The essential table required to begin a professional food cost control system is the item list. This table needs to have the same information you see on the order guides from any national distributor, storage information and vendor information. In addition, I add several columns to help classify the manner items are purchased including frequency, bid (buy from lowest bidder) and impact. Impact data can be simplified into the classic A B C model.
The A items are high volume and high cost per pound or volume, the B items are either high volume or cost but not both, and the C items are low volume and cost. You will see a higher return on your invested time spent controlling A items.
A typical food item would have the fields below for each record:
Name: BEEF TENDERLOIN PSMO CHC 12-5#UP
Category: MEAT
Purchase Unit: CASE
Pack/Size: 12/5#UP
Catch Weight: YES
Weight/Case (AVG): 72.0
Cost/Pound: $8.00
Storage Method: REFRIGERATED
Inventory Location: WALKIN COOLER 1
Frequency: 7
Primary Supplier: Premium Meat Company
Bid: NO
Alternate Suppliers:
Impact: A
This records tells us we have a high impact meat item which is ordered by the case and invoiced based on catch weight. We use a single supplier and we order weekly. Based on our contract, we now pay $8 per pound. The tenderloin is stored in the main walkin cooler.
These essential fields help us with the food cost control in several ways. Beef tenderloin is a high volume item for this restaurant and the $8/pound is a relatively high cost.
This data is sufficient for general information. We would want to add fields to help out the staff working on ordering the meat. Demand forecast data is preferable to a par stock level for your A items. If you expected to serve 2,000 covers and on average 25% of patrons choose beef tenderloin, you need 500 portions of filet mignon for the week ahead. Depending on the size of the steaks, this case will yield either 72 steaks or 60 steaks. Our data shows 60% of patrons will choose the smaller steak (72/case) and 40% will choose the larger steak (60/case). We'll need 3 1/3 cases for the larger steaks and 4 1/6 cases for the smaller steaks. Since we can't order fractions of a case without a split penalty, we would order 8 cases.
Seasonal operators should not rely on par stock averages to purchase any A items or high volume B items in their inventory. Accurate forecasts are essential. Fortunately, the counts in your busy season will be higher and more reliable.
We will develop a data table to recap the information required to analyze A items in the next article - Food Cost Control Framework - Part 2.
Showing posts with label purchasing. Show all posts
Showing posts with label purchasing. Show all posts
Wednesday, July 27, 2011
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.
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).
Wednesday, April 15, 2009
Food Cost Techniques - Orders
The number one component in your weekly or monthly food cost percentage calculation is food purchases. This figure is modified by the net inventory change before you divide by sales. Many operators tell me they don't count inventory any more. I always ask them how they order food.
In every case, food service operators go to their storage locations when determining the order requirements. This activity is an inventory count. Although there may not be a formal report or a careful valuation, the person who checked the stock room, walkin cooler or freezer performed a count. In most cases, these counts are discarded once the food order has been completed.
Do you organize your food orders by category (e.g. produce, meat, seafood, dairy, etc.), by vendor, or by storage area (e.g. freezer, cooler, dry storage, etc.)? Do you have a day of the week organization? Perhaps you order produce twice a week on Monday and Thursday. You might replenish groceries once a week for high volume items and monthly for other items. Maybe you have become aware of a special on a shelf stable item. On the other hand, prices for some high volume items may be sky high this week.
If you phone in your orders, you may be on the phone with someone trying to blowout an over stocked item. Do you change your order on the spot to "take advantage" of this limited time offer? If you answer yes, how do you determine the impact on other items you need to order? The person on the other end of the phone line has taken over your order process.
Most operators have a decent price awareness. Some are acutely aware of any market shifts in their top volume items. These same operators may have a vague idea what the market conditions are on their low volume items. Who has the time to track all this activity? Time is money.
Every operation spends a significant amount of time each week ordering, receiving and storing food items. Much of the information used in these decisions is discarded once the order has been submitted. Spot counts, market prices, last minute deals, emergency orders, short shipments, poor quality rejections, and every day customer preference shifts are processed and the impact is seen in your invoices.
Do you have a feedback mechanism built into your control system to highlight ordering issues? If you don't have any feedback other than the goods arrived, you are missing another opportunity to improve your ordering process.
Five simple recommendations:
1. Develop order guides to fit your personal environment. Document the counts, par levels, and other notes. The notes should have details on weather conditions, seasonal peaks, etc.
2. Clearly mark your orders with any changes made during the phone call with the supplier. Use a different color ink to highlight these changes.
