Tuesday, February 28, 2012

Foodservice Purchase Pro Measures Spend Performance

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:

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.

(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.

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 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/

Wednesday, February 15, 2012

Free Purchasing Advise For Foodservice Executives

In many foodservice organizations the Purchasing function is viewed as a routine low level activity. A couple of years ago our firm completed a survey of 15 emerging chain CEO's that revealed that 48% could not readily recall their annual total food spend or discuss the impact of recent commodity price increases on the cost of goods.  However, they had no problem listing sales growth, Q3 profits, salary and overhead costs! 

This approach is nuts in today's economy, and leads to what I call purpose-driven failure.   This type of executive needs to assess purchasing, R&D and distribution managements' role in their organization.  The lesson to be learned is that higher quality spend performance yields beneficial results. 

Here is a my free purchasing advise:

1.   Secure the support of your culinary and purchasing team by acknowledging their independence and accountability and by involving them in the product decision making process.

2.  Don't expect top bottom-line success if your budget doesn't include funding for travel to trade shows and visits to vendors.   Don't  expect world-class results if you are asking purchasing  to work without support staff or modern spend management systems.  Consider that without staff resources purchasing outsourcing may be your best option. 
3.  Do apply effective checks and balances between culinary and purchasing as both areas must work together to provide proper scrutiny of suppliers and  product specifications.  Allow purchasing to negotiate the final supply arrangements... and, please ask the chef to return to the test kitchen.

4.  Include time for purchasing updates at  staff meetings, remembering to allow extra time (when warranted) for procurement to explain the complexity of commodity markets or problems with distribution systems.   It will benefit the team. Start to value the skills and experience of procurement staff or  fire the buyer  and save the overhead expense.  

5.  Actually sign supplyagreements.  In this tough economy, with commodity shortages just around the corner,  the cost of supporting your business is increasing. If you pride yourself on never signing a supply-deal,  then I've got bad news. At some point your supply-chain will no longer absorb the cost of doing business with you, and there will be PAYBACK.   

6.  Subject every price increase, fuel sur-charge and extra delivery fee to a robust challenge!   Clear the way for your purchasing executive to succeed by ensuring suppliers and distributors know that you stand behind your purchasing team, then watch performance soar upwards.

To Higher Profits!

Fred M. Favole is Founder & President of Strategic Purchasing Services (SPS),  a firm specializing in purchasing department outsourcing, interim management, risk assessments and distribution program audits.  Contact information: 912.634.0030, e-mail: SP_Services@bellsouth. net   or  connect on LinkedIN.

Thursday, February 9, 2012

4 Reasons Why You Need A Foodservice Distribution Audit

The need for foodservice executives to be confident of the acquisition cost of goods remains one the keys to effective spend management.  The Sarbanes-Oxley Act of 2002  was an over-reaction to a number companies, including Foodservice Distributors’ accounting scandals which have cost every foodservice brand, supplier and distributor thousands of hours of dollars in compliance costs.  

Your foodservice organization decision to audit protects your company and investors and is the #1 reason why you need an independent distribution audit service.   The external auditor does not have any ties to your purchasing department, suppliers, shareholders or distributors. 

Reason #2: You are contractually entitled to audit distributor prices to assure compliance with contracts and pricing practices. The details of the audit are listed in your Master Distributor Agreement (MDA).  The process helps ensure that your priced order guides correct and that vendor are charging accurate pricing in compliance with contracts.  It’s trust but verify when it comes to pricing. To conduct a professional foodservice distributor audit requires expertise in purchasing, product specifications, vendor pricing methods & contracting, freight and re-distribution costs, and numerous distributor prices practices like inventory valuation. 

Reason #3: Improve spend visibility. An Independent audit empowers your supply-chain program, and provides solutions to operations and buying staff as the results can be reviewed and programs proved reliable.  Learn first hand how a "fresh-eyes" approach can be worth many times your investment in the audit service.  To achieve pricing assurance, foodservice auditors also need to perform some detection work to test if prices and charges are appropriately supported. 

Reason #4 Chain operators typically don’t examine all pricing details during a standard in-house audit. Concerns about profitability challenges the distributors the avoid pricing failures in times of severe market stress.  It is true that the audit process examines invoice details, contract prices and distribution margins and exceptions, however, this can be a giant step towards discovering cost-savings solutions. 

