Product Usage Variance in Food Cost Management

Posted by: Seva Procurement on Apr 24, 2014 at 5:57 pm |

Generating periodic food cost percentages is likely a common routine for most food service operators.  While establishing these costs is highly valuable, the mere act of calculating food cost figures does nothing to lower costs, unless the underlying causes of food cost variances are identified and eliminated.  The difficulty with doing so is that identifying these variances is not always an easy task.   While monthly food cost percentages may indicate a cost control problem, they are often too vague to indicate the exact nature of the problem.  Without this knowledge, cost control efforts cannot be effectively focused on resolving issues and improving profitability.  Unlike food cost percentages that do not provide the necessary detail to target cost control actions, a product usage variance analysis will identify the exact usage variance for each product analyzed. By uncovering this critical information, food cost control measures can be taken to reduce and eliminate these costly variances.

Before proceeding, it should be noted that product usage variances are dependent on standardized recipes, as recipe standardization is necessary in establishing ideal usages.  These recipes should contain standardized units of measurement for the products being analyzed so that this information, along with menu mix or menu item sales data, will enable the calculation of ideal product usages that will serve as the baseline when determining variances.  Once recipe standards have been established, determining product variances is a relatively easy task.

A product usage variance is the difference between the ideal and actual usage volumes of a specific product, most commonly expressed as a quantity, percentage or cost.  Identifying a product usage variance begins with the identification of all menu item, prep and batch recipes that utilize the product being analyzed.  Then, using menu item or batch recipe production counts and the standardized product portion utilized in these recipes, ideal usage figures can be calculated.  This, along with the actual usage figures determined using inventory extensions and the product purchasing history, will enable the calculation of product usage variances.  To help with creating your own product usage variances, you may find it useful to download the Product Usage Variance restaurant spreadsheet that is available on our website.

While it may, at first, seem advantageous to calculate a product usage variance for every purchased product, doing so is not highly recommended.  The amount of time necessary to calculate variances for all purchased products would greatly diminish the benefits of executing such a comprehensive analysis.  Rather, operators should be pragmatic when executing routine food cost control procedures, and focus efforts in a manner that will make the greatest impact in the least amount of time.  Limiting a usage analysis to only key items will not only save time, but will also have the greatest food cost impact.  This concept is commonly known as the Pareto principle and, applied to this scenario, states that 80% of your costs (or revenue) are a result of 20% of your products (the 80/20 rule).  Therefore, by focusing usage analysis on only the top twenty percent of products by total spend, an operator can make a significant cost control impact without a significant time investment.

To help identify the key items that should be routinely analyzed, we recommend that an operator request a velocity report from their suppliers for the prior quarter.  This report will list each product purchased in an aggregated, descending dollar format.  Our recommendation is to begin with only the top five to eight products on this report.  While only a handful of products, these key items represent the majority of your purchasing expense and any strides made in eliminating variances with these items will result in significant cost control and profitability improvements.

The report in Figure 1, below, is a portion of an actual velocity report that lists the top eight products purchased for a restaurant.  While we have truncated the report to save space, the full report indicates that this restaurant spent $234,042 during the given quarter, of which 49% was a result of the top eight products–those listed in the report.  Put another way, the top 5% of products purchased represent almost 50% of the total spend.

To illustrate how executing product usage variances for key items can result in substantial food cost improvements, we have calculated the actual product usage variances for these top eight products, as indicated in the two right columns of the report.  The average product usage variance for these items is 8%, which represents $9,178 lost dollars each quarter for this restaurant–4% of total spend! This restaurant could quickly lower their food cost expense by 4%, simply by closely monitoring the top eight items.

Figure 1
Total number of items: 147
Total Spend: $234,042
Total Spend of top eight products:  $115,188
Total Variance for top eight items: $9,178, which equals 4% of spend

Velocity Report

While the ambitious operator will recognize the opportunity to gain an additional 4% by tackling the remaining 139 items, doing so will be incredibly time intensive.  This does not mean, however, that these opportunities should be completely ignored.  Rather, after repeated variance analysis on the top products has resulted in the elimination of usage variances, operators can begin to substitute other products into the usage analysis.  It is recommended that operators routinely analyze sensitive, high dollar products that are prone to waste, spoilage or theft.  Additionally, operators should stay vigilant during shifts to uncover operational issues that may be causing variances on specific products.  Based on this operational awareness, these additional products can be added to the usage analysis.  Following this methodology will result in the targeted reduction of food cost variances for all products over time.

Once key products are identified and usage variances determined, the critical function of investigating these variances and establishing procedures to reduce them must begin, as the identification of variances will not lower food costs unless the root cause is determined and eliminated.  A few of the possible problems that could lead to usage variances are:

  •     Failure to properly charge for items, especially add-ons and extras
  •     Incorrect portions being used for menu items or batch recipes
  •     Yield goals not being consistently met
  •     Theft
  •     Improper receiving procedures
  •     Spoilage & Waste
  •     Employee Error
  •     Failure to follow recipe, cooking and preparation procedures
  •     Inventory/Counting/Transfer Mistakes

While this is not a complete list, the underlying cause of usage variances can often be linked to employee behavioral issues.  it is widely accepted that modifying employee behavior is best achieved when specific actions are targeted and measurable goals set.  By using product usage variances, specific and quantifiable goals can be established to gauge employee performance and modify behaviors.  Managing employee performance based on vague food cost percentages will typically not produce the same positive results that can be achieved by using specific product usage variance information when coaching staff.  Further, demonstrating to staff that specific operational issues can be monitored and tracked will often result in the self-policing of behaviors, increasing standards and procedures compliance.