25 items will account for over 50% of annual purchases). Daily counts on these key items will eliminate most inventory errors and will improve ordering and usage results.
Spend a lot of time designing count sheets for the freezers. No mathematical calculations should be performed while shivering count teams go through the shelves. The sheets should include every possible way to count the critical inventory items. Shrimp 16-20 may be on the sheet as case, box, pound, tray (for pre-portioned menu items) and portion. Just enter the counts and present the F&B controller with the sheets. Standard ratios should be used for portions.
Spend more time in the freezer than you do estimating the amount of dry spices in the containers. Some chefs expense spices and keep expensive saffron under lock and key. Check dates on any package with a date. Don't do this every month in the dry storage. Make a rotation schedule for these items. I've seen expiration dates more than a year past on some dry stock.
Count the stock early in the morning if possible. I am totally against the beer guzzling crew waiting for the door to close on the final customers before racing through the counts. Unfortunately, this happens too often.
Finally, if you want your inventory valuation to have more meaning you should count all stock weekly (on Monday morning). Consistently calculated weekly inventories will help you focus on chronic cost issues like over buying and over portioning and keep discussion of inventory errors from the management meetings.
Friday, May 05, 2006
Legacy Food Cost
Have you checked your freezers lately? What's in our collective freezer space? Many people create short term profits by freezing mistakes.
Imagine paying for an air shipment from Hawaii for a large purchase of freshly caught fish. Next, the fish hit the menu on advertised specials. Despite big crowds, you have sold only half of the shipment and the fish may spoil. What happens to the rest of the fish? Actually, I found them with an owner I was helping during an unannounced inventory. They were frozen solid. The profit was frozen too for another month.
Outside behind the same restaurant was a much larger freezer. It was loaded with 20 other mistakes. Freezer burned crab legs, ground beef in a box marked tenderloin, a variety of other "fresh" fish and some year-old lamb racks all scattered throughout the big box.
The unusable food in the outside freezer was valued at $10,000. This legacy food cost was pushed into the future at a seasonal resort restaurant. The chef's strategy was effective in spreading mediocre results over a long period of time.
Click Here For More Information
Imagine paying for an air shipment from Hawaii for a large purchase of freshly caught fish. Next, the fish hit the menu on advertised specials. Despite big crowds, you have sold only half of the shipment and the fish may spoil. What happens to the rest of the fish? Actually, I found them with an owner I was helping during an unannounced inventory. They were frozen solid. The profit was frozen too for another month.
Outside behind the same restaurant was a much larger freezer. It was loaded with 20 other mistakes. Freezer burned crab legs, ground beef in a box marked tenderloin, a variety of other "fresh" fish and some year-old lamb racks all scattered throughout the big box.
The unusable food in the outside freezer was valued at $10,000. This legacy food cost was pushed into the future at a seasonal resort restaurant. The chef's strategy was effective in spreading mediocre results over a long period of time.
Click Here For More Information
Tuesday, February 21, 2006
The Art and Science of Receiving
When I think of great receiving controls, I tend to remember our top client site from my days at Boatel. The move from the old green sheets with columns for food categories, vendor information and dates to Lotus 123 spreadsheets was huge. I quickly learned the Lotus commands for lookups, data queries and string manipulation.
I entered two years of inventory history into a comparative spreadsheet. Frankly, the results did not justify the effort. There were consistency issues, lots of additions written on the back of each sheet, pricing problems and little usable data.
As I visit accounts, I see where people have taken the time to create pie charts on inventory value by category. There's nothing very exciting about the final inventory value in most cases.
All the action is in the purchasing history. Did we get hosed by a meat supplier? Why did we buy so many perishable salad ingredients on a down week? Could we have used some of our excess freezer stock more effectively? Now these are high impact issues.
Once the receiving system was in place (see Traveling Accounts Payable Clerk post), I created a weekly recap by category of the purchases by day. After entering several months of receiving history, trends started to emerge. I would look for unusual circumstances, pull the invoices and try to explain the strategy for the week. Whenever I could not come up with a decent explanation for a particular purchase, I would review the activity with our regional General Manager.
