Managing Costs in OAA Nutrition Programs

1. Managing Costs in OAA Nutrition Programs Presented By Audrey C. McCool, EdD, RD, LD

2. Effective Cost Management • Managing costs effectively means OPTIMIZING costs relative to the revenue anticipated for your program. • It does NOT mean your costs are reduced to the minimum possible

3. Effective Cost Management Effective cost management is achieved through the development and consistent implementation of an effective control process throughout the entire foodservice system

4. The Control Process • Set Standards • Implement Standards • Collect Operational Data • Identify Variances • Determine Variance Significance • Investigate Causes of Significant Variances • Determine Appropriate Remedial Action • Implement Remedial Action • Collect New Operational Data • Repeat Above Steps

5. The Control Process Question: Do you have a process to control costs in your program that follows these steps? a. Yes, we do all these steps b. We do some of these steps c. No, we don’t have a defined cost control process

6. Forecasting • Provides the data base for decision making and planning • Essential for cost effective food procurement and food production • Helps avoid product shortages and spoilage • Helps avoid both over- and under-food production • Generally based on historical records

7. Forecasting • Effective historical records for forecasting should include: • Date and day of the week • Meal (Congregate, home delivered, etc.) • Notation of special event, holiday, and weather conditions, if applicable • Food items prepared (especially the entrée) • Quantity of each item prepared • Quantity of each item served

8. Forecasting Exercise 1: Forecasting If you would like to learn more about forecasting and using the Moving Average forecasting method, there is an exercise in your webinar workbook, pages 1-3, which will introduce you to this concept. You can work through this exercise on your own at your convenience.

9. PURCHASING OBJECTIVE TO OBTAIN: THE RIGHT QUALITY IN THE RIGHT QUANTITY AT THE RIGHT TIME AT THE RIGHT PRICE FROM THE RIGHT SUPPLIER

10. Match Products To Your System • Your product requirements MUST reflect your production capabilities and your storage facilities, i.e. the type of foodservice system in your operation.

11. Saving $$ Through Product Selection • Can a product be used for multiple menu items? • What form of a product is best? ?? • Production equipment available ?? • Labor available (amount & skill level) ?? • Costs of alternatives ?? • What is the yield from product alternatives? • Yield tests – can cuttings

12. Cost Effective Products For Your Program • Purchase the products that are the best “fit” for the menu items being prepared and the most cost effective form of that product relative to your overall menu and your program’s type of foodservice operation.

13. Talking the Language to Make the Best Buy for Your $$ Question: Are you familiar with the terms used in the foodservice industry – terms such as AP, EP or Yield? a. Yes, I’m familiar with foodservice industry terms and know what they mean b. I’ve heard of these terms, but I’m not too sure about what they mean c. No, I’m not at all familiar with foodservice industry terminology

14. Talking the Language to Make the Best Buy for Your $$ • To purchase cost effectively, it is important to know the difference between the “as purchased” or AP cost and the “edible portion” or EP cost • Calculating and comparing AP and EP costs for products requires an understanding of product yields and yield calculations

15. Calculating Cost – Usable Yield • AP Cost = unit price paid to vendor • EP Cost = Cost of usable (servable) yield. • AP Weight (volume) = weight (volume) purchased from vendor • EP Weight(volume) = Usable weight (volume) • Yield % = EP weight (volume)/AP weight (volume) • EP Cost = AP cost/Yield %

16. Calculating Cost – Usable Yield • LET’S PRACTICE WITH SOME PROBLEMS CALCULATING YIELDS, AP COSTS, AND PORTION COSTS FOR SOME TYPICAL ITEMS USED IN MANY PROGRAMS • LOOK IN OUR WEBINAR WORKBOOK, PAGE 4, FOR THE EXERCISE 2 PROBLEMS

