To measure the spend effectiveness of foodservice purchasing you must have a clear understanding of what the function is supposed to be doing in your organization. A typical buyer for an emerging brand is required to perform basic tasks that cannot be measured financially.
If you are concerned about the rising cost of goods and don’t know how to survive these difficult economic times of declining sales and higher prices, then you need to quickly develop a purchasing plan or hire the resources (outsourcing) needed to do so.
Before we take a look at the 3 tiers of savings, I want you to consider how your current supply relationships can impact services and product acquisition costs.
Our firm interviews several foodservice chains each year that have not developed a self-directed purchasing-program. Ronald Bay, Jeff Stine and I tell them to keep in mind “your purchases should not be linked to your sales person, distributor or brokers who profit from every supply-chain transaction.
If you cannot toss change your thinking concerning relationship buying, and you insist on allowing manufacturers and distributors to call you their supply “PARTNER”, then read no more: Let’s just stick a fork in you because - in terms of generating cost savings - you’re done.
The most basic foodservice purchasing program incorporates at least part of the SPS spend management system, the 3Tiers of Savings activities:
Identified
Strategic sourcing to align suppliers with the supply-system, point of production, negotiated pricing, when savings potential is attainable within the next buying cycle or contract term.
Implemented (or realized)
Completed vendor qualifications reviewed the cost of freight and distribution, and ensured savings through billback, rebate, term pricing agreement or fixed quantity contract. Ask your buyer how many savings programs (ideas) are filed in bottom-desk drawers because purchasing never has a chance to present.
Booked
Savings realized can now be recognized in the operating budget and the overall cost-impact on profits reported. Advanced purchasing systems can also track weekly profitability by line item for even tighter control.
Typically, you can accumulate your own spend data and use the information to develop indicators of purchasing efficiency. If you require help in this area, the Wray Advisory Group offers a unique purchasing department assessment service. For less then ten-grand they will benchmark performance, compare your contracts with the leaders in the industry and quantitatively measure purchasing effectiveness. Reporting on purchasing activity is important since it reflects the general efficiency of the department in terms of achieving your major food and supply spend objectives.
Let’s take a look at indicators and objective measurements of a purchasing department.
Purchasing Efficiency (activity) includes:
1. Dollar purchases managed
2. Dollars per category as percent of spend
3. Purchases divided by sales percentage
4. Percentage of spend under contract
5. Number of contracts managed (by each employee)
Measurements of Purchasing
1. Cost $avings / Cost Avoidance Developed
2. Percentage of off-spec deliveries
3. Departmental overhead expressed as expense per $1 million spend
4. Percentage of single source suppliers
5. Effective distributor price-compliance / internal audits
Cost savings are probably the most difficult to quantify in meaningful terms because of commodity markets, specifications and seasonal price changes. The base price you can use is the purchase price in effect at that time. Thereafter, the price of any subsequent purchases would be compared with the base price AND, for more advanced programs, you can compare the base to the forecasted cost of goods.
During times of food inflation (8% overall in 2011), the established performance standard for foodservice buyers shifts from cost savings to cost-avoidance, as a true measure of purchasing effectiveness.
Two cost-avoidance examples:
1. The buyer completes the annual RFP’s for X-long fancy, seasoned SS french fries, then negotiates a reduction in the requested increase from $.10 lb to $.07 lb., generating a cost-avoidance of $.03 lb.
2. The fresh shell egg market is advancing; however, the buyer is able to increase the purchase formula discount from $.09 behind the Urner Barry market quote for X-large eggs to $.12 per dozen
Both of these examples represent a contribution by purchasing to the foodservice organizations bottom-line profits!
To Higher Profits!