It's essential to talk about great decisions as well as poor decisions. Repeating great decisions will produce more profit and avoiding costly repeats will save money. I still like a two year history for most analyses.
Quality issues are at the heart of receiving and proper inspection is required for any commodity item. You do not have to open each jar of branded mayonnaise. However, you should open the produce boxes, the meat cases and all seafood containers. Weight is a big factor. It's good to make scales readily available. Now let's get sensory.
I used to enjoy watching receiving at a deli in New York famous for smoked fish. All of my New York clients serving smoked fish menu items used the same three top smoke houses. In addition to the big 3, many smaller specialists have high quality smoked fish. It takes training to discern great, top of the heap, creme de la creme smoked salmon or sturgeon. The process at this client was a ritual.
The delivery man would be directed over to the far end of the deli. There he would take a side of the salmon out for inspection. This fish was then smelled (deeply), stroked, prodded gently and finally tasted. Did the smoker over salt the fish? Is the texture too soft? Maybe the taste is too smoky. Normally, the answers to each question was perfect saltiness, buttery texture and just a hint of smoke. These are top quality suppliers. However, I did see rejections. Too much salt was often the reason.
These guys were true artisans. When I would visit an account which paid zero attention to the occasional purchase of smoked fish from the same suppliers, the difference was enormous. Many of the others simply purchased sliced smoked fish by the pound. You never see these guys highly ranked in Zagat's survey in the deli category.
I entered two years of inventory history into a comparative spreadsheet. Frankly, the results did not justify the effort. There were consistency issues, lots of additions written on the back of each sheet, pricing problems and little usable data.
As I visit accounts, I see where people have taken the time to create pie charts on inventory value by category. There's nothing very exciting about the final inventory value in most cases.
All the action is in the purchasing history. Did we get hosed by a meat supplier? Why did we buy so many perishable salad ingredients on a down week? Could we have used some of our excess freezer stock more effectively? Now these are high impact issues.
Once the receiving system was in place (see Traveling Accounts Payable Clerk post), I created a weekly recap by category of the purchases by day. After entering several months of receiving history, trends started to emerge. I would look for unusual circumstances, pull the invoices and try to explain the strategy for the week. Whenever I could not come up with a decent explanation for a particular purchase, I would review the activity with our regional General Manager.
It's essential to talk about great decisions as well as poor decisions. Repeating great decisions will produce more profit and avoiding costly repeats will save money. I still like a two year history for most analyses.
Quality issues are at the heart of receiving and proper inspection is required for any commodity item. You do not have to open each jar of branded mayonnaise. However, you should open the produce boxes, the meat cases and all seafood containers. Weight is a big factor. It's good to make scales readily available. Now let's get sensory.
I used to enjoy watching receiving at a deli in New York famous for smoked fish. All of my New York clients serving smoked fish menu items used the same three top smoke houses. In addition to the big 3, many smaller specialists have high quality smoked fish. It takes training to discern great, top of the heap, creme de la creme smoked salmon or sturgeon. The process at this client was a ritual.
The delivery man would be directed over to the far end of the deli. There he would take a side of the salmon out for inspection. This fish was then smelled (deeply), stroked, prodded gently and finally tasted. Did the smoker over salt the fish? Is the texture too soft? Maybe the taste is too smoky. Normally, the answers to each question was perfect saltiness, buttery texture and just a hint of smoke. These are top quality suppliers. However, I did see rejections. Too much salt was often the reason.
These guys were true artisans. When I would visit an account which paid zero attention to the occasional purchase of smoked fish from the same suppliers, the difference was enormous. Many of the others simply purchased sliced smoked fish by the pound. You never see these guys highly ranked in Zagat's survey in the deli category.