3. Organize the price quotes faxed each week on bid comparison sheets.
4. Document all specification issues and ask for credits when the delivery does not match your request.
5. Summarize this activity each week and use the information to improve the process.
Once you order food, the economic impact of the order is reflected in your food cost percentage. It is impossible for something you never ordered to spoil, be improperly portioned, stolen, or over produced. Spend less time in the long run by investing in organizing your ordering process today.
In every case, food service operators go to their storage locations when determining the order requirements. This activity is an inventory count. Although there may not be a formal report or a careful valuation, the person who checked the stock room, walkin cooler or freezer performed a count. In most cases, these counts are discarded once the food order has been completed.
Do you organize your food orders by category (e.g. produce, meat, seafood, dairy, etc.), by vendor, or by storage area (e.g. freezer, cooler, dry storage, etc.)? Do you have a day of the week organization? Perhaps you order produce twice a week on Monday and Thursday. You might replenish groceries once a week for high volume items and monthly for other items. Maybe you have become aware of a special on a shelf stable item. On the other hand, prices for some high volume items may be sky high this week.
If you phone in your orders, you may be on the phone with someone trying to blowout an over stocked item. Do you change your order on the spot to "take advantage" of this limited time offer? If you answer yes, how do you determine the impact on other items you need to order? The person on the other end of the phone line has taken over your order process.
Most operators have a decent price awareness. Some are acutely aware of any market shifts in their top volume items. These same operators may have a vague idea what the market conditions are on their low volume items. Who has the time to track all this activity? Time is money.
Every operation spends a significant amount of time each week ordering, receiving and storing food items. Much of the information used in these decisions is discarded once the order has been submitted. Spot counts, market prices, last minute deals, emergency orders, short shipments, poor quality rejections, and every day customer preference shifts are processed and the impact is seen in your invoices.
Do you have a feedback mechanism built into your control system to highlight ordering issues? If you don't have any feedback other than the goods arrived, you are missing another opportunity to improve your ordering process.
Five simple recommendations:
1. Develop order guides to fit your personal environment. Document the counts, par levels, and other notes. The notes should have details on weather conditions, seasonal peaks, etc.
2. Clearly mark your orders with any changes made during the phone call with the supplier. Use a different color ink to highlight these changes.
3. Organize the price quotes faxed each week on bid comparison sheets.
4. Document all specification issues and ask for credits when the delivery does not match your request.
5. Summarize this activity each week and use the information to improve the process.
Once you order food, the economic impact of the order is reflected in your food cost percentage. It is impossible for something you never ordered to spoil, be improperly portioned, stolen, or over produced. Spend less time in the long run by investing in organizing your ordering process today.
Thursday, February 28, 2008
Playing The Market
Do you try to time the market for your top center of the plate items?
Tolerance for using frozen protein items may be the key to your response. I have seen operators with huge outdoor freezers receive a truckload of meat shipped directly from Chicago. Prior to placing the order, they studied the Urner Barry Yellow Sheets and pulled the trigger at a favorable time.
This article is written for the other type of market play. Operators may receive calls from their meat and seafood suppliers in up markets asking if they want to lock in a high price before it goes higher. Some take the bait and lock a bad price for their busiest season. No freezer needed in this scenario. You simply agree to pay a high price for your key ingredients during your busiest period of the year.
Commodity markets climb when demand outstrips supply. Those who follow the futures markets look at long term trends like herd size and seasonal weather predictions. Recent gains in corn prices have made items sensitive to grain prices quite high.
These markets are typically difficult to trade for new entrants. Unless you have excellent information and see a major market anomaly, I would not recommend placing a futures hedge bet.
Let's look at some of the trends in the grains markets. I'm using information from Daily Futures including these charts:
Corn
Soybeans
Wheat
Both Corn and Soybeans are up strongly since October and the Wheat curve is parabolic. Will the markets for these grains redouble? Probably not. With the summer grilling season coming soon, it may not be a terrible time to stock your freezers. Certain beef items and grades are still a deal. Upward price pressure is still evident.
Click Here For More Information
In addition to my 100% free Food Cost Control Blog, I have started a second resource which will be offered for a limited time for $100 per year. This online resource will include many posts like Slow Day vs. Busy Day . These articles will not be typical on the free blog. Click the Buy Now button located on the upper left sidebar to join!
Tolerance for using frozen protein items may be the key to your response. I have seen operators with huge outdoor freezers receive a truckload of meat shipped directly from Chicago. Prior to placing the order, they studied the Urner Barry Yellow Sheets and pulled the trigger at a favorable time.
This article is written for the other type of market play. Operators may receive calls from their meat and seafood suppliers in up markets asking if they want to lock in a high price before it goes higher. Some take the bait and lock a bad price for their busiest season. No freezer needed in this scenario. You simply agree to pay a high price for your key ingredients during your busiest period of the year.
