Aug. 9, 2013
The single best way to reduce your food cost is to shop every item from several distributors each week. If you think this statement is true, congratulations, you are a buyer. If you know there is more to it, you are a purchasing manager.
Understand distribution costs
The relationship between a distributor and the operator is determined on the basket of goods and services required. That basket includes markups, food specifications, the number of deliveries per week and cases per order, time window constraints and credit terms. Demanding the lowest price on the highest quality products with a guaranteed 10 a.m. delivery three days a week and 60-day credit terms is simply not realistic. Explain which of these items is most important to your operation. Distributors want to serve your needs and when you help them lower their cost of service, they reward you with lower distribution costs. This is the best way to manage your landed food cost in the long-term.
Understand contracts & markets
Many food commodities like wheat, coffee, dairy and pork bellies have markets based on the Chicago Mercantile Exchange. Every day at the CME, buyers and sellers create a market price based on supply and demand. Many commodities are available for contract pricing for 90-180 day windows. Key items that define a foodservice operation, like prime rib for a steak house or flour for a pizzeria lend themselves to contracts. Annual crops like tomatoes have 12-month contracts. Contracts protect buyers in a rising market but lock them in at higher prices when markets fall. Buyers and sellers both have risk. Contracts can be great, you may pay more if a market falls but you lock in at a price that works for your operation's theoretical food cost. The more volatile the item, the greater motivation for a contract.
In general, the fresher the item, the closer you buy at the spot market. As an example, locking in a price on cucumbers leaves you vulnerable to bumper crop supplies or poor quality from a specific grower.
Many foodservice manufacturers have direct volume allowances for key accounts. These allowances are based on volume and commitments. Operators negotiate directly with producers and deviated prices come through their dedicated distribution channel. Defining items like the prime rib and flour examples above can qualify for these direct discounts. In most cases, operators do not have enough volume to have direct deals.
This is where a Group Purchasing Organization can help. GPO's "bundle" volume from many operators and negotiate in bulk. Manufacturers get what they want, larger volumes and a commitment, so it is in their interest to work with these organizations.
The pressures to manage your menu, your staff, your costs and insure customer satisfaction are immense. Create proper specifications, consider contracts for key items and make a commitment to manufacturers for allowances and distributors with a Managed Distribution Agreement. In the end, a true purchasing agent will lower their food cost more effectively than the buyer who shops around for some mythical best price.
John Krebs is the President of Axis Purchasing. The company specializes in group purchasing agreements, purchasing consulting and operational efficiencies.