Chapter 5 Purchasing and Inventory

Purchasing Overview The purchasing process is everything involved in buying products and services for an operation: Determine what an operation wants and needs to buy. Identify quality standards. Order products and services. Receive deliveries. Store and issue products. PURCHASING GOALS 5.1 Chapter 5 | Purchasing and Inventory

Maintaining Supplies and Quality Standards Tools to help purchasers buy the right amount of product: Customer-count histories Popularity index of items sold Vendor delivery schedules Availability of items from vendors Recognizing outside influences that might affect an operation Every item an operation produces must meet that operation’s standards for quality: Consistency is the key to drawing repeat customers. An operation must have established quality standards for each item or service. Specifications are set by the chef, manager, and/or owner, and are easy to follow when purchasing brand-name items. 5.1 Chapter 5 | Purchasing and Inventory

Minimizing Expenditures and Staying Competitive . To minimize spending, an operation needs to consider: Customer-count forecasts Available storage capacity for new product Forecasts of future costs of particular products For any operation, all costs must be controlled and the restaurant must be able to attract customers. For an operation to stay competitive, it must: Shop around for vendors who will provide the best combination of price and service for the operation’s needs. Try to get the lowest possible edible-portion (EP) price or as-served (AS) price. Try to get the maximum yield, or the total utilization, from products purchased. 5.1 Chapter 5 | Purchasing and Inventory

Channels of Distribution Flow A channel of distribution includes the particular businesses that buy and sell a product as it makes its way from its original source to a retailer. There are three main layers in any channel of distribution: Primary sources include the farmers and ranchers who raise produce and livestock. Intermediary sources include wholesalers, distributors, and suppliers. Retailers sell their products directly to the public. All restaurants are considered retailers. Note: The Channel of Distribution is the flow of food to a business. 5.1 Chapter 5 | Purchasing and Inventory

Goods and Services: What’s Being Purchased Food and Beverages: These are items that operations actually prepare and sell. Nonfood Items: These items are directly tied to the sale of food and beverages. Smallwares and Equipment: These are items that an individual can generally move from location to location easily and that require replacement fairly often. Technology: Management and employees use technology throughout the modern operation. Furniture, Fixtures, and Equipment (FFE): This category is also known as capital expenditures. An operation might purchase or lease some of the items in this category, such as big-ticket appliances. 5.1 Chapter 5 | Purchasing and Inventory

More Goods and Services Business Supplies and Services: These supplies and services support the management or marketing of an operation. Support Services: These support services are tied to the operational aspect of the business. Maintenance Services: These services help keep the facility in good shape. Many of these services are essential to the efficient functioning of an operation. Utilities: In many areas of the country, operations can choose among competing utility suppliers. Careful negotiation of the various utilities in a given area will end up saving an operation money. 5.1 Chapter 5 | Purchasing and Inventory

Goods and Services What’s being purchased Purchasing is important because it can make or break a business. Purchasing too many supplies ties up your assets or operating capital and may make it hard for a business to succeed. Purchasing too little supplies leads to stockouts and frustrates customers. Quality and consistency are the keys to delivering desirable products to the customers. Purchasing lower or inconsistent quality food items can quickly lead to the failure of an organization.

Using the business money It is important to make good decisions about how to use the profits that a business makes. Buyers must balance how much to spend on supplies with how much can be sold in a given time period. Businesses can use their capital (assets or money that they have to spend) to buy supplies, pay salaries and rent and other expenses. Businesses also can make investments (the use of money for future profit) in the business. Investments could be new equipment, remodeling, new menus, redecorating etc.

Buyers: Who’s Doing the Purchasing In independent or single-unit operations, the buyer of an operation’s product might be the owner or manager. In a franchise operation, purchasing is often controlled by the franchising organization. The purchasing structure in chain operations might include an individual to perform or review all purchasing activities. Hotels, large restaurants, and chains use the formal-purchasing method to order goods and services. For an operation to run effectively, buyers must have a full understanding of the everything in the operation and the purchasing process. A buyer must have integrity. 5.1 Chapter 5 | Purchasing and Inventory

Purchasing continued There are different documents that are used during the formal purchasing process. Quotes are notices of a price that a supplier gives to a buyer during the purchasing process. A specifications form describes in detail the characteristics of products and services that an operation may buy. A market form identifies how an item has been processed before it is packaged. A requisition form is a filled out at the beginning and is a request to buy something and a request for a purchase order.

