Lesson4-2-1

HA355 : The Class : Food and Beverage : Food Purchasing : Lesson4-2-1

Food Purchasing

Introduction

Food purchasing is the function of ordering the food products for a foodservice organization; it's the acquiring of the basic raw materials needed to produce the meals served to customers. Since food can comprise anywhere from 25% to 45% of a restaurant's revenue it is imperative that manage exercise tight control over this area of activity.

Objectives

The exercise of the purchasing requires the all the following objects be accomplished:

The operation must have food needed to serve customers when needed.
The food needs to be the right quality consistent with the operation's standards.
The food needs to be purchased at lowest cost, consistent with the other objectives.

Purchases need to made in such a way as to maintain minimum inventory levels, consistent with good operations

Changes in food purchasing

Food purchasing procedures are in a constant state of change. Some of these changes are:

Food distributors are expanding their line of products carried; some have total shopping capability.
In addition to food products purveyors are providing non-merchandise services such as financing.
Small purveyors are merging into larger organizations
Purveyors are adding new products such as convenience foods.
Multi unit restaurant organizations have added centralized purchasing and preparation facilities.
Restaurants that have gone to simpler and standardized menus that do not change too often have simpler purchasing requirements.
Small restaurants have formed buying combines to increase their influence on purveyors.
Some food manufacturers are selling direct to restaurant organization thereby eliminating the "middleman" purveyor.
Because of rising delivery costs, purveyors are insisting on with fewer deliveries.
Supermarkets and clubs are now acting as purveyors thus offering the foodservice organization other options.
Management needs to be aware of potential supply problems when purchasing foods.
Improved food shelve life and storage facilities have changed purchasing procedures.

One stop purchasing

The traditional purchase procedure is to use a selected number of purveyors. Click here to see a flow chart, which shows the steps in a traditional purchase procedure.

However a number of foodservice organizations are going to one stop purchasing because of the following advantages:

Ease of ordering and reduced paperwork.
Should result in better service from the purveyor.
Utilization of purveyor's information system to supplement the restaurant's information needs.
Larger orders should theoretically permit purveyor to provide more frequent deliveries with at lower prices
Purveyors can provide financing at favorable terms.

The major disadvantage to one stop purchasing is that management lose a sense of market conditions and may be paying prices that are too high.

Who should purchase

The purchasing function is critical to the success of the foodservice company. The assignment of this function should recognize the following considerations:

The employee assigned to handle purchasing should have thorough knowledge of foods used by the restaurant.
Depending on size of organization one employee can handle purchasing; however large organizations can use several employees, each one specializing in a different products group.
Usually an administrative employee is used for the purchasing function.
For security reasons management should maintain segregation of duties: the employee handling purchasing should not be involved in receiving, preparation or payment of purveyors.

Purchase quantities

A major factor in ordering food is maintaining the right level of inventory. If too high a balance is allowed we end up with too much money tied up with added interest cost. Also excessive levels of inventory can lead to high spoilage .Low inventory, on the other hand can lead to shortages and poor customer service. Examining a number of factors to arrive at the proper size order and timing can control inventory levels. The following factors need to be considered:

What is the daily usage rate?
What is the lead time once an item has been ordered for delivery of the product?
What is the minimum safety level for the inventory item in question?
What level of inventory balance should be considered the reorder point for ordering
What is the maximum inventory level that should be allowed?

We can illustrate how all of this can work by looking at the following example:

Reorder amount
Lead time-days	5
daily use rate	1,000
order amount	5,000
safety level	2,000
order at	7,000

In the above example we are using an inventory item at 1,000 units per day. Since it takes an average of five days between the order and delivery, we need to order 5,000 units. To that we add a safety level of 2,000 units and arrive at a reorder point of 7,000 units. Lets further assume that there are 20,000 units on hand and we institute a procedure of ordering 5,000 units when inventory drops below 7,000 units. The inventory ledger would show the following activity:

Day	Use	Order	Recieve	Balance
0				20,000
1	1,000			19,000
2	1,000			18,000
3	1,000			17,000
4	1,000			16,000
5	1,000			15,000
6	1,000			14,000
7	1,000			13,000
8	1,000			12,000
9	1,000			11,000
10	1,000			10,000
11	1,000			9,000
12	1,000			8,000
13	1,000			7,000
14	1,000	5,000		6,000
15	1,000			5,000
16	1,000			4,000
17	1,000			3,000
18	1,000		5,000	7,000
19	1,000	5,000	-	6,000
20	1,000		-	5,000
21	1,000		-	4,000
22	1,000		-	3,000
23	1,000		5,000	7,000
24	1,000	5,000	-	6,000

Once the policy is instituted the inventory balance will vary from a high of 7,000 units and a low of 3,000 units. You can down load a file graph that shows the inventory balances from day 0 out to day 60. inventory.xls

The above example is simplified. But even with varying usage figures that above principle can be applied using average usage figures.

Economic order quantities-formula

A quantitative approach to ordering of a regularly purchased item is economic order quantity (EOQ). There are two types of cost to consider when ordering a product: the cost of placing the order and the cost of carrying the inventory. Depending on the frequency of ordering these two cost move in opposite directions. With frequent ordering, inventory is kept low but ordering costs are high. If less frequent, but larger orders, are made the cost of ordering goes down but the carrying cost of inventories goes up. The EOQ gives us a happy medium that minimizes the total of the two costs.