Fred
Fred Favole is Founder & President of Strategic Purchasing Services (SPS), a firm specializing in purchasing-outsourcing, staff mgt., risk assessments and distribution program audits. His contact Information: Office: 912.634.0030, e-mail: SP_Services@bellsouth.net Connect with Fred on Linked IN or follow his blog at https://purchasinginsights.blogspot.com/
If you are concerned about the rising cost of goods and don’t know how to survive these difficult economic times of declining sales and higher prices, then you need to quickly develop a purchasing plan or hire the resources (outsourcing) needed to do so.
Before we take a look at the 3 tiers of savings, I want you to consider how your current supply relationships can impact services and product acquisition costs.
Our firm interviews several foodservice chains each year that have not developed a self-directed purchasing-program. Ronald Bay, Jeff Stine and I tell them to keep in mind “your purchases should not be linked to your sales person, distributor or brokers who profit from every supply-chain transaction.
If you cannot toss change your thinking concerning relationship buying, and you insist on allowing manufacturers and distributors to call you their supply “PARTNER”, then read no more: Let’s just stick a fork in you because - in terms of generating cost savings - you’re done.
The most basic foodservice purchasing program incorporates at least part of the SPS spend management system, the 3Tiers of Savings activities:
Identified
Strategic sourcing to align suppliers with the supply-system, point of production, negotiated pricing, when savings potential is attainable within the next buying cycle or contract term.
Implemented (or realized)
Completed vendor qualifications reviewed the cost of freight and distribution, and ensured savings through billback, rebate, term pricing agreement or fixed quantity contract. Ask your buyer how many savings programs (ideas) are filed in bottom-desk drawers because purchasing never has a chance to present.
Booked
Savings realized can now be recognized in the operating budget and the overall cost-impact on profits reported. Advanced purchasing systems can also track weekly profitability by line item for even tighter control.
Typically, you can accumulate your own spend data and use the information to develop indicators of purchasing efficiency. If you require help in this area, the Wray Advisory Group offers a unique purchasing department assessment service. For less then ten-grand they will benchmark performance, compare your contracts with the leaders in the industry and quantitatively measure purchasing effectiveness. Reporting on purchasing activity is important since it reflects the general efficiency of the department in terms of achieving your major food and supply spend objectives.
Let’s take a look at indicators and objective measurements of a purchasing department.
Purchasing Efficiency (activity) includes:
1. Dollar purchases managed
2. Dollars per category as percent of spend
3. Purchases divided by sales percentage
4. Percentage of spend under contract
5. Number of contracts managed (by each employee)
Measurements of Purchasing
1. Cost $avings / Cost Avoidance Developed
2. Percentage of off-spec deliveries
3. Departmental overhead expressed as expense per $1 million spend
4. Percentage of single source suppliers
5. Effective distributor price-compliance / internal audits
Cost savings are probably the most difficult to quantify in meaningful terms because of commodity markets, specifications and seasonal price changes. The base price you can use is the purchase price in effect at that time. Thereafter, the price of any subsequent purchases would be compared with the base price AND, for more advanced programs, you can compare the base to the forecasted cost of goods.
During times of food inflation (8% overall in 2011), the established performance standard for foodservice buyers shifts from cost savings to cost-avoidance, as a true measure of purchasing effectiveness.
Two cost-avoidance examples:
1. The buyer completes the annual RFP’s for X-long fancy, seasoned SS french fries, then negotiates a reduction in the requested increase from $.10 lb to $.07 lb., generating a cost-avoidance of $.03 lb.
2. The fresh shell egg market is advancing; however, the buyer is able to increase the purchase formula discount from $.09 behind the Urner Barry market quote for X-large eggs to $.12 per dozen
Both of these examples represent a contribution by purchasing to the foodservice organizations bottom-line profits!
To Higher Profits!
Fred
Fred Favole is Founder & President of Strategic Purchasing Services (SPS), a firm specializing in purchasing-outsourcing, staff mgt., risk assessments and distribution program audits. His contact Information: Office: 912.634.0030, e-mail: SP_Services@bellsouth.net Connect with Fred on Linked IN or follow his blog at https://purchasinginsights.blogspot.com/
