Hotel & Food Cost Control: Purchasing Considerations

When it comes to food and beverage purchasing management, Seva Procurement has often found both hotel and restaurant operators unfamiliar with how to construct the best purchasing programs for their operation.  As purchasing management is a critical component of food cost control and overall hotel or restaurant profitability, these operators fail to maximize their potential food service or hotel operating profit.  To be clear, we find that while every operator recognizes that purchasing best practices are integral to cost control, many often do not invest the time to research and execute these procurement best practices. While any successful operator will want to get the right product at the best price, we have found that there are as many hotel and food and beverage purchasing methods in use as there are operators.  Often times, we find that operators simply do not address or fully recognize everything involved in a comprehensive procurement program—for both food and beverage, as well as hotel categories such as engineering, amenities, linen, chemicals and office supplies.  The following will take a look at several considerations when looking at food and beverage purchasing management.

Food Cost Control Begins with Understanding Your Needs. The first critical step in good purchasing is to develop specifications for all product needs.  Each product has a set of specifications that makes that product unique–sometimes these specifications make the quality better or worse; sometimes it just makes the product different.  In addition to the taste and quality differences—varying specifications also impact the product’s price.  If an operator does not identify the proper product specifications, then it is probable that both consistency and price will fluctuate.  If products being purchased by an operation are consistent, it is critical to thoroughly examine the specifications of these products to ensure that what is currently being ordered is the best for your operational needs.  Often times, this consistency may be due to either product decisions that were not researched or because the supplier chose a product that seems to have met an operator’s needs.  While this may seem good, it is possible that other products would also be suitable for less cost.  For example, we recently on boarded a new member that was very happy with the quality of oranges that they were consistently receiving from their supplier.  This made sense, as they were top quality oranges without any exterior blemishes.  However, because these oranges were being used by the kitchen to produce fresh squeezed orange juice, there were other oranges available that, while having exterior blemishes, were just as well suited for making orange juice as the expensive ones that their supplier had been shipping to them.  Whenever we execute these specification analyses for new Seva Procurement members, we find examples of this practice.

Lower Supply Chain Costs (should) Lower Operator Costs. Seva Procurement often finds operators that believe hard negotiation and bidding out products is the best way to purchase.  We believe this is often the case simply because it provides an operator with certain benefits, along with a sense of purchasing control, with limited time invested.  The truth is that while negotiation is certainly important, tough negotiation, alone, will never produce the best possible results.  Operators truly seeking to manage either food cost control or hotel cost control should recognize that getting the best price is also about lowering the cost for distributors and suppliers of the operator.  Some may be wondering why that should be the concern of the operator.  Here is an example:

If an average case costs $20 from the manufacturer and it costs the distributor $3 to deliver that case, then even the best negotiator will not get the price of the case below $23—this is simply an economic reality of doing business.  While there may be times that an operator is able to push the distributor down on certain products, at the end of the day the distributor will always ensure that they cover both their cost and desired profit.  While negotiation may help control the desired profit piece, it does not address the distributor’s cost, which is the other influence on the invoiced price.  Now, in this example, if an operator is able to purchase in a manner that lowers the distributor’s cost to deliver a case from $3 per case to $2, then that operator has created an opportunity to save an additional dollar on every case by reducing the distributor’s cost to service.  The following are a few ways to achieve this.

The issues with “cherry picking”.

We recognize that many operators bid out products among multiple distributors or suppliers in an attempt to get the best price.   Dividing volume, however, simply adds costs to the supply chain that are passed on to the operator. Ultimately, choosing the most economically efficient way to receive product should always result in reduced costs for the operator.  More specifically, operators should consider working with a single distributor so that volume can be consolidated, reducing the cost per case to deliver.  Of course, we recognize that with this operators now have to worry about whether they are getting the best price since they are not getting the visibility provided by utilizing multiple suppliers.  The best way to manage this is through a prime vendor agreement that commits volume to a single supplier in return for a contract that establishes pricing margins.  Alternatively, many hotel and restaurant operators become Seva Procurement members and take advantage of our national prime vendor agreement, currently through Sysco and a host of hotel suppliers, that provides the same national pricing for all members across the country based on our $1 billion in purchasing leverage.

Drop Size.

Similar to “cherry picking,” inefficient drop (delivery) sizes add costs to the supply chain because it takes more deliveries to transport the same amount of product.  Obviously, adding an additional delivery will increase the average cost per case to deliver, which will ultimately be passed on to the operator.  Setting realistic drop sizes will help whenever you negotiate a distribution program.

Payment Terms.

In today’s economy, we are all aware of the cost of credit—which is a consideration for any supplier when an operator chooses to not be a “C.O.D.” account.  Having payment terms other than C.O.D. is never just a benefit of being an established business, as the supplier will always factor in the cost of extending credit based on expected repayment—even if the terms are “net 30” and for the best accounts.  Ensuring that you stay within your established payment terms with your distributor is essential when it comes to getting the best possible pricing, as well as negotiating a supplier contract.  While you may not get pressure from your distributor for paying late, you can be sure that you will pay more for your products or that you will be unable to get the most advantageous supplier contract.  Also, you may be able to work with your distributor to get early pay incentives.  For example, the Seva Procurement program provides members with 7 day, 14 day and 21 day early-pay incentives, reducing our supplier invoices when paid early.