17. Calculating Cost – Usable Yield Exercise 2: Problem 1: Case of iceberg lettuce = 25 lbs AP; trim = 5 lbs; usable lettuce = 20 lbs. 2 oz. of trimmed lettuce is used in a salad. AP cost/case = $30.00 Calculate: a) The % yield b) The cost per pound of trimmed lettuce c) The portion cost for the 2 ounces of lettuce in the salad

18. Calculating Cost – Usable Yield Exercise 2: Problem 1 Answers: a) Yield = 20 lbs EP/25 lbs AP = 80% b) EP Cost/lb (20 lbs usable lettuce) = $30.00 AP cost per case/.8 (80% yield)= $37.50 EP cost per case or 37.50/20 lbs EP = $1.87/lb or $1.87/16 oz per lb = $0.117 per oz EP cost c) Portion Cost: Thus, a salad using 2 oz of lettuce would have an ingredient cost of $0.234 per portion (either $0.117 X 2oz or $1.87/8 portions per pound).

19. Calculating Cost – Usable Yield Exercise 2: Problem 2: A #10 Can of cream corn = 7 lbs & has an AP cost of $5.00. Cream corn is 100% usable from the can, but there is some production loss during heating and portioning – about 3%. Calculate: • The EP cost per can • The EP cost per ounce • The portion cost of a 3 ounce portion

20. Calculating Cost – Usable Yield Exercise 2: Problem 2 Answers: a) The EP cost/can = $5.00/.97 (97% yield)= $5.15 for 6.75 pounds of corn (7 pounds AP X 97% yield = 6.75 pounds EP) b) Cost per Pound: $5.15 EP cost/6.75 EP pounds = $0.76 per pound or $0.048 per ounce ($0.76/16 oz) c) Portion Cost: If a 3 oz portion is served, $0.048/per ounce X 3 ounces = $0.144 per portion

21. Calculating Cost – Usable Yield Exercise 2: Problem 3: A 25lb bag of dry rice costs $20.00 AP, or 1 lb costs $0.80 AP. Rice absorbs water in a 2:1 ratio when cooked. Calculate: a) The yield percent b) The EP cost of 1 pound of cook rice c) The portion cost of a 3 ounce serving of cooked rice

22. Calculating Cost – Usable Yield Exercise 2: Problem 3 Answers: • Yield percent: 1 lb AP dry rice = 3 lb EP cooked rice (1 lb rice + 2 lb of absorbed water). Thus, yield = 3 lb cooked rice/1 lb dry rice= 300% • EP cost/lb = $0.80/3.0 = $0.267 (cost of 1 lb dry rice [$0.80]/yield % [300% or 3.0]. c) Portion Cost: Cost /oz = $0.267 EP cost per pound/16 oz = $0.017. So, a 3 oz portion cost = $0.017 X 3 = $0.051. Or there are 5.33 portions (3 oz size) in a pound; so the portion cost could also be calculated as $0.267 (EP cost per pound)/5.33 (number of portions per pound) = $0.50.

23. Calculating Cost – Usable Yield Exercise 2: Problem 4: Ground beef A costs $2.95/lb AP – cooked yield = 85% Ground beef B cost $2.65/lb AP – cooked yield = 76% Ground beef C cost $3.10/lb AP – cooked yield = 94% Calculate: a) The EP cost per pound for each of the 3 ground beef alternatives b) Determine which of the 3 products you should purchase, based on the EP costs per pound.

24. Calculating Cost – Usable Yield Exercise 2: Problem 4 Answers: • Calculated EP costs per pound: Ground beef A costs $2.95/lb AP – cooked yield = 85%; so EP cost/lb = $2.95/.85 = $3.47 Ground beef B cost $2.65/lb AP – cooked yield = 76%; so EP cost/lb = $2.65/.76 = $3.49 Ground beef C cost $3.10/lb AP – cooked yield = 94%; so EP cost/lb = $3.10/.94 = $3.30 b) Which product to purchase: Ground Beef C as it has the lowest EP cost/lb even though it has the highest AP cost per pound. It is the yield from the product that determines the actual EP cost, or the cost for the amount of the product that can be served.

