Lowering Food Cost Through Key Item Analysis

Posted by: Seva Procurement on Apr 24, 2014 at 5:40 pm |

Restaurant cost control contains volumes of work relating to the food service cost control trifecta: food, labor and alcohol costs. While there are invaluable cost control systems and theories presented in these works, operators often find it difficult to implement such procedures, as they need to balance their time between running the daily operation and managing cost control systems and procedures—of course, these two things are certainly not mutually exclusive. Key Item Management, however, is a relatively simple method of effectively managing food cost without a tremendous time investment. While it is not recommended that an operator limit their food cost control efforts to only Key Item Management, it is probably the best place to begin and also the most important food cost control system to stay current with. Presented here are the basics of Key Item Analysis and Key Item Management.

Step One: Identify your key items. The best way to achieve this is by requesting a descending purchase recap from your distributor(s). This report will rank all purchases during a specified time period in descending order based upon the total dollar amount spent for each item. It is recommend that operators focus on no more than the top ten items identified on this report for the purposes of a Key Item Analysis during the first attempt at this process. Focusing on only the top ten items makes the task manageable, while still having a significant impact on food cost. Think of this methodology as the food cost 80/20 rule.

Step Two: Examine Key Item purchasing specifications. While product specifications are an inherent part of the process described in step three, they are also so critical that they deserve specific analysis and attention. When examining key items, operators need to question the factors that have influenced the current purchasing specifications. Manufacturer and brand, quality specifications, trade and federal grades, fat content, unit size, case size, production region, receiving condition and many more specifications all have cost implications on a given product. In general, the more lenient the specifications are for a particular product, the cheaper the landed cost will be for an operation. However, the less strict an operator is with specifications, the less consistent the product will also be. Therefore, the benefits of reducing a key item cost in this manner need to be weighed against the potential effect on product quality and consistency. That being said, an operator should examine all available specifications for a key item and determine which are important for the intended use. Once these specifications are determined, operators will be more effective in managing key item product costs, as described in the next paragraph. Often times, operators will realize that certain specifications have been assumed by the distributor. Other times, operators may simply be unaware of the varying product specifications that are available, therefore, they many not be taking advantage of potential opportunities. Operators should be sure to pay particular attention to case sizes, package sizes and the use of split cases. By merely adjusting these packing specifications, operators can experience significantly lower landed costs. It is worth noting at this point that when determining key item specifications, care must be given to how a particular specification will affect the edible portion cost. What might appear to be a better price for a particular product based upon a spec change might, in fact, be more costly in the end. Meat grades and fat percentages are a good example of this. This is of critical importance to operators with Prime Rib as a key item.

Step Three: Manage the price paid for each key item. Depending on what the item is, operators may be able to negotiate contracted prices for key items. Whenever possible, it is recommended that operators negotiate contracted prices for key items to simplify the purchasing process. A good contracted price might not always bring the landed cost of the product in below bid pricing at a given point in time, but on an annualized average the contracted price should have a net positive effect on purchasing. Because key items inherently represent significant purchasing volumes, an operator may be able to negotiate with a broker or manufacturer to get manufacturer price deviations that will be passed on through the distributor. This method of negotiation should be examined to see whether it is possible, as it rarely has negative impacts on the distributor and, therefore, has fewer potential downsides. If a price deviation is negotiated through a broker or manufacturer, it will typically be available through the vendor of your choice. Therefore, even with manufacturer price deviations in place, an operator may still want to bid out the item to several distributors to keep their mark-up on these items in check. For many operators, bid pricing is the method of choice for purchasing decisions. This method is also commonly referred to as “cherry picking.” While this method can work, operators are required to actively examine bids and stay vigilant that distributors are not passing their lost profits from bids onto other, non-bid items. If an operator negotiates a purchasing contract with a particular distributor, they need to look at both a market basket report, as well as the pricing structure for the key items under the contract. A cost plus contract could seem to be a great deal, until you realize that a particular vendor is unable to be competitive on certain key items because of their particular market share and case movement sizes.

