September, 1998

Increasing Profits Without Increasing Prices

In many food service organizations, lack of information control often leads to a mis-estimation of food costs, faulty inventory figures and lowered profitability. By implementing the right back-office system, however, profits can be increased without having to raise prices. How? By centralizing back-office operations with a comprehensive, fully integrated software system, a four to five percent reduction in food costs is well within reach for most organizations. Based on this estimation, a restaurant ordering $1,000,000 of inventory per year, for instance, would save upwards of $40,000 - a quick pay-back for most automated systems.

There are several ways in which back-office efficiency translates into food cost reduction:

1. Bid Tracking
   Food costs are changing constantly. Climatic variations and seasonal changes make produce an especially volatile commodity. Additionally, constant underbidding by rival vendors makes it difficult to stay on top of current rates. Through the use of an effective back-office system, however, the ever-changing rates of suppliers can be accurately tracked, giving operators access to the lowest possible cost for each vendor.
   
   Purchasing, too, is made easier. Every time a shopping list is drawn up, a centralized back-office system has the ability to display the bidding history of each item on the list. Even if a restaurant is happy with a particular supplier, discounts can often be acquired by informing them of lower rates for certain items available from the competition.



2. Cost Analysis
   In any menu mix, it's important to discover what's profitable, what's popular and what isn't selling in order make the necessary adjustments. And for any intended price change, a prediction of consequences is vital. A good system is able to easily provide this level of functionality.
   
   Additionally, by using a system that is able to conduct detailed analyses throughout the organization, management can effectively target what items or locations generate profit and where any losses originate.



3. Just-In-Time Purchasing
   The ability to forecast sales based on prior activity and current inventory greatly simplifies and refines the purchasing process. By being able to accurately predict what is needed, guesswork is eliminated and inventory levels are kept at a minimum. Just-in-time purchasing permits a much higher degree of control over stock levels. Running out of items on the one hand or spoilage on the other, is either greatly reduced or eliminated altogether, significantly effecting the bottom line.



4. Inventory Control
   Some operators continue to estimate inventory by manual count. But today, that's not enough. A good system can automatically pinpoint what's on order, where current stock is located, as well as spoilage and loss rates, and other variance. This type of detailed analysis allows a facility to determine if its kitchens are over or under-portioning, if yields are less than expected, and even pinpoints the possibility of theft.



5. Forecasting
   Based on history, needs, par levels, and what's available on hand or on order, a forecast calculates what a restaurant's needs are. Based on this, a shopping list is created. Numbers can then be adjusted, depending on targeted food costs and the level of profitability desired. By manipulating quantities, portion sizes and food costs, profitability can be maximized.



6. Purchase Order Tracking
   Through computerized purchase order tracking, quantities received are compared against purchase orders. The National Restaurant Association estimates that, on average, there is a one percent error per invoice - almost exclusively in the vendor's favor. Using a system that provides for automated merchandise arrival, operators could readily spot these errors. This one function alone would translate into a substantial annual savings.

Time Savings Performing administration manually or with non-integrated systems is an extremely time-consuming activity. However, with a system that automates the wide-ranging facets of their food and beverage operations, management personnel are released from the task of constantly inputting and updating information. With the extra time, they are free to focus on what they do best: manage.

The Bottom Line Implementing a comprehensive, integrated and centralized back-office system gives food service operators the opportunity to greatly increase efficiency and profitability without passing the costs along to their customers. "By increasing our control over stock levels and food costs, and eliminating duplicative functions, our system paid for itself in only a few months," says Mark Reppert, owner of the Jazz Restaurant chain of San Antonio TX. "I can track every steak we order from the supplier - in the door, onto the table and all the way to the financial statement whether I'm in Texas or Timbuktu."

It must be understood, of course, that a labor investment is always required at the front end, before back-end time savings translate into increased profits. Databases must be developed, and procedures, recipes and bidding data must be entered before a centralized system delivers substantial rewards. But when it does, a significant reduction in food costs is not just a dream, it's a reality, allowing an increase in profits without raising prices!

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