Section 5.1 Summary There are five basic steps to the procurement process: determine what an operation wants and needs to buy; identify quality standards; order products and services; receive deliveries; and store and issue products. There are four major goals of purchasing: maintain the right supply of products and services, maintain the quality standards of the operation, minimize the amount of money the operation spends, and stay competitive with similar operations. There are three main layers in any channel of distribution: Primary sources are the producers; intermediary sources include wholesalers, distributors, and suppliers; and retailers sell their products directly to the public. 5.1 Chapter 5 | Purchasing and Inventory

Section 5.1 Summary (Cont.) There are nine major categories of goods and services: food and beverage; nonfood items; smallwares and equipment; technology; furniture, fixtures, and equipment; business supplies and services; support services; maintenance services; and utilities. A buyer must know everything about an operation—from the items on the menu and their current prices to the expected volume of business. Buyers must have integrity to avoid forming relationships with vendors that could either compromise the relationship with that vendor or compromise the best interests of the operation. 5.1 Chapter 5 | Purchasing and Inventory

Determining Quality Standards Quality refers to the value or worth that customers place on a product or service. Establishing solid quality standard specifications helps an operation create the consistency that customers expect. Factors to be addressed when defining an operation’s quality standards include: The Item’s Intended Use: Knowing how an item will be prepared and served is the most-influential factor in determining quality standards. The Operation’s Concept and Goals: The overall concept and goals of the operation guides all decisions. The Menu: The buyer must specify in the quality standard exactly how the item is described on the menu. 5.2 Chapter 5 | Purchasing and Inventory

Quality Standards (Cont.) Employee Skill Level: If an operation offers items that require extensive preparation, the operation will need highly skilled employees. Budgetary Constraints: Operations in highly competitive markets may need to include cost limits in their quality standards. Customers’ Wants and Needs: It’s very important to look closely at what customers want and why they choose to eat at an operation. Seasonal Availability: The seasonal nature of produce and other items affects price and availability. Storage Capacity: An operation’s storage space limits the amount of product it can purchase, which may then affect the quality of some menu items. 5.2 Chapter 5 | Purchasing and Inventory

Writing Product Specifications Product specifications, or specs, describe the requirements for a particular product or service that an operation wants to buy. Specifications include the details that help a product or service meet the operation’s quality standards. Operations should always document product specifications. Buyers should always work with approved, reputable suppliers. Buyers must be very familiar with the operation’s quality standards and product specifications and communicate these standards and specifications to both staff and vendors. 5.2 Chapter 5 | Purchasing and Inventory

Ordering Buyers conduct make-or-buy analyses to decide if an operation should make an item from scratch or buy a ready-made version. Knowing exactly what and when to order is at the center of purchasing. Buyers and managers use production records to forecast their buying needs. A production sheet lists all menu items that the chefs will prepare on a given day. Buyers use production sheets to spot signs of stockouts and overproduction. 5.2 Chapter 5 | Purchasing and Inventory

Figuring Out What to Order One of the most important ways managers try to limit food waste is by keeping accurate daily food cost sheets. Managers keep sales mix records that track each item sold from the menu. This record shows which items sell well, called leaders, and ones that don’t sell well, called losers. Par stock levels are the ideal amounts of inventory items that an operation should have at all times: Par stock – Amount in stock = Amount to be ordered Another way to ensure that an operation always has the proper level of stock on hand is to establish a reorder point, or ROP, for each item. A reorder point is like a warning bell; it alerts an operation to make orders immediately. 5.2 Chapter 5 | Purchasing and Inventory

Ordering Forms A purchase order is a legally binding, written document that details exactly what the buyer is ordering from the vendor. Buyers can place purchase orders by phone, fax, or the Internet. Keeping track of the information on the purchase order helps the buyer control products and services. When a chef believes that a piece of expensive equipment should be purchase or replaced, the chef must first fill out a requisition and send it to company headquarters. Once headquarters approves the purchase and notifies the buyer, the buyer can place the order. 5.2 Chapter 5 | Purchasing and Inventory

Knowing Food Prices A buyer must understand and keep track of the factors that affect food prices. Factors that affect a product’s value: Time value: The price retailers pay for the convenience of selecting the time of delivery from suppliers. Form value: The price savings created when a buyer purchases bulk quantities of food instead of individually portioned servings. Place value: The differences in price of a product depending on where it needs to be shipped. Transportation value: The cost of choosing a quick but expensive form of transport to get goods delivered. Service value: Additional convenience services that a vendor provides to its customers. 5.2 Chapter 5 | Purchasing and Inventory

