Purchasing powerPurchasing power

by alan j. LIDDLE

The good news is that food price inflation is not expected to outpace the quantum leap it made in 2011. The bad news is it’s not supposed to retreat much, either. That means no rest for the weary purchasing officials still challenged by volatile commodity costs and the need to maintain margins.


And even as operators wrestle with food price volatility, they also are continuing to battle the consumers’ seemingly intractable focus on menu price, leaving little room for increases and making it an ideal time to review supply chains for ways to drive costs out. 


Given the current environment, purchasing veterans advise operators to re-examine product specifications; the numbers, locations and capabilities of manufacturers and distributors; commodities purchasing practices; and freight cost-management strategies.


“Supply chains compete, and companies that don’t recognize that will lose out,” said David Parsley, senior vice president of supply chain management for Brinker International Inc. of Dallas.


According to the National Restaurant Association, wholesale food price inflation will “somewhat level off” in 2012, after hitting 8 percent last year — the highest level in three decades. Meanwhile, many companies are factoring food inflation into their projections. For instance, McDonald’s executives anticipate 2012 commodity cost inflation of 4.5 percent to 5.5 percent for the domestic system. 


The scope of food price inflation facing operators depends largely on the foods they sell, and commodity price forecasts for the year vary greatly. Prices for milk, block cheese, butter, eggs, turkey, pork, soybean meal and soybean oil are all projected down, according to Market Vision, a commodities analysis and forecasting firm based in Fairfield, N.J. And prices for choice-grade beef, broiler chickens, dry whey, wheat, corn and soybeans are projected to rise — sometimes markedly. (See chart.)


Point A to point B


A company’s logistics management is a good place to kick off a review, especially since diesel prices in 2011 jumped 28.7 percent to average $3.85 per gallon nationally, and look to be in a similar place in 2012, said John Barone, president of Market Vision and a contributor to NRN.


Logistics management is one of the “fundamental blocking and tackling strategies” of supply chain management that yields the greatest return on investment, said Brinker’s Parsley.


Keith Rosenthal, vice president of purchasing and product development for Bojangles’ Restaurants Inc., agreed, pointing out that long-term strategies and relationships have value.


“Efficiency in the supply chain is important and continuity is important; change costs money,” said Rosenthal, whose Charlotte, N.C.-based company operates or franchises more than 500 Bojangles’ Famous Chicken ‘n Biscuits restaurants.


When considering shipping, order processing, dealing with third parties and holding inventory, supply chain analysts need to ask, “What is the most efficient process for getting something from the manufacturer or processor to my restaurant’s door?” Rosenthal said.


Everyone involved needs to have input into such process mapping, Parsley noted.


“The supply chain team by itself doesn’t have all the answers,” he said. “You need the operators and you need the other folks involved, inclusive of your supplier and distributor partners, for a cross-functional assessment of what you are doing, how you are doing it, and what is adding value and what isn’t.”


He noted how Brinker, through supplier rationalization, was able to better manage costs without altering quality or specifications. The company, which operates or franchises 1,574 Chili’s Grill & Bar and Maggiano’s Little Italy casual-dining restaurants, initially had five fresh ground beef suppliers using seven plants to supply Brinker.


“We’re down to four points of distribution and soon will be at three,” he said, noting that the process yielded more consistent product and lower negotiated costs based on the higher volume of business done with the remaining plants, as well as lower effective freight rates because trucks are carrying larger amounts of product from each plant.


Savvy companies also conduct a distributor rationalization, Parsley said. 


Count your SKUs


Supply chain reviews recently have benefited mid-sized and smaller operations, as well, including Parasole Restaurant Holdings of Edina, Minn. 


Parasole generates annual sales of about $65 million from 14 casual-dining restaurants and a handful of bars, including Burger Jones, Chino Latino, Il Gatto and Manny’s Steakhouse. In 2011 the company cut its core vendor list from about 85 to 75 by reducing its number of product SKUs, diverting business from some smaller suppliers to its broad-line distributor and making one produce supplier the source for 40 key items.


Michael Larson, Parasole’s vice president of purchasing, said discounts granted by the broad-line distributor for the additional business saved Parasole $70,000 a year, or half a percent in consolidated food costs. Among other benefits, he said, was a reduction in the number of deliveries to restaurants because of larger average drop sizes, and lower corporate and in-restaurant purchasing administration duties, which, in turn, was a factor in the company’s decision to eliminate bookkeeper positions at some locations.


Parsley observed that operators often get excited about shaving a penny or a nickel off the cost of a case of product, which, if they use 20,000 cases per restaurant per year, could yield up to $1,000 in savings per unit. But he said that if an operator were to better manage freight costs and reduce rates by a penny per pound, and if, for example, an average product case weighs 40 pounds, the example operation could save $8,000 per restaurant per year.


Market Vision’s Barone suggested that a small chain might save by switching to a product brand in which its distributor already does a large volume of business, allowing the chain to share in the lower effective freight rates the distributor enjoys because of fuller trucks of that incoming product. 


He also suggested that an operator might similarly save on freight by having proprietary products manufactured by a company that already sends a large volume of goods to the operator’s distributor. 


Larger chains can talk with suppliers of proprietary products about reducing the cushion built into the price to cover possible variables in shipping costs from the plant to the distribution center during the term of the contract, Barone suggested. He noted that suppliers might be more receptive to the idea if operators agree to share in any extraordinary costs.


Know the category


Managing product costs, in general, is important because “we’re not retailers, so we can’t raise and lower prices like a grocery store,” Rosenthal noted.


When dealing with commodities and contract prices, he said, operators must look at their menu and products and ask: “Where can I live? Can I make a fair margin if I have to pay this or that for a product?” If the answer is, “I can,” Rosenthal continued, “let’s try to flatten the price for the long term, instead of cutting it by a penny, because if I know where my costs are, then all I have to worry about is managing my top line.”


To deal with pricing and other product issues, Parsley said some companies are hiring or developing expert “category managers.”


“They can work intelligently with the culinary team, the quality assurance team and the operations team, and really look at how a product needs to function in our world and what are the best ways of dealing with it,” he said, noting that Brinker has 10 managers for different foods and beverages.


Operators who need short-term savings might tweak beef specifications and consider pre-marinated or tenderized products, lower-cost select-grade beef cuts, or increasing the percentage of fat in a hamburger, Barone said. If a company has negotiated a good price for a popular protein, such as chicken breast, he said, it might pad the tonnage for the year, and allow for multiple limited-time offers to be planned around different versions of that base product.


Contact Alan J. Liddle at [email protected]
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Follow him on Twitter: @AJ_NRN.