Commodity markets climb when demand outstrips supply. Those who follow the futures markets look at long term trends like herd size and seasonal weather predictions. Recent gains in corn prices have made items sensitive to grain prices quite high.
These markets are typically difficult to trade for new entrants. Unless you have excellent information and see a major market anomaly, I would not recommend placing a futures hedge bet.
Let's look at some of the trends in the grains markets. I'm using information from Daily Futures including these charts:
Corn
Soybeans
Wheat
Both Corn and Soybeans are up strongly since October and the Wheat curve is parabolic. Will the markets for these grains redouble? Probably not. With the summer grilling season coming soon, it may not be a terrible time to stock your freezers. Certain beef items and grades are still a deal. Upward price pressure is still evident.
Click Here For More Information
In addition to my 100% free Food Cost Control Blog, I have started a second resource which will be offered for a limited time for $100 per year. This online resource will include many posts like Slow Day vs. Busy Day . These articles will not be typical on the free blog. Click the Buy Now button located on the upper left sidebar to join!
Monday, February 25, 2008
Time For Burgers and Fries
Current market data for February 22, 2008 shows a better environment for restaurants with menus dominated by burgers and fries. Using a pub sized portion for the burger (8 ounces) and the french fries (8 ounces), these operators have picked up 3 cents since last year.
The price of soybean shortening has doubled. This unfavorable trend is offset by stable prices for frozen potatoes and ketchup and a decline in the ground beef price.
Market Data from Foodservice.com (www.foodservice.com) - An Online Community for Foodservice Operators was used in creating the chart.
Operators looking for greener grass in the other vegetable oil markets won't find much relief. Canola oil and corn oil are both way up since February 2007. I'm using Wenzel Menu Maker's oil-to-fries ratio of 8 pounds oil per 100 pounds of potatoes. The Wenzel model uses fresh potatoes. With today's innovative oil solutions, some operators may have an additional edge.
Click Here For More Information
In addition to my 100% free Food Cost Control Blog, I have started a second resource which will be offered for a limited time for $100 per year. This online resource will include many posts like Slow Day vs. Busy Day . These articles will not be typical on the free blog. Click the Buy Now button located on the upper left sidebar to join!
The price of soybean shortening has doubled. This unfavorable trend is offset by stable prices for frozen potatoes and ketchup and a decline in the ground beef price.
Market Data from Foodservice.com (www.foodservice.com) - An Online Community for Foodservice Operators was used in creating the chart.
Operators looking for greener grass in the other vegetable oil markets won't find much relief. Canola oil and corn oil are both way up since February 2007. I'm using Wenzel Menu Maker's oil-to-fries ratio of 8 pounds oil per 100 pounds of potatoes. The Wenzel model uses fresh potatoes. With today's innovative oil solutions, some operators may have an additional edge.
Click Here For More Information
In addition to my 100% free Food Cost Control Blog, I have started a second resource which will be offered for a limited time for $100 per year. This online resource will include many posts like Slow Day vs. Busy Day . These articles will not be typical on the free blog. Click the Buy Now button located on the upper left sidebar to join!
Monday, February 18, 2008
Food Prices Are Way Up!
In today's SmartBrief, there's an article about wholesale price increases for food quoting the National Restaurant Association data. The prices for food at the wholesale level have risen 7.3% since this time last year.
Although the article focuses on a sole proprietor who has found it difficult to raise menu prices, they mention the efforts of publically traded Panera Bread. It's too bad they didn't interview a pizzeria owner or a Mexican concept. The current market statistics available to subscribers at Foodservice.COM show Mozzarella Cheese has increased 49% in market price since last year.
Click Here For More Information
In addition to my 100% free Food Cost Control Blog, I have started a second resource which will be offered for a limited time for $100 per year. This online resource will include many posts like Slow Day vs. Busy Day . These articles will not be typical on the free blog. Click the Buy Now button located on the upper left sidebar to join!
Although the article focuses on a sole proprietor who has found it difficult to raise menu prices, they mention the efforts of publically traded Panera Bread. It's too bad they didn't interview a pizzeria owner or a Mexican concept. The current market statistics available to subscribers at Foodservice.COM show Mozzarella Cheese has increased 49% in market price since last year.
Click Here For More Information
In addition to my 100% free Food Cost Control Blog, I have started a second resource which will be offered for a limited time for $100 per year. This online resource will include many posts like Slow Day vs. Busy Day . These articles will not be typical on the free blog. Click the Buy Now button located on the upper left sidebar to join!
