Production and Planning

							IFWA 1217-Food Production and Planning
Spring 2004
Chapters 5 and 6

Preparation to Lecture:
Read Chapters 5-6

HOMEWORK #2 -LET’S REVIEW

Handout on Recipe Cost

Vocabulary
   1. Cost of Food Sold — the actual dollar value of food products served to guests
   2. Directs — food purchased that is used the day it is received; these items never go into inventory.
   3. Inventory turn over rate — how many times we turn our inventory monthly
   4. Perpetual inventory — a record of all products placed into and taken from inventory
   5. Physical inventory — an actual count of each item in inventory
   6. Control — to verify or regulate
   7. Planning — a detailed method for the accomplishment of an objective
   8. Standardized recipe — a list of ingredients, quantities and preparation method that will yield a specific quantity
       and consistent product every time

Cost Control- The Challenge Of Food And Beverage Operations
•Overview Of The U.S. Restaurant Industry
–Over $400 Billion In Annual Sales
–Approx. 850,000 Locations
–Over 11 Million Employees (Approx. 70% PT)
–Approx. 50% Of All Money Spent For Food
–4.2 meals Per Week Per Person Consumed Away From Home
–Employs Approx. 8 % Of All Persons Working In The U.S.
–Average Restaurant Annual Sales: $601,000
–Sales Distribution: 11% Breakfast, 37% Lunch, 52% Dinner
–40% Of People Eat Out On A Typical Day
–About 1 Billion Meals Per Week
–60% Of Rest. Meals Are Eaten At Home
–Approx. $40.00 per week, per person, spent on restaurant food

Inventory
Types of Inventory Systems
    PERPETUAL INVENTORY
            • Keeps a continuous record of the items in inventory
            • Even under this method, a physical inventory (count) is taken at least once a year!
    PERIODIC INVENTORY
            • More widely used - no continuous record
            • Physical inventory (count) each period

Inventory Record Keeping Procedures
•Perpetual Inventory Procedures
        –Expensive Items
        –“Product Analysis” Concept
        –Best If System Is Computerized
•Physical Inventory Procedures
        –Monthly For Food/Nonfood Supplies
        –Every 2 Weeks For Alcohol
        –“Full-Case Inventory” Concept
Perpetual vs. Physical
       Staff, Facility, Timing, Budget, Operational Needs

3 Inventory Valuation Issues
     Error in valuation (regardless of method used)
     Loss/damage - How to determine ending inventory?
     4 basic methods of valuation

INVENTORY VALUATION-3 MOST COMMON METHODS:

       LIFO - lowest value of ending inventory; highest CGS; lowest Gross Profit, Use Oldest AP Prices
       FIFO - highest value of ending inventory; lowest CGS; highest Gross Profit, Use Recent AP Prices (Most
        Common Procedure)
       Weighted Average - “In between” LIFO and FIFO - Average AP Prices
–Once a Method Is Selected You Need To Use It Consistently

Example
                                # of Units                        Cost/Unit                           Total Cost
Beginning Inventory   25                                 $10.00                                $250.00
Feb. 15th purchase              30                                11.00                               330.00
May 6th purchase                20                                13.00                               260.00
August 22nd purchase            35                                14.00                               490.00
October 10th purchase           40                                15.00                               600.00
December 2nd purchase           25                                16.00                               400.00

   Available for sale           175                                                                    $2300.00
   Units sold                   145
   Ending Inventory             30

Inventory Turnover Analysis
•T/O Is Equal To The Cost Of Food/Beverage Divided By The Average Inventory Value
•A Measure Of How Quickly/Slowly Inventory Is Used
•Goals:
        –Consistent T/O
        –Balance Between Stock Outs and Excess Inventory Amounts
Bar Inventories
        •Perpetual Inventory System Is Most Accurate -- Use Auto Bar
        •“Full Bottle” Concept
        •“Bottle Exchange” Concept
        •Use Outsourced Inventory-Taking Service
        •Count All Containers, Even Opened Ones? (May be Unrealistic)
Issuing (Requistioning)
         Direct and Storeroom
Types
         ABC
         Minimum/Maximum Method (par value, safety stock, lead time)

Bar Issuing Controls- Why are Controls Important Here?
        •Cost Out Requisitions
        •Product Analysis for Expensive Items
        •Full For Empty (Alcohol)
        •Daily Issues/Weekly Issues/Monthly Issues
        •Set Certain Issuing Hours
        •Consider Using Standard Issuing Amounts/Times

Determining Par Value and What to Order

Par Value= stock amount always on hand
        Determine what average you use on a daily basis-always on hand + safety stock
Safety Stock=amount you have to use between deliveries
Lead Time=amount of time is takes from ordering to receiving

Example:
If you use an average of 8# of flour per day, this is your par
It takes 3 days of lead time
         Order on Monday, Receive on Thursday morning


                                                                             Receive
                     Order
Day             Monday          Tuesday         Wednesday        Thursday       Friday    Saturday   Sunday
#’s used/day    8#              8#              8#               8#             8#        8#         8#


        Therefore on Monday you should have - 8#, 8#, 8# = 24#
        Safety Stock=24#

This is in a perfect world. Normally par stocks will equal average plus

Determining the Appropriate Order Sizes
•Balance Carrying Costs With Stock Out Costs
•Perishable Products:
–A basic “Use-Based” System, I.E., Amount Needed Less Amount On Hand = Order Size
–Adjust This Order Size For Special Parties, Etc.
–Consider A “Route Salesperson” Strategy