Step Four: Complete a yield analysis for all key items whose edible portion cost is different than the “as purchased” cost and for all key items that are utilized in sub-recipes or prep recipes. Key items that are utilized in these two ways can translate into significant, unnecessary food cost expense if yields are not tracked and managed to ensure consistency. Once acceptable yield standards have been established, continuous monitoring of yields should occur to ensure compliance to production and purchasing specifications. The most common issue with yields among the key item category for operators occurs with meats. Meats that are cooked off prior to portioning or that are broken down in house can often times have huge yield variances that can play havoc with food cost. The following paragraph deals with managing menu item profit margins with respect to key items, but before establishing accurate menu item costs, accurate yields need to be established to determine the accurate edible portion costs.

Step Five: Manage the profit margin for menu items that utilize key items as ingredients. This process is relatively easy, but requires some initial time investment, as well as a bit of ongoing effort. To analyze the profit margin and menu item food cost, recipe cards should be created for each menu item. Based upon the results of the recipe cards, operators should determine if the profit margin and food cost are acceptable according to an operation’s standards. If menu items that utilize your key items have a disadvantageous pricing structure, an operation will always struggle with achieving a desired food cost. It is highly recommended that an operator execute menu engineering for menu items that utilize key items, although simply using and updating recipe cards to keep tabs on shifting profit margins will also have a positive effect. Operators should be certain that recipe cards utilize the edible portion cost of particular items, rather than the “as purchased” cost. Not to beat a dead cow, but operators that serve Prime Rib need to be very careful and vigilant during this step.

Step Six: Complete an ideal usage for your key items. By comparing actual key item usage against ideal usage, operators can identify operational issues effecting key items. Operators can easily determine ideal key item usage by multiplying menu item sales counts located on a product mix report by the standardized key item portion for that specific menu item. This process should be repeated for all menu items that utilize the key item and the sum of these represents the ideal usage for the key item. Comparing this ideal usage with the actual usage that can be determined utilizing purchasing data and inventory extensions will reveal the usage variance for key items. Ideally, the usage variance should be zero. While this is often an impossible goal for all but value-added, convenience items, operators should examine all key item variances that are above established tolerance levels and create a strategy to reduce the variance.

Step Seven: Attack the usage variances! Once the ideal usage comparison previously described has been completed, an operator should begin attacking the identified variances above the tolerance threshold. I have included a few of the common problem areas when trying to attack key item usage variances. First, check current yields against the established acceptable standards. These variances can be due to improper training and production procedures, as well as a change in the key item specifications. For example, flank steak that is cooked off and pre-portioned will have a decreasing yield as the fat content in the flank steak is increased due to improper purchasing or distributor error. Second, operators should increase the awareness of key item variances within the operation. It is not enough to see the variance on paper, but rather habits in the field need to be tweaked and adjusted if this variance is to be corrected. Raising awareness should include staff training on what the proper recipe specs are and how to execute portion control. Raising awareness and communicating concerns often goes a long way to help reduce variances. Third, make sure that there are portion control systems in place to control portioning and that all necessary supplies are in place. It does no good to tell a cook to put 1/2 cup of cheese on a pizza if he does not have a 1/2 cup, or if he refuses to use it. Fourth, execute sensitive inventories. Store managers should do beginning and ending inventories for key items that have variance issues and compare the actual usage from these inventories against the product mix by following the procedures set forth above. Operators should also make sure that accurate inventories are being taken and that purchases are being accurately recorded. It is recommended that when trying to identify key item usage variances that operators do not use too small of a sampling period. The larger the sampling period, the greater the accuracy of the result. I recommend that quarterly variance analysis be executed at first to identify usage variance trends that require further investigation. Following this method will eliminate wild goose chases that end up being a result of poor inventory figures, rather than actual usage variances.

In conclusion, it is a well-know fact that the food service business can be one of both stress and excitement. Operators often find themselves trying to prioritize and balance their time amongst the competing needs required by the operation. Executing the key item analysis and key item management techniques described above have helped many operators balance their time constraints with the need for implementing effective food cost control systems.