Wednesday, February 13, 2008
Prime Market Follow Up
In my recent post Prime Market Deal , the moves in the market prices for prime beef tenderloin were highlighted. We now have a new update.
The recent market update available at Foodservice.COM shows the market anomaly of the week ended 2/1/2008 reversed course in the following week. A 10.8% gain in the price for prime beef tenderloin wiped out most of the short term opportunity. It is possible to now place the 2/1/2008 market opportunity in better perspective.
Prime beef tenderloin market priced below $11 per pound is a bargain when put in the context of recent market activity. As I compose this post, oil prices are falling close to the $90 level. Since the grains market is linked to oil now due to the increased ethanol production, further volatility is likely.
It appears these short term weaknesses in prime beef prices represent a clear buying opportunity. Now is a good time to check your delivered price per pound and put it in relationship with the market.
Click Here For More Information
The recent market update available at Foodservice.COM shows the market anomaly of the week ended 2/1/2008 reversed course in the following week. A 10.8% gain in the price for prime beef tenderloin wiped out most of the short term opportunity. It is possible to now place the 2/1/2008 market opportunity in better perspective.
Prime beef tenderloin market priced below $11 per pound is a bargain when put in the context of recent market activity. As I compose this post, oil prices are falling close to the $90 level. Since the grains market is linked to oil now due to the increased ethanol production, further volatility is likely.
It appears these short term weaknesses in prime beef prices represent a clear buying opportunity. Now is a good time to check your delivered price per pound and put it in relationship with the market.
Click Here For More Information
Saturday, February 09, 2008
Prime Market Deal
Market prices for prime beef tenderloin has plummeted from last year's $14 plus levels to below $11 a pound. These are market prices so you won't see anything close to $10 on your invoices. It's possible for savvy high end operators to find a sweet spot. Normally, a Beef Tenderloin yields 6 nice steaks from a 6 pound piece. This is a huge drop in the cost per portion (almost 25%).
If a typical operation serves 1,000 steaks a week from the tenderloin, the savings is $3,500. Major dollars. Two factors seem to be in play. Oil has declined from the $100 per barrel level and the supply/demand mix has changed. Fewer people are buying prime filet in relation to the supply. I see this as logical. During the period of rising prices, many operators shifted from prime to choice. The market statistics on the excellent industry portal Foodservice.com for the week of February 1, 2008 support this observation.
The change in average price per pound for choice is down only 4.4% from last year's figure. This is a minor drop which can be accounted for in the modest recent energy cost improvement. In sharp contrast, the average price for prime is way down - over 24%.
How much would you pay for a wonderful prime Filet Mignon steak? For fantasy purposes, let's pretend our restaurant is right next to a major beef producer and we can get market prices. We'd need a selling price of $35 to offer the meat with some rolls and butter at a 33% food cost percentage. Back a year ago, we would need to offer the same steak for over $45 to obtain the 33% result. Many operations have increased their selling prices over the year. If they are charging the $45 plate charge, a 25% food cost percentage is possible.
Back to reality, most operators live far from the huge beef producers and pay a fair markup. The food cost percentages are far above my fantasy example. Regardless, if you locked in for the quarter with your supplier last week, you may have pulled the trigger at a great prime market time. Let's stay tuned to see if it was a good deal.
Click Here For More Information
If a typical operation serves 1,000 steaks a week from the tenderloin, the savings is $3,500. Major dollars. Two factors seem to be in play. Oil has declined from the $100 per barrel level and the supply/demand mix has changed. Fewer people are buying prime filet in relation to the supply. I see this as logical. During the period of rising prices, many operators shifted from prime to choice. The market statistics on the excellent industry portal Foodservice.com for the week of February 1, 2008 support this observation.
The change in average price per pound for choice is down only 4.4% from last year's figure. This is a minor drop which can be accounted for in the modest recent energy cost improvement. In sharp contrast, the average price for prime is way down - over 24%.
How much would you pay for a wonderful prime Filet Mignon steak? For fantasy purposes, let's pretend our restaurant is right next to a major beef producer and we can get market prices. We'd need a selling price of $35 to offer the meat with some rolls and butter at a 33% food cost percentage. Back a year ago, we would need to offer the same steak for over $45 to obtain the 33% result. Many operations have increased their selling prices over the year. If they are charging the $45 plate charge, a 25% food cost percentage is possible.
Back to reality, most operators live far from the huge beef producers and pay a fair markup. The food cost percentages are far above my fantasy example. Regardless, if you locked in for the quarter with your supplier last week, you may have pulled the trigger at a great prime market time. Let's stay tuned to see if it was a good deal.