You already know that most accounting firms do not understand food service or have a working knowledge of products, designation categories, sheltered income, re-distribution costs, inventory valuation methods, and other distributor practices which can impact your delivered cost of goods.  

Foodservice brands are re-thinking audits and spend management programs, and you should too.  When you schedule an audit with our firm you gain the respect of the supply-distribution community, and you can use the information we provide to bring spend analytics to the next higher level of performance.  When you start thinking of the the supply-chain in terms of a series of linked-costs from farm to plate, you can better understand the value of an external audit.  

An Audit is a Decision as well as a Solution

Your company is responsible for contract compliance within you supply system to assure accuracy in pricing and distribution charges.  However, product pricing, transportation and distribution systems make spend transactions complex, and behond the skills of your accounting firm.  The most elaborate internal purchasing systems are not adequate, and mean nothing unless the base pricing and selling margins are verified through the audit examination and documentation process.  

Next Steps 

You are encourages to initiate a high quality professional internal and external audit and price-compliance program to assure that standard business practices are being followed. The role of our firm or any external audit service is to be sure, one of "assurance" and validation. However, you also want the service to be proactive in the dissemination of procurement-supply chain practices that can be incorporated into you  program to reduce acquistion costs. 

While an independment audit is not a replacement for a complete purchasing department assessment and spend profile, the audit report and information you receive will deliver a tremendous ROI for your investment in the service.

To Higher Profits! 
Fred M. Favole is Founder & President of Strategic Purchasing Services, a firm specializing in procurement supply-chain outsourcing, interim managment, risk assessments, and distribution program audits.  Fred's contact information:  p: 912.634.0030, e-mail: SP_Services@bellsouth.net. or connect on LinkedIN.

Sunday, February 5, 2012

Is the Foodservice Supply-Chain Out to Get You?

That might seem like a paranoid question, from a seasoned procurement executive, but if you take into consideration today's business environment, it doesn't seem so far off base.
Suppliers are fighting for economic survival, just like you are.  Doesn't it make sense that Every one benefits in the long run from improving  pricing practices and re-directing resources to the end user. 
When will  suppliers stop deep discounting prices and absorbing freight for the largest chains at the expense of the regional and emerging chains?  How much does it cost for the supplier to slot new products at the leading broad line distributors? How much more do emerging brands pay because of distributor spiffs, sheltered income, freight adjustments, and no-show food shows?  
Distributors can improve delivery and pricing practices, too. Why do they continue to pass along their buying mistakes (100% of all price increases, charge customers based on replacement cost  and not inventory value?  Will distributors continue the class pricing warfare against the independent operator and emerging chain?  Why can't they get pricing for contacted items right month after month?  Do they profit by substituting for proprietary products?  Why is it that  fresh eggs, cheese and bacon prices don't follow the market down, as quickly as they move prices up? 
Will the distributors' "in-house"  brokers and manufactures' representatives continue to keep prices higher for smaller restaurant brand.  Prove it, you say! If you move just one level higher in the food sales chain, ask the manufacturer's regional chain sales manager to confirm that the local and regional chain is priced higher than large regional or national chains for the same item.   
Why do distributors and manufacturers close-code products (those non-private label  products brought into inventory but not make available to you)  that could save you  money?   Why does the industry allow distributors and suppliers to pass along institutional, GPO and health care discount pricing to non-qualified restaurant customers? 
When will actual freight cost be used to determine the landed cost of goods?   Exactly when will distributors start calculating selling prices for margin and case fee accounts based on true tax cost.   You get the idea!
Keep in mind that not all suppliers and distributors participate in these practices. We would not be a successful purchasing firm without the strong support of a great many honest distribution companies and quality manufacturers.  These folks work as hard as any operator that I know.  
As part of your financial survival plan,  we recommend that you implement or improve the performance of 4 spend management programs:
4  pillars of food service procurement
  1. strategic sourcing
  2. commodity-price management
  3. distribution price-compliance 
  4. percentage of spend under contract 
If you are willing to use a systematic approach to managing the buying process you will be protecting your bottom-line and business interests.
To Higher Profits,
Fred M. Favole is Founder & President of Strategic Purchasing Services (SPS), a firm specializing the purchasing services such as department outsourcing, bid management, and distribution program audits. Wray Advisory Group (WAG) has selected SPS as service provider to foodservice organizations    Fred's contact information: p: 912.634.0030, e-mail:  SP_Services @ Bellsouth.Net