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.
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Friday, March 17, 2006
Wednesday, March 15, 2006
Yield Analysis
If you expect to hit a consistent food cost percentage, make sure you actually receive everything you've paid for on all the invoices.
Once the goods have been safely stored in freezers, coolers and dry storerooms, the next biggest source of variance is production. Over production is a huge issue in food service since the value of produced food declines rapidly. Finished products should be served as intended whenever possible. You can't ask someone to pay a premium price for a twice roasted piece of meat.
All production starts in the prep phase and the most expensive mistakes are generally made with protein items. Perhaps you need to slice a peeled tenderloin into 8 ounce steaks. Maybe you are a gambler and have decided to butcher a veal rack. Generally, every operation has at least one major prep item which significantly impacts food cost.
If you hit the shore, most good operators can tell you how much it costs to make a crab cake (based on the most recent delivery). The deli managers can see the cost of a sandwich change based on examining the exterior fat on the briskets. Even french fries have a tendency to yield below average portions.
The one item I find lacking in the prep and butchering operation is a sense of standard yield. People seem to be aware of major discrepancies. If the short loin yielded 75% instead of 81%, there is plenty of discussion but not many know their cost of goods sold will be 8% higher.
A lack of standard yields turns many problems into anecdotal discussions in the weekly management meetings.
Try to develop standards and track actual results against these figures. You'll start to see why a particular vendor always has a lower price per pound. You will develop an awareness of delivery mistakes which allow you to request and receive credits.
Pay the right price for what you actually receive and make sure you get the precise standard expected.
Once the goods have been safely stored in freezers, coolers and dry storerooms, the next biggest source of variance is production. Over production is a huge issue in food service since the value of produced food declines rapidly. Finished products should be served as intended whenever possible. You can't ask someone to pay a premium price for a twice roasted piece of meat.
All production starts in the prep phase and the most expensive mistakes are generally made with protein items. Perhaps you need to slice a peeled tenderloin into 8 ounce steaks. Maybe you are a gambler and have decided to butcher a veal rack. Generally, every operation has at least one major prep item which significantly impacts food cost.
If you hit the shore, most good operators can tell you how much it costs to make a crab cake (based on the most recent delivery). The deli managers can see the cost of a sandwich change based on examining the exterior fat on the briskets. Even french fries have a tendency to yield below average portions.
The one item I find lacking in the prep and butchering operation is a sense of standard yield. People seem to be aware of major discrepancies. If the short loin yielded 75% instead of 81%, there is plenty of discussion but not many know their cost of goods sold will be 8% higher.
A lack of standard yields turns many problems into anecdotal discussions in the weekly management meetings.
Try to develop standards and track actual results against these figures. You'll start to see why a particular vendor always has a lower price per pound. You will develop an awareness of delivery mistakes which allow you to request and receive credits.
Pay the right price for what you actually receive and make sure you get the precise standard expected.
Sunday, March 12, 2006
How Close Should You Get To Your Supplier?
During a tour of a large institutional kitchen, I asked the manager why the deli meat salesman was in the walkin cooler with a two wheel truck. He said the salesman is fantastic and saves the company loads of time.
In explaining the relationship, he described the entire process. After placing the delivery items in the walkin cooler, the salesman takes an inventory and compares stock levels to historic usage. He then completes an order form for the manager. The manager simply signs for the delivery and the new order.
Twice a week, this process takes place with minimal management involvement.
It seemed important to note how trustworthy this salesman is and how they would never allow ALL salesman to have the same access. OK?
NO. Regardless of the long term relationship involved with this particular salesman, I could not OK this style of ordering/receiving control. Generally, you should not allow delivery personnel in your storage areas. They should not be filling out purchase orders. This relationship represents a complete breakdown in the internal control system.
Click Here For More Information
In explaining the relationship, he described the entire process. After placing the delivery items in the walkin cooler, the salesman takes an inventory and compares stock levels to historic usage. He then completes an order form for the manager. The manager simply signs for the delivery and the new order.
Twice a week, this process takes place with minimal management involvement.
It seemed important to note how trustworthy this salesman is and how they would never allow ALL salesman to have the same access. OK?
NO. Regardless of the long term relationship involved with this particular salesman, I could not OK this style of ordering/receiving control. Generally, you should not allow delivery personnel in your storage areas. They should not be filling out purchase orders. This relationship represents a complete breakdown in the internal control system.
Click Here For More Information
Monday, March 06, 2006
JIT vs. Too Many Deliveries
Since food products are quite perishable, over ordering should be avoided at all times. Certainly, I strongly recommend daily deliveries of fresh seafood, bread and pastries. It's possible in most markets to receive deliveries daily from most suppliers. This unlimited access to supply may be costly.
The classic optimization technique for reorder frequency, EOQ, is often ignored by most operators in our industry. This technique establishes the optimal reorder point as the inventory level that equalizes carrying cost and order cost. One of the most useful variations of the straight EOQ model is the S,s model.
The S,s model requires a perpetual inventory system and establishes a maximum inventory level(S) and a lower level(s) which triggers an order. If you have greater than s in stock, no order. If you are below s, you order S-current stock level.
Now let's examine a typical food service stock with hundreds items. Would you save by running a perpetual S,s style ordering system? Absolutely! Just don't do it for every item. Locate your top 100 items. Make a short list of the suppliers needed to supply these items. This list will handle the bulk of your ordering since these high consumption items are often perishable.
Pretend you are a remote site feeder and every delivery requires a trip up a snowy haul road. The truck will be sent exclusively to your operation. Imagine a really expensive delivery cost (high energy costs, union driver and lots of tolls).
It is very likely you could find some innovative ways to schedule deliveries if you were subjected to these conditions. These innovations could be jointly identified by you and your best suppliers. Pick suppliers interested in passing along part of the savings to concerned customers.