Click Here For More Information
Monday, February 19, 2007
Number One Cause of High Food Cost
When your accountant or office manager hands you the monthly income statement, where do your eyes go first? Probably, you look at net income and then head back up top to see sales and food cost. If labor cost is a problem, you'll make that line a priority. When the net income is below budget, serious analysis begins.
I'd like to see a lot more analysis of super net income months. My bias comes from the high percentage of disappointments which follow an unbelievable profit in the previous month.
You can really dig deep into the numbers behind your weekly or monthly food cost calculations. A typical restaurant stocks over 800 food items and spends more on food than any other income statement item. Each of these ingredients has a unique mix of shelf life, popularity, storage requirements, preparation requirements, portion size, market conditions and delivery days. Savvy operators need to reorder these food items frequently due to food's perishable nature.
Improper ordering is the number one cause of high food cost. If you don't believe me, look at your accounting records. You'll find your worst food cost percentages are in slow months which follow an especially busy month. The lack of sales volume brings the problem into the light of day. Ordering problems get "solved" during busy periods since storage capacity is strained as patron counts soar.
It's important to recognize the coming reality as you move from a peak season to the off-peak period ahead. Order less food. You'll be forced to use more of your stocked items. Run some specials to clear frozen items. Produce and sell some soups with the overstocked produce. Above all you should not shift the cost of over ordering in the peak month to the next month. If your ending inventory is more than your expected consumption for the next two weeks (off season), you should ask the accountants to setup a reserve for waste and spoilage.
Look ahead when ordering food and your cost fluctuations will decrease.
I'd like to see a lot more analysis of super net income months. My bias comes from the high percentage of disappointments which follow an unbelievable profit in the previous month.
You can really dig deep into the numbers behind your weekly or monthly food cost calculations. A typical restaurant stocks over 800 food items and spends more on food than any other income statement item. Each of these ingredients has a unique mix of shelf life, popularity, storage requirements, preparation requirements, portion size, market conditions and delivery days. Savvy operators need to reorder these food items frequently due to food's perishable nature.
Improper ordering is the number one cause of high food cost. If you don't believe me, look at your accounting records. You'll find your worst food cost percentages are in slow months which follow an especially busy month. The lack of sales volume brings the problem into the light of day. Ordering problems get "solved" during busy periods since storage capacity is strained as patron counts soar.
It's important to recognize the coming reality as you move from a peak season to the off-peak period ahead. Order less food. You'll be forced to use more of your stocked items. Run some specials to clear frozen items. Produce and sell some soups with the overstocked produce. Above all you should not shift the cost of over ordering in the peak month to the next month. If your ending inventory is more than your expected consumption for the next two weeks (off season), you should ask the accountants to setup a reserve for waste and spoilage.
Look ahead when ordering food and your cost fluctuations will decrease.
Friday, June 16, 2006
Prime vs. Choice
I decided to take a look at the price differential between prime and choice grades for the popular beef cuts. The NAMP numbers for the 5 cuts are 112A, 174, 180, 184 and 189A. My source is www.foodservice.com and I used market data from early 2005 through this month. The sample includes every fourth report and my prices represent the averages. The chart shows average market cost per pound for each cut.
Porterhouse Steaks cut from prime Short Loin 174 cost 80% more than choice. New York Strip Steaks cut from prime Strip 1x1 180 cost 62% more than choice. Tenderloin looks like a bargain. Prime Tender 189A costs about 34% more than choice. Finally, a prime Sirloin Steak cut from a Top Butt 184 will cost about 8% more than choice.
Click Here For More Information
Porterhouse Steaks cut from prime Short Loin 174 cost 80% more than choice. New York Strip Steaks cut from prime Strip 1x1 180 cost 62% more than choice. Tenderloin looks like a bargain. Prime Tender 189A costs about 34% more than choice. Finally, a prime Sirloin Steak cut from a Top Butt 184 will cost about 8% more than choice.
Click Here For More Information
Thursday, June 15, 2006
One Dollar of Food Cost
In an earlier post Purchasing Dollar vs. Food Cost Percentage , the topic of dollar analysis of food cost was explored. When I say "dollar" in this context, I am referring to an entire year of food cost expressed in terms of one dollar.
There are many interesting ways to look at one dollar of food cost. One of the easiest starting points is vendor analysis. Find out how much of your food cost dollar is spent with each vendor. If you want to improve your overall results, start out with the top 3 to 5 vendors. Could competitive bidding or market-based pricing contracts help lower your costs with these high volume vendors?