•Non-Perishable Products
–Set Minimum Par Level, I.E., “Safety” Level
–Set Maximum Stock Level, I.E., The Safety Level Plus The Normal Usage Rate Between Orders
–Set Order Point, I.E., The Safety Level Plus The Amount Used During The Lead Time
–The Order Size Should Bring You Up To The Maximum Stock Level When It’s Delivered
Let’s Look at our Example

                         ORDER                                              RECEIVE
Day             Monday       Tuesday            Wednesday        Thursday       Friday    Saturday   Sunday
#’s used/day    8#           8#                 8#               8#             8#        8#         8#


Safety Level or Par= 8# on hand at all times
Order Point= 8# + 24# = 32#
Maximum Stock Level= 8# + 56# = 64#
At Delivery you should have in inventory- Par Value (8#) + Use of Thursday (8#) = 16#
Your order should bring you up to 64#, so 64# - 16# = 48#
     (check yourself : You need flour for Friday through Wednesday, that is 6 days and 6 x 8=48#)
Forecasted Covers
   • Production Controls-Production Planning
          •          Forecasting
             –     Most Common Method Is To Use Sales Histories; e.g., MM% From Past Months
             –     If You Have A New Operation, Try To Use MM% From A Similar Restaurant
             –     Time Series Analysis Is More Common In Noncommercial Feeding
             –     Everything Is Based On Expected Total Customer Count

Production Schedules and Controls-Importance of planning and control

What is a Production Schedule?
    Detailed time and action of food and beverage production. This schedule determines the order in which food and
        beverages are produced so they are served timely and follow the quality guidelines of the location.

Issues to Consider;
     Time
     Equipment
     Intensity of Production
     Mise en place
     “Distance” of production
     Time of Service
     Cooking, Holding and Serving Issues (time, temp, qc)

Writing a Schedule
    1. Consider the above issues for each recipe
    2. Develop stations and duties
    3. Develop mise en place plans
    4. Work backwards

    What does this schedule do for you?
    1. Works into total production schedule
    2. Assists in purchasing, requisitioning
    3. Labor scheduling
    4. HACCP assurance

Introduction to Costs
I. Standard Costs- used to set benchmarks

Standard Portion Cost-
    • Pre-Costing (Determine the Expected Cost Of Preparing And Serving One Portion)
    • Equal To: (Recipe’s Total Ingredient Cost/Number Of Portions The Recipe Produces)
    • This is done for each individual food item

Standard Dinner Costs
    • Calculate Portion Costs For Each Item Included In A Standard “Dinner”
    • Calculate Total Costs For Each “Dinner”
    • Be Sure To Include Garnishes, Condiments, And Other Supplementary Items
    • Typically Done For “Bundled” Menu Offerings

Calculating Standard Costs
    • Establish All Standard Cost Tools
    • Select A Time Period For Analysis
    • Calculate “Expected” Cost During This Period
    • Divide Expected Cost By Sales Revenue To Obtain The Cost Percentage
    • Compare This Percentage To Actual Cost Percentage

Actual Costs-used to compare against standards (very important that they are accurate)

How are Actual Costs determined?
•Actual Cost could = O.I. + Purchases (Stores) - E.I.
•Actual Cost could = O.I. + Purchases (Stores) - E.I. + Transfers In - Transfers Out - Employee Meals - Comps
•Or Actual Cost could = Purchases (Stores)
Calculating Actual Costs
    • Calculate O.I.
    • Add Directs And Issues
    • Subtract C.I.
    • Add Value Of Transfers In
    • Deduct Value Of Transfers Out, EDR Meal Costs, and Comps
    • Calculate Actual Cost Percentage
    • Compare to Expected Cost Percentage

•Actual Cost is Compared to Standard (Expected; Theoretical) Cost
•Actual Cost Can Be Fudged By Unscrupulous Manager
        –“Inventory Padding” Will Cause Actual Cost To Decrease
        –Ignoring In-Process Inventories May Allow Manager To Hide Theft/Pilferage
        –Transfers Can Be Hidden (what is a transfer?)

•Actual Costs Should Be Calculated For Food, Beverage, And Non-Food Supplies (Rules of the Game)
        •You Should Always Do A Monthly Actual Cost Calculation For Food and Non-Food Supplies
        •You Should Always Do A Bi-Weekly Cost Calculation For Beverage
        •You Should Always Do A Quarterly Inventory Of Replacement Items (Glassware, Utensils, Silverware, Etc.)
        •You Should Always Do An Annual Inventory Of Capital Equipment
Daily Cost Calculations
•May Work Well In A Predictable, Large Restaurant
•The Daily Cost Is Assumed To Equal:
        –Issues + Directs +/- Adjustments That Occur That Day
        –This Is A Form Of “Cash Accounting” System
        –Theoretically: The To-Date Cost % Every Tenth Day Is Close To The Actual Cost

•Daily Cost Calculations In The Bar May Work Better:
        –Bottle-For-Bottle
        –Easier To Predict What Each Shift Will Do
        –Usually The In-Process Inventories At The Bar Do Not Vary As Much As Food/Non-Food Supplies
        –You Can Track Bar Productivity Easier Than Food
Let’s Review our Recipe Cost Sheet! What does it mean?