25. Yield Tests • You should periodically conduct yield tests on most products – especially meats, canned fruits and vegetables, and fresh produce – before making decisions as to which products to purchase for your menu items.

26. Yield Test Procedures • Weigh (or measure – volume) AP product as accurately as possible • Prepare item to servable form (drain canned items, trim/cut produce, trim/cut/cook meat – as appropriate) • Weigh (or measure – volume) servable (EP) product as accurately as possible • Divide EP weight (volume)/AP weight (volume) to calculate yield % • Divide AP product cost by yield% to calculate EP product cost

27. Purchasing Products Purchasing Alternatives • Cooperative Purchasing • Prime Vendor • Local Suppliers • Bid Purchasing • Daily/Weekly Quotations • Contracting Consider the advantages (possible cost savings) and disadvantages (possible program costs) for all possible alternatives for your program

28. Product Specifications Question: Do you write your own product specifications? a. Yes b. No

29. Product Specifications • A specification may be defined as a ready reference to the standards by which you measure the foods you specify for purchase and inspect upon delivery.” • Specifications are a communication tool between you and your suppliers • For more information on specifications, you can access the following web site: http://nutritionandaging.fiu.edu/creative_solutions/bid_specs.asp Information will also be available on the information library currently under development by MOWAA.

30. Product Specifications • Are essential for product quality and consistency • Are needed for all items purchased • Can be developed specifically for your program or can be “borrowed” from various reference resources such as: • Meat Buyer’s Guide • http://www.namp.com/namp/Meat_Buyers_Guide.asp?SnID=2 • USDA grading standards • http://www.ams.usda.gov/AMSv1.0/ams.fetchTemplateData.do?template=TemplateN&navID=USGradeStandards&rightNav1=USGradeStandards&topNav=&leftNav=&page=FreshGradeStandardsIndex&resultType=&acct=freshgrdcert • Federal product standards • http://www.fns.usda.gov/fdd/foods/specs.htm • Product suppliers such as the produce industry or canned foods packers • Multiple references for food product specifications are available on the Internet.

31. Product Specifications Sample Specification BEEF PATTY Beef U.S. Grade Good or Better not to exceed 25 percent fat, 2.67 ounce patty, six patties per pound, no soy, meat by-pro­ducts, binders, or extenders. Meat shall be free of bone. Meets Institutional Meat Purchase Specification #1136.

32. Product Specifications Sample Specification APPLESAUCE Quality: GRADE A Style/Variety: REGULAR OR CHUNKY Count Size: 6 / #10 Condition: CANNED Description: LIGHT GOLDEN IN COLOR; FREE FROM PARTICLES OR SEEDS. LIGHTLY SWEETENED.

33. Product Specifications Sample Specification BANANAS Quality: No. 1 Style/Variety: PETITE - 5/6" LONG Count Size: 150 Condition: FRESH Description: PLUMP, FIRM, BRIGHT COLORED FRUIT, FREE FROM SCARS AND BRUISES. FRUIT SHOULD BE SOLID YELLOW

34. Product Specifications Sample Specification BROCCOLI Quality: GRADE A Style/Variety: CHOPPED, SPEARS Count Size: Condition: FROZEN Description: TENDER AND FREE FROM TOUGH FIBER, BRIGHT GREEN COLOR TYPICAL FOR YOUNG, TENDER BROCCOLI.

