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Class Name Instructor Name Date, Semester Foundations of Cost Control Daniel Traster Control Through the Purchasing Process chapter 8.

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Presentation on theme: "Class Name Instructor Name Date, Semester Foundations of Cost Control Daniel Traster Control Through the Purchasing Process chapter 8."— Presentation transcript:

1 Class Name Instructor Name Date, Semester Foundations of Cost Control Daniel Traster Control Through the Purchasing Process chapter 8

2 Opening Questions When purchasing food for yourself, what factors do you consider other than price? How do you decide where to shop? Where does price rank among those other factors? How do you decide how must food to buy? Do you buy exact quantities or estimate? Are the quantities impacted by packaging size? 2

3 Factors for Selecting the Right Product 3 Factors Quality Processing Equipment and Staff Skills Storage Space and Type Shelf Life Brand and Mission Cost and Value

4 Product Specification or “Spec” Defines acceptable parameters for a product. Eliminates miscommunication between purchaser and purveyor May list product ―quality ―yield grade ―size, processing ―brand name ―origin ―degree or ripeness ―color, pack size ―container type 4

5 Purchase Specification 5 A purchase specification is the product specification plus the delivery schedule and credit terms..

6 Choosing Purveyors 6 Service Should be flexible, reliable, easy to work with, willing to correct errors, with a helpful salesperson and reasonable payment/ credit terms. Product Must be able to supply products to spec and in a safe, wholesome form. Pricing Should be competitive in general (factoring delivery charges, too). Choosing Purveyors

7 Securing Product Pricing (and Other Shopping Means) 7 Open Bidding Sealed Bidding Cost-Plus Purchasing Contract Purchasing Co-Op Buying Standing Orders One-Stop Shopping

8 Calculating Purchase Quantities The process for determining quantities to order differs for perishables (short shelf-life) and non-perishables (long shelf-life) 8 Forecast prediction of expected customers Menu Mix prediction of number of sales of each dish, often as a percent of total plate sales

9 Purchasing Quantities for Perishables Order only enough to get through to the next delivery to minimize spoilage, but with a small buffer. Take into account inventory on hand and forecast sales. Predicted Item Sales = Forecast Guests x Menu Mix Percent (as a decimal) 9

10 Example 8a Item Sales = Forecast Guests X Menu Mix % = 210 X 0.07 = 14.7 10 A restaurant forecasts 210 guests. 7% of guests usually order the cream of asparagus soup. How many asparagus soups should the chef expect to sell?

11 Perishables In forecasting dish counts, always round up (though the purchaser may add an additional buffer anyway) Use standard recipes to determine ingredient order quantities from predicted sales Use: AP = EP ÷ Y% 11

12 Example 8b Asparagus Soup Yield = 20 portions IngredientQuantityYield % Asparagus Stems4#60% Leeks1#48% Butter8 oz100% Chicken Stock3 Qt100% Cream1 Qt100% 12 Chef forecasts sales of 15 portions of asparagus soup. Calculate quantity of ingredients to order using recipe below.

13 Example 8b IngredientOld Q (EP)C.F. (New ÷ Old) New Q (EP) (Old Q X CF) Y %AP Q to order (New Q ÷ Y%) Asparagus Stems 4 #1.335.33 #60% save tops for elsewhere) 8.88 # Leeks1 #1.331.33#48%2.77 # Butter8 oz1.3310.64 oz100%10.64 oz Chick. Stock 3 Qt1.334 Qt100%4 Qt Cream1 Qt1.331.33 Qt100%1.33 Qt 13

14 Example 8b Notes 1.Money is saved if asparagus stems are used for soup and tips are used elsewhere. 2.When two parts of an ingredient are shared by two recipes, the recipe with the greater quantity need determines the order quantity. 3.Quantities will always be rounded up as a buffer 4.Ingredient need is not usually the final purchase order 14

15 From Ingredient Need to Order Order = ingredient need – forecast amount on hand when delivery arrives 15 Conduct a storeroom inventory of perishables and deduct expected usage before the next delivery arrives. What remains is forecast amount on hand at delivery arrival.

16 Summary of Steps for Perishables 16 Order = forecast ingredient need – inventory expected on hand at delivery Inventory expected on hand at delivery = current inventory – expected inventory usage Conduct current inventory count Calculate expected inventory usage between order placement and order receipt Calculate forecast ingredient need for order period

17 Example 8c Chef forecasts 170 guests between now and the next delivery arrival. Usually 14% of guests order spinach salad (the only dish using spinach). Spinach has Y% of 78% and each salad uses a 2 oz EP spinach serving. Purchaser is ordering for the following 3 day period to cover 520 forecast guests. Currently there are 5# of spinach in walk-in. 17 How much spinach should be ordered?