Online Ordering.

If you walk into a Whole Foods or similar high-end grocery store, you will have no problem finding a staff member to provide any necessary service.  Walk into a Costco or similar volume operation and it may be a bit more difficult.  Of course, the prices are not the same, either.  Having a distributor sales representative take each order in person or over the phone is certainly nice, but this process is inefficient and adds costs to the distributor, which are passed on to the operator.  It is because of this that Seva Procurement provides all members with a dedicated account manager from their local Sysco distribution center to provide customer support and product information, but requires members to order their products online.  Doing so has cut out a major distribution cost and has resulted in a distribution agreement that provides significantly lower pricing.  If you are not a Seva Procurement member, it is most likely possible to get setup using an online order system and may be possible to negotiate a lower pricing structure.

Proper Ordering and Receiving.

Finally, it is absolutely critical that operators execute ordering and receiving best practices to ensure that sufficient product is ordered and that it is delivered as expected.  Failing to execute inventories when placing orders by using a clear order guide will lead to missed product that requires additional distributor deliveries or recovery trips from the distributor representative–both of which add costs to distribution that will be passed on to the operator.  Often, we find that operators will have more scheduled deliveries per week than necessary not because they don’t have the room for storage, but because they like the flexibility of having extra deliveries to cover them when they forget to order product.  Unfortunately, this practice will drive up an operator’s costs.

Sometimes It Is About Good Old-Fashioned Leverage.

Up to this point, we have discussed how leverage alone will not produce the best possible product pricing.  While true, leverage is certainly important.  Using your volume to negotiate the best distribution program is critical in developing the best possible contract.  In fact, a significant factor in Seva Procurement being able to provide members with a “best in nation” distribution contract, is because of our $1 billion that we have as leverage.

Manufacturer Contracting.

An additional purchasing consideration is the need to negotiate deviated product pricing directly with the manufacturers of your products.  Unfortunately for many operators, doing so requires time, expertise and significant volume, which are often not available.  Even more unfortunate is the fact that no purchasing program can ever come close to maximizing opportunities if the operator does not put manufacturer contracts in place.  Very simply, while it is absolutely critical to negotiate a strong program to control your distribution costs, the available margin for distributors is relatively low due to intense competition among distributors—limiting the actual savings that can be gained by negotiating only with hotel suppliers or food service distributors.  While savings can certainly be obtained through good distribution management, the majority of available savings comes from the manufacturer.  Because barriers to entry are significantly higher for manufacturers, due to brand recognition and capital expenses, manufacturers enjoy a much higher profit margin. Because of this, if an operator is truly interested in establishing the most beneficial purchasing program, then negotiation with manufacturers on top products will be necessary.  Again, this can be extremely difficult for operators because of the time, expertise and required volume necessary to put these contracts in place.  To effectively achieve this it is often necessary to employ teams of internal procurement professionals to oversee and manage this process.  Of course, this is only possible if the operator has the volume to justify this expense and meet the manufacturers’ minimums for engaging in such contracts.  Alternatively, Seva Procurement members of all sizes and volumes are able to benefit from our procurement expertise and product category experts by getting access to over 20,000 products that have been negotiated back to the manufacturers by our team.  For our members, these products are available at prices 10-20% cheaper because of the manufacturer’s deviated price contract and our “best in nation” distribution program.  If operators have the ability to execute this internally, then these savings can also be achieved through that method.

“Trust But Verify.”

The last consideration that we will examine in this article is the need to audit invoices, as well as your distributor and manufacturer contracts.  As this is a routine part of the Seva Procurement program, we can attest to the fact that pricing mistakes are common.  To be fair, in almost all cases these mistakes are not malicious and are just the result of clerical or careless mistakes.  Regardless, these mistakes can be costly for an operator.  Unfortunately, executing these audits can be a costly practice in terms of both time and money.  Our recommendation for operators is to invest in a technology partner that will electronically monitor your invoices and contracts to ensure that billing is accurate.  Again, another possibility is to become a member of Seva Procurement, as every line item of every invoice for each member is compared to our contracts using bleeding-edge technology to ensure that every price is correct for our members.  This, combined with our routine supplier and distributor audits, ensures that our members are always invoiced based on our national supplier pricing.

When you think about all that goes into running a hospitality or food service operation, it is amazing that operators find a way to create successful businesses.  It is no wonder why hospitality and food service operators are known for working long hours week after week.  When you add the intricacies of running great shifts, managing staff in a high-pressured environment, controlling easily lost and often perishable inventory and ensuring guest satisfaction, even the most well-staffed operators will often find that they do not have enough time to address all of the purchasing considerations that we examined in this article.  That being said, failing to execute a proper purchasing program can result in significant loss in potential profit.