35. Sample Specification Form Sample form that could be used for writing product specifications: Product Name: ___________________________ Quality: ___________________________ Style/Variety: ___________________________ Packing Medium: _________________________ Count Size: _________________________ Condition: _________________________ Description: ________________________________________________________________________________________________

36. Product Specifications Exercise 3: Product Specifications At your convenience, you can use the sample product specification form, page 5 in your webinar workbook, to help you write specifications for products that you use in your program. Product Name: __________________________________ Quality: ________________________________________ Style/Variety: ___________________________________ Packing Medium: ________________________________ Count Size: _____________________________________ Condition: ______________________________________ Description: _____________________________________

37. Purchasing Process Prior to actually purchasing, or ordering, products: • Distribute copies of your specifications to all potential suppliers • Obtain bid prices or price quotations for products • Determine which suppliers will be used by your program for the different categories of products to be purchased (meats, poultry, fish, produce, canned goods, cleaning products, paper products, condiments, etc.)

38. Purchasing Process When ready to purchase products: • Determine what products are needed and the quantity needed for each of the products • Prepare one or several purchase orders (PO’s) for needed products • Retain copies of PO’s for your files; submit the original to the selected supplier • File a copy of the PO’s near the receiving area in the kitchen so it is available for reference when the order is received.

39. Purchasing and Receiving Personnel Question: Do you have someone trained who does the food purchasing for your program? a) Yes b) No

40. Purchasing and Receiving Personnel Question: Do you have someone trained who is the person that does the product receiving for your program? a) Yes b) No

41. Receiving Products Cost effective receiving of purchased products requires receiving equipment such as: • Accurately calibrated platform scale with sufficient capacity to weigh the volume of product usually purchased by your program • Accurately calibrated food thermometer for checking refrigerated and frozen product temperatures • Desk or similar writing area • Filing cabinet for purchase orders and other paperwork • Small items such as marking pens and a calendar

42. Receiving Process • Set times that your program will receive products and notify all suppliers of those times. • Refuse to receive products at other times, particularly during your busy production and packaging times • Receiving person should check ALL items being delivered against the listing on the invoice and on the purchase order • Check prices to be sure invoice prices charged match prices on the purchase order • Check invoice quantities to be sure the listed quantities match the quantities on the purchase order • Check that all items listed on the invoice were items ordered on the purchase order.

43. Receiving Process • Receiving person must check the weights of items -- especially meat, poultry, & fish. • Check the ice pack on fresh poultry and fish to make sure that there is adequate, but not excessive ice. • If portion cut pieces of meat, poultry, or fish are being received, weigh sample portions to be sure the portion size is accurate.

44. Receiving Process • Receiving person must check the temperatures of refrigerated & frozen products • Products out of the safe temperature zone or which show evidence of having been thawed and refrozen should not be accepted, but should be returned to the supplier with the delivery person

45. Receiving Process • If all products are acceptable & all is correct on the invoice, the receiving person signs the invoice • Original copy is kept for program accounting office • Copy goes back to the supplier with the delivery person • If all is not acceptable/correct, the receiving person should not sign the invoice until the delivery person has issued a credit memo or other documentation is obtained adjusting/correcting the invoice. • Once the adjustment has been made, the receiving person should sign the invoice. • Then, all products are moved to storage areas ASAP.

46. Receiving Process REMEMBER: • The program owns the products that have been delivered , as they were delivered – whether correct or not -- as soon as anyone associated with the program signs the invoice. Once the invoice is signed, the program is legally responsible for paying the stated amount to the supplier.

47. Purchasing and Receiving Personnel • It is essential that you have a specific person designated to do the purchasing for the program and one or more specific persons designated to receive products when they are delivered • These persons must be trained in appropriate purchasing and/or receiving procedures.

48. Purchasing and Receiving • Cost effective purchasing and receiving provide you with the quality of products you desire in the quantity that you desire when and where you want them • Both the purchasing and receiving processes are critical components of effective cost control. Neither process will be as effective as it should be without the other.

49. Purchasing and Receiving Whiteboard Discussion: What are the biggest purchasing and/or receiving challenges at your program?

50. Product Preservation • Product “shrinkage” must be avoided to optimize product costs • “Shrinkage” can result from: • Theft - intentional or unintentional • Excessive use of product • Waste in product preparation/handling • Spoilage