18 Example 8c (cont.) 1.Ingredient need = 520 guests X 0.14 X 2oz/salad = 145.6 oz (EP) ÷ 0.78 (Y%) = 186.7 or 11.67# (AP) 2.Forecast usage between now and delivery = 170 guests X 0.14 X 2oz/salad = 47.6 oz (EP) ÷ 0.78 (Y%) = 61 oz or 3.81 # (AP) 18

19 Example 8c (cont.) 3.Amount expected on hand at delivery = 5# - 3.81# = 1.19# 4.Order = 11.67# - 1.19# = 10.48# (11# rounded) 19

20 Ordering and Technology Process for calculating order quantities by hand is complicated. Set up in a spreadsheet, it is easy! Purchaser just enters forecast guest counts for now to delivery and for the order period. Computer calculates preliminary order from standard recipes and menu mix information. Purchaser then just deducts current inventory from preliminary order. 20

21 Two Non-Perishable Methods 21 Periodic Inventory Counting inventory only at regular intervals (week, bi- week, month). Perpetual Inventory Keeping a constantly current database of inventory by updating inventory sheets or cards every time a product is removed from or added to the storeroom. vs.

22 Periodic Inventory Purchasing System 1.Forecast ingredient needs. Non-perishables are usually stable across order periods with adjustments made for holidays, weather, season or menu changes, major business shifts. 2.For each ingredient, determine a safety net quantity (or %) to protect against business shifts and to sustain kitchen from order placement to receipt. 3. Conduct a physical inventory on the regular schedule (which is just before the order is placed). 22

23 Periodic Inventory Purchasing System 4. Quantity to Order (for each ingredient) = 23 quantity needed for upcoming order period quantity currently in inventory safety net quantity.

24 Example 8d Restaurant orders non-perishables every two weeks. It uses 22# of penne pasta weekly and management wants a 10# safety net in inventory at the end of each order period. Currently 12# of pasta in inventory. 24 How much pasta should be ordered for the next two-week period?

25 Example 8d (cont.) Ingredient need for period =22#/week X 2 weeks = 44# Order Quantity = 44# - 12# (current inventory) + 10# (safety net) = 42# If the purchaser cannot order exactly 42#, round up to the nearest pack size. 25

26 Perpetual Inventory Purchasing System Inventory card or spreadsheet includes (for each ingredient) date and quantity added to or removed from storeroom, par stock, reorder point, reorder quantity 26 Par Stock maximum quantity to have in inventory Reorder Point Lowest number of units of an item in inventory that triggers an order of that ingredient Reorder Quantity amount of an ingredient a purchaser will order at the reorder point

27 Perpetual Inventory Purchasing System To order, just place an order for an ingredient of the reorder quantity when it reaches the reorder point. In determining par stock value, it must be high enough to get through an order period but low enough to fit in the storeroom and not tie up excess money. 27

28 Calculating Reorder Point 28 Quantity Needed between Order and Delivery Daily Usage Days between Order Placement and Delivery Receipt

29 Calculating Reorder Point 29 Reorder Point Quantity Needed between Order and Delivery Safety Net Quantity

30 Reorder Quantity 30 Reorder Quantity Par Stock Reorder Point Quantity Needed between Order and Delivery

31 Example 8e Restaurant has par stock of 50 cans of kidney beans. It uses 3 cans per day. Management wants safety net of 9 cans in inventory at delivery. Order usually takes 2 days to arrive after placement. 31 Determine the reorder point and reorder quantity.

32 Example 8e (cont.) Quantity Needed between Order and Delivery =Daily Usage X Days bet. Order & Delivery = 3 cans/day X 2 days = 6 cans 32

33 Example 8e (cont.) Reorder Point =Quantity needed bet. order and delivery + Safety net = 6 cans + 9 cans = 15 cans 33

34 Example 8e (cont.) Reorder Quantity =Par Stock– Reorder Point + Quantity Needed between order and delivery = 50 cans- 15 cans + 6 cans = 41 cans 34

35 Perpetual Inventory Purchasing System 35 When pack size does not match reorder quantity exactly, round down to the nearest pack size because par stock is a maximum quantity for the storeroom.

36 Which Inventory Method to Use Perpetual Inventory offers better control but requires a dedicated employee in the storeroom to record every product removal and addition. Usually affordable only in large operations. Smaller businesses without a dedicated storeroom clerk usually use the periodic inventory system. 36

37 Make-Buy Analysis Factors cost of ingredients (cost per portion) labor (direct labor cost) energy cost in the decision-making process 37 To decide when to make a product from scratch vs. buying it premade:

38 Make-Buy Analysis 38 Cost per portion = recipe cost direct labor cost energy cost number of portions

39 Example 8f Labor Cost = $12/hour X 2 hours = $24 Cost per portion = ($41.58 + $24 + $3.50) ÷ 48 = $1.44/portion 39 Lasagna recipe yields 48 portions and costs $41.58 in ingredients. Employee earning $12/hour spends two hours making lasagna. Recipe’s energy costs are estimated at $3.50. What is the recipe’s cost per portion for a make-buy analysis?

40 Example 8g Labor = 0.25 hours X $12/hour = $3 Cost per portion = ($28 + $3 + $2) ÷ 30 = $1.10/portion Premade ($1.10/portion) is cheaper than scratch version ($1.44/portion) 40 The restaurant in example 8f can buy frozen lasagna, serving 30 portions, for $28.00. It requires $2.00 in energy and only 15 minutes of the $12/hour cook’s time. What is the cost of the premade lasagna?

41 Other Variables in Make-Buy Analysis Is quality of the two products similar or is one noticeably worse? ―If customers sense decline in quality, business will decrease Does the restaurant have the space and equipment to make the product from scratch? ―A necessary major financial investment to make something from scratch may negate cost savings 41

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