Monday, February 13, 2006
Traveling Accounts Payable Clerk
Shortly after finding the lost truckload of eggs ( see Who is Fred Hardy? post), I went to our sites to strengthen receiving controls. At one account, a pile of old bills was hidden beneath the telephone book. Manilla folders loaded with unpaid invoices were everywhere.
Starting in Western Colorado, I setup a new set of controls for handling receiving, inspection and documention. Even today, it's important to balance automation with proper documentation. Many of the controls we used then would help most operators.
For the office, buy a set of six plastic baskets and label them MEAT/FISH, PRODUCE, DAIRY, GROCERIES, PAPER/CHEMICALS, OTHER. Set up a spreadsheet or column pad with Supplier, Invoice Number, Date and the categories on the basket. Use a separate spreadsheet for each week. If you handle alcoholic beverages, make a column for BEER, WINE and LIQUOR.
On the receiving dock, get a large basket and label it TODAY'S DELIVERIES. All shipping documents will be temporarily stored in the basket. You'll also need a clipboard (no spreadsheet this time). On the clipboard, you'll need a sheet with columns SUPPLIER, INVOICE, AMOUNT, RECEIVED BY. Feel free to add other columns but make sure there is a RECEIVED BY column.
For each delivery, the responsible person should examine every item for specification, price, quantity and condition. All rejected goods should be clearly marked and initialed. The person observing the delivery needs to sign off on the invoice and on the sheet. They should fill in the basic information on the clipboard log. At the end of the receiving period, they should total the amounts on the log and in the invoice bin. The adding machine tape for each should be initialed and included in the invoice basket. All of the paper work should go to the office the same day.
The office person should feed the category baskets with the invoices. Check each invoice for the appropriate signature and notations before the account distribution. If there are any invoices with no signature, have the manager of the receiving person sign off on the invoice. They will need to go to the storage area and make sure the goods were received. Make a note of the Supplier and the delivery person if possible.
For each basket, run an adding machine tape. Initial the tape and mark it with the category. Finally, make a summary tape totaling all categories. The total should agree with the receiving dock total. Investigate all discrepancies, credits, missing numbers, etc.
Now you can complete the spreadsheet or column sheet for the day. Print or copy the sheet and staple all initialed tapes to the document.
Our office manager Barb always called me the Traveling Accounts Payable Clerk because I started every site visit checking the files for this information. After achieving a food cost 20% below budget ($4.80 per manday vs. $6.00), my boss had me visit every site with substandard numbers.
Starting in Western Colorado, I setup a new set of controls for handling receiving, inspection and documention. Even today, it's important to balance automation with proper documentation. Many of the controls we used then would help most operators.
For the office, buy a set of six plastic baskets and label them MEAT/FISH, PRODUCE, DAIRY, GROCERIES, PAPER/CHEMICALS, OTHER. Set up a spreadsheet or column pad with Supplier, Invoice Number, Date and the categories on the basket. Use a separate spreadsheet for each week. If you handle alcoholic beverages, make a column for BEER, WINE and LIQUOR.
On the receiving dock, get a large basket and label it TODAY'S DELIVERIES. All shipping documents will be temporarily stored in the basket. You'll also need a clipboard (no spreadsheet this time). On the clipboard, you'll need a sheet with columns SUPPLIER, INVOICE, AMOUNT, RECEIVED BY. Feel free to add other columns but make sure there is a RECEIVED BY column.
For each delivery, the responsible person should examine every item for specification, price, quantity and condition. All rejected goods should be clearly marked and initialed. The person observing the delivery needs to sign off on the invoice and on the sheet. They should fill in the basic information on the clipboard log. At the end of the receiving period, they should total the amounts on the log and in the invoice bin. The adding machine tape for each should be initialed and included in the invoice basket. All of the paper work should go to the office the same day.
The office person should feed the category baskets with the invoices. Check each invoice for the appropriate signature and notations before the account distribution. If there are any invoices with no signature, have the manager of the receiving person sign off on the invoice. They will need to go to the storage area and make sure the goods were received. Make a note of the Supplier and the delivery person if possible.