Lets illustrate this with the following example:

Terms:

Symbol

Value

Cost of making order F
$ 10.00

Annual usage of product in units S
1,000

Annual inventory carrying cost C
20%

Purchase pirce per unit of product P
$ 15.00

The EOQ is calculated by the following formula:

The economic order size is 82 units.
The annual cost of ordering is $ 121.95 ((1000/82) x$10). The annual cost of carrying the inventory is $ 123 ((82/2) x$15x20%) and the total cost is $ 244.95. To see a spreadsheet and chart that explains this case more thoroughly download here.eoq.xls

Purchasing methods

There are many different method of purchasing food. Besides one-stop purchasing, which we examined above, there are six methods:

Open market buying
This is the most traditional method of purchasing. The basic steps of this method are: (1) determine the products to be ordered, (2) obtain price quotes for all products to be ordered, and (3) allocate order to purveyors to obtain lowest costs commensurate with service and quality. Click here to down load flow chart showing traditional purchase sequence. TRADITION PURCHASING FLOW CHART.doc

Sealed bid buying
This method is used by large organizations and government agencies. The basic steps of this method are: (1) determine quantity of the product to be ordered, (2) prepare detail product specifications, (3) request sealed bids from purveyors, and (3) select the best price.

Cost plus buying
Under this method the operator pay the purveyor's cost plus a negotiated percent. This method is not frequently used and is usually confined to large organizations. The supplier provides a minimum of service and receives all the business of the operator. The operator needs to periodically verify the accuracy of the supplier's costs

Co-op buying
This method is used by groups of similar types of organizations such as schools, hospitals and fraternities. By working together these operators can obtain more favorable terms from purveyors.

Warehouse club buying
This approach is useful for smaller restaurants.

Contract purchasing
This approach is used by large organization for high volume products. Besides price benefits this method cuts down paperwork. Pricing can on a cost plus a fixed fee basis; formulae pricing, or fee for service.

Steward's market order sheet

The steward's market sheet is a purchase order sheet that is a great help in purchasing (textbook fig. 10-1) the form shows the foods that are likely to be used and has columns to list how much is on hand, how much is to be ordered and the bids received from different purveyors. The purchaser uses the form by calling each vendor and records the quote on the sheet. He then circles the low prices and then calls the purveyors back to place the order. Computer purveyor quote forms are also coming into use (textbook fig. 10.2).

Standard specifications

In order purchase the correct quality and type foods foodservice operators need to use written standard specifications. With specifications there can be precise communications between the operator and the purveyors describing products ordered. Specifications should be written and maintained by the employee responsible for purchasing, with copies to the purveyor and the employee responsible for receiving. The specification document for each product should include the following information:

Name of product
Standard of quality
Size of product
Special instructions
Origin of the product
Class, style, kind or variety of the product

Yield factors (AP and EP costs)

For some purchases, particularly meats, it is necessary to consider the yield that is actually available from the gross weight of meat purchased. The terms AP applies to "as purchased" and EP to "edible portion." The buyer needs to aware of this when ordering meat and figuring costs. Assume an operator is planning a rib banquet for 100 customers. The EP, or edible portion is 9 ounces (.5625 lbs). The AP purchase of the ribs of beef is $3.00 per pound and, after trimming and cooking, a yield of 60% is expected. We need to know how many pound of rib do we need to purchase and what is the cost per portion of the banquet meals. The information we are dealing with is as follows:

Yield Factors Term Value

Edible portion weight-lbs Ep
0.5625

Yield conversion factor Y
60%

AP price P
$ 3.00

Meals served M
100

The rib order, "Ap" can be calculated by the following:

The cost per meal, "Cm" is calculated by substituting the AP price for meal in the above equations:

If the buyer were considering other purveyors, offering different prices and yields, he could evaluate the comparative results by use of the above equations.

Trade credit and payment policies

Payment terms are an important part of the purchase arrangement. Purveyors will generally allow 15 to 30 days for payment after delivery. If payment is late, the purveyor might assess a penalty such as 1.5 percent per month (18% annually) of the payment. As an incentive many purveyors provide cash discounts if payment is made early. For example the terms might be:"2/10, N30." This means that if payment is made within 10 days a 2% discount can be taken; otherwise the full amount must be paid within 30 days. Generally cash discounts are worth taken. Assume that we are considering paying an invoice of $ 1,000 with the above terms. The 2% discount can be converted to an annual rate:

From the above it is clear that diverting funds from short term investments, which usually pay less than 10%, makes sense.

Ethics in purchasing

The food purchaser needs to keep his relationship with the vendor in a courteous but formal manner. The danger can arise when a purveyor tries to influence the food purchasers by personal gifts and favors. The operator should have a policy of either no gifts or a dollar limitation of gifts. The best policy is to accept no gifts.

Once you have finished you should:

Go back to Topic 2: Food Purchasing

Send E-mail to Kevin Helland
or call (520) 523-1001

Terms:	Symbol	Value
Cost of making order	F	$ 10.00
Annual usage of product in units	S	1,000
Annual inventory carrying cost	C	20%
Purchase pirce per unit of product	P	$ 15.00

Yield Factors	Term	Value
Edible portion weight-lbs	Ep	0.5625
Yield conversion factor	Y	60%
AP price	P	$ 3.00
Meals served	M	100