You may want to answer this question with a more in depth view. A simple matrix could be used to analyze the dollar value by vendor for each major cost category. Every operation has certain categories which stand out. Steak houses would have a major part of their dollar spent with butchers and meat suppliers. Mexican concepts and pizzerias spend big amounts on dairy products and sauces. The dough ingredients and tortillas are high on their list.
The matrix would have a row for each major category. Many use the following categories: meat, seafood, produce, dairy, dry goods, frozen goods, breads and baked goods. I recommend a more focused list. A QSR chicken concept might have a category called fryer items. The actual ingredients in the category could include chicken tenders, frozen fries and the 35# containers of fryer oil. A pizza concept might have dough components, sauce components and toppings as their rows. Try to visualize the operation by production function.
Your top 3 to 5 vendors would make up the columns.
The entire matrix should equal one dollar. Find out which vendors supply you with the ingredients used in each phase of production. It's common to find cells in the matrix with values greater than or equal to a quarter. These cells are high impact activities. Focus your attention on these areas and vendors first.
On the other hand, there will be many cells with values below five cents. Don't devote excessive time on these activities. The use of flour would be a low level activity in many operations. If you make pizza dough or have a major bakery, flour could be part of a major impact cell.
Rank the cells and attack the big parts of your food dollar first. You'll get results faster with less effort.
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There are many interesting ways to look at one dollar of food cost. One of the easiest starting points is vendor analysis. Find out how much of your food cost dollar is spent with each vendor. If you want to improve your overall results, start out with the top 3 to 5 vendors. Could competitive bidding or market-based pricing contracts help lower your costs with these high volume vendors?
You may want to answer this question with a more in depth view. A simple matrix could be used to analyze the dollar value by vendor for each major cost category. Every operation has certain categories which stand out. Steak houses would have a major part of their dollar spent with butchers and meat suppliers. Mexican concepts and pizzerias spend big amounts on dairy products and sauces. The dough ingredients and tortillas are high on their list.
The matrix would have a row for each major category. Many use the following categories: meat, seafood, produce, dairy, dry goods, frozen goods, breads and baked goods. I recommend a more focused list. A QSR chicken concept might have a category called fryer items. The actual ingredients in the category could include chicken tenders, frozen fries and the 35# containers of fryer oil. A pizza concept might have dough components, sauce components and toppings as their rows. Try to visualize the operation by production function.
Your top 3 to 5 vendors would make up the columns.
The entire matrix should equal one dollar. Find out which vendors supply you with the ingredients used in each phase of production. It's common to find cells in the matrix with values greater than or equal to a quarter. These cells are high impact activities. Focus your attention on these areas and vendors first.
On the other hand, there will be many cells with values below five cents. Don't devote excessive time on these activities. The use of flour would be a low level activity in many operations. If you make pizza dough or have a major bakery, flour could be part of a major impact cell.
Rank the cells and attack the big parts of your food dollar first. You'll get results faster with less effort.
Click Here For More Information
Monday, May 22, 2006
Food Purchasing - Decomposed
Your purchasing decisions have the greatest impact on the food cost percentage. When I refer to purchasing, I do not mean expediting vendor orders. Often, poor forecasting can turn the purchasing function into a frenzied group of expeditors. The more time the purchasing team spends on follow up calls, the less time is available for vendor analysis, material standardization and negotiation.
Your purchasing director should have the time and resources necessary to perform the critical tasks of this function. The best purchasing directors are market savvy and have standard costs for all major items. These pros focus on tiny windows of market opportunity and make larger purchases when the conditions are favorable. Due to the perishable nature of many food items, they need to be completely aware of usage trends and near term forecasts.
I find the purchasing directors often have either a poor relationship with the executive chef or a phenomenal relationship. The great relationships produce the best results. These teams discuss upcoming demand and alternate specifications. The purchasing pros handle the supplier negotiations. The chef handles the menu and demand forecasts for key items.
In the manufacturing environment it is common to use an ABC stratification system. The "A" parts represent 10 to 15% of items and 70 to 75% of purchase volume. The "C" parts represent 70 to 75% of items and less than 10% of purchase volume. In the middle are the "B" parts. Typically, purchasing agents focus on the "A" parts and setup long term contracts with suppliers and manufacturers. A greater planning effort is devoted to the "A" parts.
Switching to our industry, I've found the top 25% of items will encompass a very large percentage of purchase volume. Depending on menu focus, their coverage varies from 60% to 90% of total purchases. If you study these items carefully, you will see three conditions develop.
The first condition will include items which seldom vary in price per pound or case. These items are plentiful, shelf stable and easier to monitor. Some items will vary depending on season and temporary weather conditions. Volatility is high when moving in and out of season. Finally, some items change in price constantly due to a variety of variables.