Section 5.2 Summary Quality standards refer to the value or worth that customers place on a product or service. Product specifications describe the requirements for a particular product or service that an operation wants to buy. Buyers conduct a make-or-buy analysis to decide if an operation should make an item from scratch or buy a ready-made version. Buyers use production sheets, daily food cost sheets, and sales mix records to help with purchasing decisions. There are many economic factors that influence the price of an item. 5.2 Chapter 5 | Purchasing and Inventory

Receiving Orders Receiving means inspecting, accepting, and, in some cases, rejecting deliveries of goods and services. Guidelines for efficient receiving procedures include: Plan ahead for shipments. Inspect and store each delivery before receiving another one. Inspect deliveries immediately. Record items on a receiving sheet. Correct mistakes immediately. Put products away as quickly as possible. Maintain the receiving area. Receivers have the right to refuse any delivery that doesn’t meet the operation’s standards. 5.3 Chapter 5 | Purchasing and Inventory

Storing Orders Perishable products are food products sold or distributed in a form that will spoil or decay within a limited period of time. Nonperishable products are items that, generally due to packaging or processing, do not readily support the growth of pathogens. When storing items in refrigerated storage: Set refrigerators to the correct temperature. Monitor food temperature regularly. Schedule regular maintenance of coolers. Don’t overload coolers. Use open shelving. Keep cooler doors closed as much as possible. Wrap or cover all food properly. 5.3 Chapter 5 | Purchasing and Inventory

Frozen and Dry Storage When storing items in frozen storage: Set freezers to the correct temperature. Check freezer temperatures regularly. Place frozen food deliveries in freezers once inspected. Ensure good airflow inside freezers. Defrost freezers on a regular basis if necessary. Clearly label food prepared on-site that is intended for frozen storage. When storing items in dry storage: Keep storerooms clean and dry. Make sure storerooms are well ventilated. Store dry food away from walls and at least 6″ off of the floor. Keep food out of direct sunlight. 5.3 Chapter 5 | Purchasing and Inventory

Some storage facts Item or area Temperature Humidity Meat, poultry, fish and dairy products 41 degrees F or lower 75 to 85 percent Live shellfish 45 degrees F Eggs in shell 45 degrees F or lower Most fruits and vegetables 85 to 95 percent Dry storage (items should be away from walls and at least 6-inches off the floor) Between 50 and 70 degrees F NA (ventilation should circulate air through the room) Note: Humidity is the amount of water moisture in the air. It is important to keep humidity at proper levels to store food successfully.

Taking Inventory An inventory is a record of all products an operation has in storage and in the kitchen. In the physical inventory method, the entire stock is physically reviewed on a regular basis. In the perpetual inventory method, employees record items when they are received and then when they are used up. A physical inventory is an actual count of all items in stock, while a perpetual inventory is an estimate of stock on hand based on data entry. Issuing refers to the official procedures employees use when taking an item out of the storeroom and putting it into production. 5.3 Chapter 5 | Purchasing and Inventory

Calculate Usage, Food Costs, and Loss Using an inventory system helps a buyer calculate product usage, food cost, and losses. Tracking the amount of a product used during a period of time helps the buyer calculate how much needs to be ordered. Buyers calculate the total cost of food the same way they calculate item usage, except that they use the figures for total restaurant food inventory value. If sales of food for the period are less than the cost of food sold, then the operation is operating at a loss. Another type of loss is inventory shrinkage, or the difference between the total cost of food and the cost of goods issued during the period. 5.3 Chapter 5 | Purchasing and Inventory

Profit and loss Since the goal of any business is to make money, it is important to know if it is operating at a profit or loss. Profit is money that is left over after the business has purchased its supplies and paid all its bills. Loss means that the business is spending more money than it takes in from customers. Gross profit is the profit before all other costs are deducted. Net profit is the cost after all other costs are deducted.

Section 5.3 Summary Receiving means inspecting, accepting, and, in some cases, rejecting deliveries of goods and services. Perishable products are food products sold or distributed in a form that will spoil or decay within a limited period of time. Nonperishable food is generally purchased in large quantities and less often than perishable food. Food should be stored according to whether it’s perishable or nonperishable. There are three types of storage available in most foodservice establishments: refrigeration, freezer, and dry storage. An inventory is a record of all products an operation has in storage and in the kitchen. 5.3 Chapter 5 | Purchasing and Inventory