With today's higher energy costs, this might be a great opportunity to call key suppliers and find out how you could be a better customer. Also, find out what's in it for you. You need a win/win scenario. A 50/50 cost split is a good starting point.
Partner with the suppliers you buy these top 100 items from each week. Discuss market fluctuations, delivery, payment terms and the days their trucks are carrying less product. Optimizing your supplier's costs could save you big money.
I have mentioned our contract at Syncrude before. We partnered with a second tier meat supplier with great quality and some empty trucks. He allowed our other suppliers to drop their pallets at his dock rather than drive up the haul road. By synchronizing orders and signing a solid, market-based price agreement, we allowed this supplier to deliver FREE to our account. We asked our other suppliers to deduct all haul road costs from our pricing. We used the savings to completely cover our meat supplier(gas, driver, fleet depreciation, etc.).
Whether you are located in the mountains or in a city with loads of small delivery trucks, rising gas prices are now built into your invoices. Suppliers do appreciate customers watching their backs.
Click Here For More Information
The classic optimization technique for reorder frequency, EOQ, is often ignored by most operators in our industry. This technique establishes the optimal reorder point as the inventory level that equalizes carrying cost and order cost. One of the most useful variations of the straight EOQ model is the S,s model.
The S,s model requires a perpetual inventory system and establishes a maximum inventory level(S) and a lower level(s) which triggers an order. If you have greater than s in stock, no order. If you are below s, you order S-current stock level.
Now let's examine a typical food service stock with hundreds items. Would you save by running a perpetual S,s style ordering system? Absolutely! Just don't do it for every item. Locate your top 100 items. Make a short list of the suppliers needed to supply these items. This list will handle the bulk of your ordering since these high consumption items are often perishable.
Pretend you are a remote site feeder and every delivery requires a trip up a snowy haul road. The truck will be sent exclusively to your operation. Imagine a really expensive delivery cost (high energy costs, union driver and lots of tolls).
It is very likely you could find some innovative ways to schedule deliveries if you were subjected to these conditions. These innovations could be jointly identified by you and your best suppliers. Pick suppliers interested in passing along part of the savings to concerned customers.
With today's higher energy costs, this might be a great opportunity to call key suppliers and find out how you could be a better customer. Also, find out what's in it for you. You need a win/win scenario. A 50/50 cost split is a good starting point.
Partner with the suppliers you buy these top 100 items from each week. Discuss market fluctuations, delivery, payment terms and the days their trucks are carrying less product. Optimizing your supplier's costs could save you big money.
I have mentioned our contract at Syncrude before. We partnered with a second tier meat supplier with great quality and some empty trucks. He allowed our other suppliers to drop their pallets at his dock rather than drive up the haul road. By synchronizing orders and signing a solid, market-based price agreement, we allowed this supplier to deliver FREE to our account. We asked our other suppliers to deduct all haul road costs from our pricing. We used the savings to completely cover our meat supplier(gas, driver, fleet depreciation, etc.).
Whether you are located in the mountains or in a city with loads of small delivery trucks, rising gas prices are now built into your invoices. Suppliers do appreciate customers watching their backs.
Click Here For More Information
Friday, March 03, 2006
Some Things Just Don't Work Well
When I first started reporting how great remote site feeding was to my best friend, The Murph, we got into long discussions regarding the various techniques we could use to analyze operating data. One of the top of the line MBA analytical techniques is multiple regression. Since some contracts required prices per manday with extra charges for special meals, we thought MR was the way to go. You could never get the general managers and operations directors too much food cost data. Serious craving!
Armed with our APL keyboards and an IBM mainframe, we started loading meal statistics into tables. I had weekly food cost numbers available by category and summary. A typical record would include weekly data as follows: Week, Breakfasts, Lunches, Dinners, Midnight Meals, Take Out Lunches, Mandays, Food Cost (in dollars). We included employee meal counts in the details and totals.
After many attempts to get a better fit using multiple regression analyses, I found simple linear regression always worked better. Food cost is highly variable. If you find a large fixed component, it is often a danger sign.
I recently ran regression statistics on some quarterly data available at the SEC's Edgar site. One steak house concept with predominantly company-owned units runs a 36% food cost. The regression line is actually 40% variable with a negative fixed component. Try to figure that out!
The notes to their financial statements are very clear and open. However, they do not address menu pricing strategy.
My best guess is they have a menu pricing strategy which adds a fixed dollar profit into every menu item to cover overhead. So to calculate a menu price, they multiply the standard recipe cost by 2.5 and add a factor to cover the overhead costs. Maybe this was a reaction to the increase in oil prices.
Click Here For More Information
Armed with our APL keyboards and an IBM mainframe, we started loading meal statistics into tables. I had weekly food cost numbers available by category and summary. A typical record would include weekly data as follows: Week, Breakfasts, Lunches, Dinners, Midnight Meals, Take Out Lunches, Mandays, Food Cost (in dollars). We included employee meal counts in the details and totals.
After many attempts to get a better fit using multiple regression analyses, I found simple linear regression always worked better. Food cost is highly variable. If you find a large fixed component, it is often a danger sign.
I recently ran regression statistics on some quarterly data available at the SEC's Edgar site. One steak house concept with predominantly company-owned units runs a 36% food cost. The regression line is actually 40% variable with a negative fixed component. Try to figure that out!
The notes to their financial statements are very clear and open. However, they do not address menu pricing strategy.
My best guess is they have a menu pricing strategy which adds a fixed dollar profit into every menu item to cover overhead. So to calculate a menu price, they multiply the standard recipe cost by 2.5 and add a factor to cover the overhead costs. Maybe this was a reaction to the increase in oil prices.
Click Here For More Information
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