Within the top tier of items, often further stratification may be performed to isolate the top 10 or top 25 items. I would make an additional recommendation. Spend slightly less time on the items with steady price trends. Focus more efforts on the volatile items. Secondly, spend significant efforts on forecasts for items with very low shelf lives. Overstock of highly perishable items is to be avoided if at all possible.
A solid purchasing team with proper resources can make a major impact on your overall food cost percentage. It is possible to buy 10% less food for the same menu and sales level. For example, I have seen a company without a well managed purchase function drop from a 40% food cost percentage to a 36% figure. Similar results have been achieved by operators across industry segments.
A big question always comes up regarding the cost of such and effort. Most multi-unit groups have a well developed purchasing function since the numbers speak for themselves. Find the balance between the cost of improving purchasing results and the benefit using a simple formula.
Multiply your most recent 12 months of purchases by 10%. This result is the break even budget for a qualified purchasing director. Compare your result against HR market studies in your region.
A $3,000,000 volume of food sales with a 40% food cost percentage would justify an annual expenditure of $120,000 at break even. If you could hire a competent professional for $75,000, you would see a $45,000 benefit. That's a net benefit of 1.5% of sales. If your growing the concept, the return on investment will increase as your units increase since the benefit of purchasing efforts is multiplied by the group volume.
Click Here For More Information
Your purchasing director should have the time and resources necessary to perform the critical tasks of this function. The best purchasing directors are market savvy and have standard costs for all major items. These pros focus on tiny windows of market opportunity and make larger purchases when the conditions are favorable. Due to the perishable nature of many food items, they need to be completely aware of usage trends and near term forecasts.
I find the purchasing directors often have either a poor relationship with the executive chef or a phenomenal relationship. The great relationships produce the best results. These teams discuss upcoming demand and alternate specifications. The purchasing pros handle the supplier negotiations. The chef handles the menu and demand forecasts for key items.
In the manufacturing environment it is common to use an ABC stratification system. The "A" parts represent 10 to 15% of items and 70 to 75% of purchase volume. The "C" parts represent 70 to 75% of items and less than 10% of purchase volume. In the middle are the "B" parts. Typically, purchasing agents focus on the "A" parts and setup long term contracts with suppliers and manufacturers. A greater planning effort is devoted to the "A" parts.
Switching to our industry, I've found the top 25% of items will encompass a very large percentage of purchase volume. Depending on menu focus, their coverage varies from 60% to 90% of total purchases. If you study these items carefully, you will see three conditions develop.
The first condition will include items which seldom vary in price per pound or case. These items are plentiful, shelf stable and easier to monitor. Some items will vary depending on season and temporary weather conditions. Volatility is high when moving in and out of season. Finally, some items change in price constantly due to a variety of variables.
Within the top tier of items, often further stratification may be performed to isolate the top 10 or top 25 items. I would make an additional recommendation. Spend slightly less time on the items with steady price trends. Focus more efforts on the volatile items. Secondly, spend significant efforts on forecasts for items with very low shelf lives. Overstock of highly perishable items is to be avoided if at all possible.
A solid purchasing team with proper resources can make a major impact on your overall food cost percentage. It is possible to buy 10% less food for the same menu and sales level. For example, I have seen a company without a well managed purchase function drop from a 40% food cost percentage to a 36% figure. Similar results have been achieved by operators across industry segments.
A big question always comes up regarding the cost of such and effort. Most multi-unit groups have a well developed purchasing function since the numbers speak for themselves. Find the balance between the cost of improving purchasing results and the benefit using a simple formula.
Multiply your most recent 12 months of purchases by 10%. This result is the break even budget for a qualified purchasing director. Compare your result against HR market studies in your region.
A $3,000,000 volume of food sales with a 40% food cost percentage would justify an annual expenditure of $120,000 at break even. If you could hire a competent professional for $75,000, you would see a $45,000 benefit. That's a net benefit of 1.5% of sales. If your growing the concept, the return on investment will increase as your units increase since the benefit of purchasing efforts is multiplied by the group volume.
Click Here For More Information
Friday, March 17, 2006
Purchasing Dollar vs. Food Cost Percentage
One way to increase awareness of food cost control problems and opportunities is to assign a greater weight to significant ingredients and recipes. It is very difficult to have a meaningful discussion about a tenth (using food cost as a percentage of sales). In fact, I find many huge problems overlooked in operations with a singular focus on food cost percentage.
When analyzing the menu prices, they say: "percentages don't pay the bills, dollars do". The same is true in reverse. You don't pay suppliers a percentage of your sales. You pay them in dollars.
