Food Cost Techniques - Receiving

The second biggest opportunity for saving money in a restaurant is available at the loading dock. Receiving controls can save you a bundle. The amount of savings is directly proportional with the number of miles from the supplier. If you are the last stop on the delivery route, the morning's rejects may find their way onto your doorstep.

We once followed a rejected case of salmon all over New York when I was working with a local chain. The driver tried to unload the case at each and every location. Good noses and lots of phone calls kept the spoiled fish from our walkin coolers. Do you let the delivery man load the goods on your shelves? I recommend you end this practice. Especially in operations with limited deliveries and long lead times, drivers often bring the stock up to the order quantity using items already on the shelf.

Imagine you order 20 cases at the order point which is 5 cases. By the time the driver makes the delivery, you have 3 cases left. You let him put the cases in your storage. He delivers 17 cases and calls you in to check off the delivery and sign the invoice. You count 20 cases and sign. You just paid for 3 cases you never received. This is just slightly better than a phantom delivery.

One site I was sent to audit for an out of control food cost had several assistant managers. I was in charge of the inventory and I assigned everyone a location. Keeping the refrigerators for myself, I began looking for a truckload of eggs. Looking everywhere, I could not locate the eggs. The managers started complaining about not finishing in time. I persisted and increased the heat.

Eventually we located the truckload of eggs at our competitor's project five miles away. The invoice had been rubber stamped with one of the manager's signature. We threw out all the rubber stamps and got a credit for the eggs. The driver and our purchasing manager were in collusion.

In general, try to treat your inventory delivery with the same seriousness shown to the armored delivery of cash. You probably lose more cash in food not received than the miscounted cash delivered.

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.

Reader Feedback on Priorities

Hi Joe,
I think no matter how you answer that interview question you have to back it up with an explanation to make it sensible. Personally, I think they are all equally important and certainly completely intertwined. Therefore, there is no way to isolate these as three separate entities.

As far as the warehouse is concerned would it be helpful to discuss the concept of averaging a price for items that are coming from the warehouse that has in inventory product that was purchased at varying prices?

Thank you,

Paul

Thanks for your feedback Paul. These 3 priorities are completely intertwined. You are 100% right. I see better food quality in kitchens with less waste and spoilage. Customers love to receive a consistent portion size. If a researcher studied the relationship between food quality and food cost control for a focused menu, they would find better food cost results at restaurants with higher food quality. Top quality food sells better and higher volume helps your percentage.

Properly trained and supervised employees are needed to make everything work. Good financial results and happy customers result from a motivated staff.

As far as using average costs in a complex organization, I'd certainly recommend a consistent cost method with all transfer activity priced on an average. In a period of price volatility, this is the fair method. The goals of a tight transfer model are simple: control flow of food and allocate the costs based on usage. An average cost fairly measures the unit operators control over usage. The central purchasing management is responsible for getting all the profit centers better prices.

Personnel Supervision is Job One

Ralph said...
Joe:
Great answer. I know you focus in on cost control, but it seems to me personnel supervision is the #1 cost control issue...but it also the #1 revenue generator.

In this economy, I believe restaurants overlooking the obvious.

I'm still eating out. Just not as many places. I make it an occasion, and still spend a fair amount of money.

But I only go where the food AND service AND atmosphere AND value...are all excellent.

I'm believe many of the restaurants could thrive in this recession/depression by focusing on these items. I know these items make up more than 1/2 of the costs of running a business. Why wouldn't business owners focus their energies on this?

But instead I keep seeing chefs/owners reducing the wrong items: food quality, food freshness (localness), portions or service.

I was just in Vegas. All of the casinos and restaurants and employees have gotten the message. Every single person was extremely helpful and grateful for my business. I thought I was going to get a kiss for just a $2 tip. I loved the service from the waitress to the pit boss.

I would ask every restaurant owner: do you have the best possible server, captain, busser, hostess working for them? Are the best possible trained employees out front positively representing the restaurant?