For each basket, run an adding machine tape. Initial the tape and mark it with the category. Finally, make a summary tape totaling all categories. The total should agree with the receiving dock total. Investigate all discrepancies, credits, missing numbers, etc.
Now you can complete the spreadsheet or column sheet for the day. Print or copy the sheet and staple all initialed tapes to the document.
Our office manager Barb always called me the Traveling Accounts Payable Clerk because I started every site visit checking the files for this information. After achieving a food cost 20% below budget ($4.80 per manday vs. $6.00), my boss had me visit every site with substandard numbers.
Saturday, January 07, 2006
Who Is Fred Hardy?
My first Visit to Syncrude was in May 1981. It was my job to visit the site and make sure there were proper internal controls. Syncrude was a huge project involved in mining oil sand and converting the ore into crude oil. We offered food service and housekeeping for over 3,000 workers.
The month end inventory was scheduled for the next day. I went on a tour of the food service operation, met the site managers, ate dinner and went to sleep.
Early the next day, I arose and walked to the office. Our office manager gave me the count sheets. We divided up the 30 sheets between 4 count teams.
It was necessary to invalidate the initial count due to an unauthorized delivery. I don't like deliveries during month end inventory counts. This made me quite unpopular.
We finally completed the counts and took the sheets back to the office. Everyone began using their calculators at a furious pace. I asked everyone to total each page. We finished up in 30 minutes. Using the previous inventory and the purchase information, I calculated the food cost. The number was way high.
I took a quick look at each page and noticed the dairy figure was much higher than normal. In a quick review of dairy purchases, I noticed a delivery the previous day of an entire truckload of eggs. The inventory sheet had a zero count for eggs. After asking why the eggs were not on the sheet, I was told there was no delivery the previous day. As I held the invoice in my hand, I noted the signature: F. Hardy, Manager.
I asked "Who is F. Hardy?" The regional manager said it was Fred Hardy. When I asked to speak with Fred, they said he was vacationing for two weeks. He would be back in 8 days. "So how did his signature get on this invoice?"
After a long pause, the assistant site manager produced a rubber stamp from the desk with an inverted F. Hardy on the back. I threw it in the garbage.
To complete the story, the eggs WERE delivered the day before. The problem was they went to our competitor's site down the road (another large oil sands project). The invoice was for $5,000.
I'm really big on receiving controls. HUGE!!!
The month end inventory was scheduled for the next day. I went on a tour of the food service operation, met the site managers, ate dinner and went to sleep.
Early the next day, I arose and walked to the office. Our office manager gave me the count sheets. We divided up the 30 sheets between 4 count teams.
It was necessary to invalidate the initial count due to an unauthorized delivery. I don't like deliveries during month end inventory counts. This made me quite unpopular.
We finally completed the counts and took the sheets back to the office. Everyone began using their calculators at a furious pace. I asked everyone to total each page. We finished up in 30 minutes. Using the previous inventory and the purchase information, I calculated the food cost. The number was way high.
I took a quick look at each page and noticed the dairy figure was much higher than normal. In a quick review of dairy purchases, I noticed a delivery the previous day of an entire truckload of eggs. The inventory sheet had a zero count for eggs. After asking why the eggs were not on the sheet, I was told there was no delivery the previous day. As I held the invoice in my hand, I noted the signature: F. Hardy, Manager.
I asked "Who is F. Hardy?" The regional manager said it was Fred Hardy. When I asked to speak with Fred, they said he was vacationing for two weeks. He would be back in 8 days. "So how did his signature get on this invoice?"
After a long pause, the assistant site manager produced a rubber stamp from the desk with an inverted F. Hardy on the back. I threw it in the garbage.
To complete the story, the eggs WERE delivered the day before. The problem was they went to our competitor's site down the road (another large oil sands project). The invoice was for $5,000.
I'm really big on receiving controls. HUGE!!!
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