So we need a way to make our numbers and statistics have greater impact. A simple start is to shift the key factor from food cost percentage to purchasing dollar analysis. For an operation with a target cost of 33.3%, the result is a tripling of the values. Since the key factor is $1.00 vs. 33.3%, the supporting figures will triple as well.
It's probably best to give a short example before proceeding too far with this change. Imagine the overall food cost percentage is 33.3% and you have subgroups as follows: meat (12%), seafood (4%), dairy (3%), produce (7%), groceries (5.3%), and baked goods (2%). Now, we will shift to a breakdown of your purchase dollar by category: meat (36%), seafood (12%), dairy (9%), produce (21%), groceries (16%), and baked goods (6%).
We can plainly see the meat and seafood represent almost one half of purchases. Category analysis is a single factor. You can imagine how expanding the value assigned to other factors will improve visibility.
In the end, you'll hit a lower food cost percentage by assigning weights to issues in relationship to the entire purchasing dollar. I start every food cost control project with the objective of buying 10%* less food for the same sales level.
*Note: That's a 3.3% change in food cost percentage in an operation like the example above.
Click Here For More Information
When analyzing the menu prices, they say: "percentages don't pay the bills, dollars do". The same is true in reverse. You don't pay suppliers a percentage of your sales. You pay them in dollars.
So we need a way to make our numbers and statistics have greater impact. A simple start is to shift the key factor from food cost percentage to purchasing dollar analysis. For an operation with a target cost of 33.3%, the result is a tripling of the values. Since the key factor is $1.00 vs. 33.3%, the supporting figures will triple as well.
It's probably best to give a short example before proceeding too far with this change. Imagine the overall food cost percentage is 33.3% and you have subgroups as follows: meat (12%), seafood (4%), dairy (3%), produce (7%), groceries (5.3%), and baked goods (2%). Now, we will shift to a breakdown of your purchase dollar by category: meat (36%), seafood (12%), dairy (9%), produce (21%), groceries (16%), and baked goods (6%).
We can plainly see the meat and seafood represent almost one half of purchases. Category analysis is a single factor. You can imagine how expanding the value assigned to other factors will improve visibility.
In the end, you'll hit a lower food cost percentage by assigning weights to issues in relationship to the entire purchasing dollar. I start every food cost control project with the objective of buying 10%* less food for the same sales level.
*Note: That's a 3.3% change in food cost percentage in an operation like the example above.
Click Here For More Information
Saturday, December 24, 2005
Market Conditions and Bid History
I highly recommend www.foodservice.com and their wonderful market reports. In addition to the market data provided on their site, buyers can now access a number of excellent government sites. It's possible to get weekly updates on most perishable products. Daily quotes are available for the major markets.
Using the data to your advantage requires a simple comparison of current market conditions to supplier bids. A review of bid history will point out obvious red flag items: suppliers tend to react quickly to increases in costs at the market; suppliers tend to react slower to decreases in costs at the market; supplier salesmen tend to promote overstocked inventory items; supplier salesmen tend to promote higher margin alternatives. Careful scrutiny of bids in relation to the market prices will highlight opportunities during times of price volatility.
The best way to approach market price vs. bid price is to treat the market as a supplier. If you are inclined to work with spreadsheets, you can inflate the raw market prices with transportation and storage factors. Whether or not you use raw market costs or adjusted costs, the comparison will give you a negotiation advantage.
Before: "You're a bit high! Can't you do anything with your number?" Not too insightful.
After: "You are still quoting me the same as last week. The market corrected down 6% this week. Do you expect me to pay for your mistakes the previous week?"
Keeping a history of this activity is a great tool for vendor selection, budget forecasts and long term planning activities.
Using the data to your advantage requires a simple comparison of current market conditions to supplier bids. A review of bid history will point out obvious red flag items: suppliers tend to react quickly to increases in costs at the market; suppliers tend to react slower to decreases in costs at the market; supplier salesmen tend to promote overstocked inventory items; supplier salesmen tend to promote higher margin alternatives. Careful scrutiny of bids in relation to the market prices will highlight opportunities during times of price volatility.
The best way to approach market price vs. bid price is to treat the market as a supplier. If you are inclined to work with spreadsheets, you can inflate the raw market prices with transportation and storage factors. Whether or not you use raw market costs or adjusted costs, the comparison will give you a negotiation advantage.
Before: "You're a bit high! Can't you do anything with your number?" Not too insightful.
After: "You are still quoting me the same as last week. The market corrected down 6% this week. Do you expect me to pay for your mistakes the previous week?"
Keeping a history of this activity is a great tool for vendor selection, budget forecasts and long term planning activities.
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