Are you unequivocally proud of every single employee?
If not, then your employees are driving your business into bankruptcy.
Now ask yourself the same about atmosphere, cleanliness, quality and value.
Am I the only person in the restaurant concerned about these factors?

We are definitely in sync Ralph! Employees make the guest experience. They produce the top quality menu items, served guests with a positive, friendly attitude and help keep your restaurant spotless. They also help you make money by following portion control guidelines and making sure both the quality and serving size are consistent.

During my most recent trip to Las Vegas in October, I had two excellent dining experiences.

If you really want service, take a trip to St. Kitts. The Royal Beach Marriott has several restaurants. At every meal, the management and staff came by at least five times to check on my satisfaction. Most of these people wanted to know if I was able to explore the island and they each mentioned their favorite spots. I asked my client if there was a course all resort employees were required to take prior to work. He said the entire island is sensitive to the needs of tourists. The whole population recognizes the importance of the industry.

When you contrast these tremendous service experiences with the mediocre efforts at many restaurants and hotels, there is no reason to return to a poorly managed operation. Over on Roadfood.com , a recent review of a famous hamburger spot in Connecticut points out a serious attitude problem:

Posted by Joan Keating

What a letdown! We made a special trip to name left out just for the great burgers. We walked in and found it packed with first-timers like us, standing in a confused mob inside the door. The counter-person (owner?) and the cook, standing next to each other at the counter, neither acknowledged nor made eye contact with ANYONE in the line for an annoying 20 minutes or so. FINALLY the counterman said, "OK, who has to order?" Not, "how can I help?" or anything cordial. He then took orders for about a dozen or so burgers from six or eight people, and was surly at best during the entire process.

No menus, no explanation, not even a list on the wall to explain protocol. We ordered based on hearsay, and waited an excruciating 40 MORE minutes (for a total of ONE HOUR) to get a mediocre, dry burger; and the order was wrong! If it was supposed to be a cheeseburger, there was so little cheese it was a hint at best. "The works" were forgotten, and it was NOT the default medium-rare that is supposedly served unless otherwise requested. It was flavorless, dry, and boring, on white toast with not a drip of ketchup or other condiment, and NO SALT OR PEPPER either!

The icing on the cake was the FU attitude from the owner and the chef, who sighed and rolled their eyes at anyone who asked a question or made a special request. We are SO disappointed at this bum deal. Worst of all: it cost roughly $30 for four lousy, dry, overcooked burgers, a half-cup of potato salad, a bag of chips, and two sodas. What a RIPOFF!

Report Format - Food Cost Control

Sir,
I need the proper format for costing. Can you send it to me.
Thanks & regards,
Jayanta

Back in May 2006, I posted a series of articles to help explain both the format of the period food cost results and the impact of each component. The report format varies for hotels and resorts with more than one profit center. When you have central purchasing and transfers of both stock items and batch recipe items, you need a more complex approach. It helps to start with a matrix.

The rows of the matrix are the formula components. You would have a column for each profit center (including the central purchasing - warehouse operation). The transfer activity should net to zero for the entire operation (i.e. transfers in equal transfers out). In theory, central purchasing & control's revenue and usage should be zero. All cost should flow to the operating units. We can evaluate each profit center's performance (as a % of revenue) and use the statistics to explain overall performance.



[Click on the matrix for a larger view.]

The goods available for use number is exactly the same as the simple formula. The beginning inventory plus purchases equals goods available. Usually, purchasing is done centrally and the profit centers will have very little purchasing activity.

Transfers out of the commissary to the units should closely track purchases since food is perishable. When net commissary transfers are far less than purchases, par stock levels should be modified to prevent future over stock conditions.

The commissary equals goods available plus the net transfer activity minus the ending inventory. We should see zero or a very small usage amount. A negative result would indicate a error in your data entry.

Each profit center's usage is simply the beginning inventory plus net transfers minus ending inventory. Divide the usage by the revenue to find the usage as a % of sales.