Know the most crucial costs to key menu items such as flour and cheese for pizza

Know the most crucial costs to key menu items, such as flour and cheese for pizza.

10 tips to manage commodity cost swings

Soaring corn prices aren’t the only challenge restaurant operators face.

In today’s volatile economic climate, restaurant operators face more challenges than ever in managing commodity and other supply chain costs. Prices are affected by what is happening globally, making long-term stability much harder to predict. Some smaller and medium-sized companies tackle this daunting task themselves with limited staff, while others turn to third-party purchasing organizations. In either situation, operators can take control of managing supply chain costs by following these 10 management strategies.

1. Thoroughly understand the 20 percent of your products that drive 80 percent of your costs, and focus your cost-saving efforts on these items.  Don’t be distracted by lower-use items that have less impact on your costs. For instance, the most crucial costs to a pizza chain are cheese, flour and protein toppings.

2. When contracting, bring in competition as a negotiation tool. Comparison shopping will help you learn which suppliers are offering the best prices. Take the time to solicit proposals for your top five products as contracts expire.

3. Know your specifications to ensure you’re comparing apples to apples when getting price quotes from suppliers and distributors. Consult with your executive chef or R&D department as part of this process, confirming the products under review meet operational and brand expectations.

4. Understand how allowances or rebates work, and don’t be fooled by them—they don’t manage your costs long-term. Evaluate your rebate programs twice a year, if possible, or a minimum of once a year. A rebate may stay the same yet your prices may be changing monthly, quarterly or annually, causing that rebate or allowance to have less impact than you expected on your cost of goods (COGs).

5. A fixed contract is the best way to manage and know your landed costs (including mark-ups for manufacturing, freight and distribution) over rebates. Depending on your resources and leverage, you can go either directly to your suppliers or use your distributors to help provide fixed contract pricing.

6. If you learn that prices are going down, take shorter-term contracts, perhaps three months instead of a year. When prices drop to the bottom, lock in for a longer term. Conversely, if it’s likely that prices will continue to rise for awhile, get a longer-term contract.

7. Understand the COGs budget for your organization at all levels. Ensure those items that drive your COGs are protected. If the market data suggest that costs may go up or down, lock in your price, confirming your organization can meet the budget. Know what your organization can’t afford to have happen and use that as your guide and not the markets.

8. For educated economic outlooks, don’t depend solely on your suppliers or distributors. Rather, use objective expert companies like Advanced Economics, Market Vision or American Restaurant Association. Reliable data has never been so accessible. Having multiple sources of information will help in negotiating with suppliers.

9. If you’re considering hiring a third-party purchasing organization, key questions to ask include: What value can it provide? Who else has the company worked with, and can it provide references? How does it get paid? Is it fully transparent about whether it makes money from relationships with manufacturers, suppliers, distributors or others? Does it fit with your culture?

10. Share commodity cost information and trends throughout the company. Other departments can use this knowledge to wisely plan menu changes, price increases, promotions and other strategies.

Maryanne Rose is chief executive of Denver-based SpenDifference, a third-party supply chain organization that focuses on providing midsized restaurant brands a competitive cost edge. She is a 25-year veteran of the foodservice industry.