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From: Food Quality & Safety magazine, June/July 2006

Don't Let Food Cost Eat Up Bottom Line Profits

Those who Avail Themselves of IT Tools will not Only Reduce Costs and Improve Operations, but They will also Enjoy a Significant Competitive Advantage

by Jeff Smith

Food costs are the most significant driver of restaurant business profitability. For a typical restaurant chain, a million dollar reduction in food costs has the same impact on the bottom line as a $25 million increase in same store sales or opening 22 new stores. When a small change in this key input can lead to a magnified impact on the bottom line, costs must be managed aggressively - particularly in today’s inflationary and competitive environment.

Food service purchasing professionals combat rising costs and competitive pressures by negotiating strong contracts with their trading partners, obtaining the best possible price for the highest quality products that meet their specifications. Unfortunately, operators seldom recognize the full value of these efforts as they are unable to monitor contract compliance within their organization or across their suppliers, ensuring their units are buying the right products and paying the right price. Taken individually, pricing deviations of a few cents may appear small, but the cumulative effect across a restaurant chain over time can total several million dollars of untapped savings opportunities. Worse yet, off program purchasing reduces rebate and marketing funds collections and may lead to lapses in quality control that could lead to brand-damaging events.

Everyone agrees that better information – information about unit and system wide purchasing, contract and trading partner performance, marketing fund and rebate collections, quality controls and events, and customer behavior - is the key to addressing these challenges. In the food service industry, however, where complex business practices are often supported by manual processes in an environment that lacks any standards for communication among trading partners, “better information” can be hard to come by. It’s buried in disparate systems or stacks of paper remitted by franchises, distributors, and manufacturers. Even should an operator manage to aggregate all of this information and have the resources to review it, it might as well be written in Greek. Distributors and manufacturers are “speaking their own language,” referencing their own product and location codes, pack sizes, units of measure, and other descriptors that are meaningless to the operator. Countless hours can be invested in collecting and decoding all of this information without producing any real result.

So is this just the nature of the beast? Until recently, the answer would have been an unfortunate “yes.” There is, however, an alternative. Leveraging innovative technology, leading operators are auditing 100 percent of their purchasing, ensuring they are reaping the full value of their contracts and controlling quality, at the touch of a button. These capabilities alone can drive significant value to the bottom line, but are even more powerful when used as part of a larger, unified solution that allows operators to gain control over key business drivers and visibility into system-wide processes.

A “unified solution” begins with robust product information management, providing a single source of truth for key product and trading partner data. With this in place, additional capabilities can be layered into the system that not only support spend management, but also enable such key processes as promotion and inventory management, quality and compliance measurement, and business analytics.

Regardless of the business process being supported, “best of breed” technology solutions help operators ensure the right information reaches the right person at the right time, ensuring the right decision is made. While there are different approaches to leveraging technology in this manner, for any given approach to succeed it must include four key elements that ensure actionable information is put in front of the right person at the right time, enabling better decisions.

Elimination of Paper Based Processes

As long as critical data is buried in reams of paper sitting in file cabinets or off-site storage facilities, it’s useless. Given the quantity of data involved, manual conversion of paper to an electronic format is also a non-starter. Best of breed systems must provide for the electronic collection and standardization of data from internal and external sources.

Even after data has been captured in an electronic format, as long as trading partners are referencing their own codes and nomenclature, the data is meaningless. While some systems facilitate the ability for operators to map their own data in technology tools, this is an incredibly time intensive and error-prone process. Best of breed systems provide for the automatic translation of key data elements such as product and location codes, removing this burden from the operator.

Aggregation of Key Data Elements

While electronically collecting and automatically translating data are steps in the right direction, that data is still potentially incomplete or untimely, hampering effective decision making. In addition, an individual data point often needs to be “assembled” with other data points in order to create an actionable piece of information. For example, it may be necessary to combine a reading from a temperature sensor, with a complaint from a franchisee, with an audit result of a particular supplier in order to determine whether a wilted case of lettuce represents a random incidence or a systemic problem. Best of breed systems allow users to easily link key data elements and identify trends across organizational silos.

Exception Based Management

Even if data has been collected, translated and assembled in a timely, complete manner, there is still a significant hurdle to using this data to make an informed decision. Time or resource strapped foodservice professionals struggle if forced to pour through voluminous reports or perform ad-hoc analysis in order to extract the information they need to make an informed decision. Best of breed systems allow users to “manage by exception,” leveraging dashboards, thresholds, alerts, and workflows to identify which issues are material and require action to be taken.

Best of breed solutions also provide the ability for operators to leverage their capabilities via a hosted or “on-demand” model. While some operators have large technology departments and prefer to manage software in-house, many are severely resource constrained when it comes to IT resources. On-demand solutions – in which the vendor hosts the technology and manages all aspects of the software implementation, upgrade, and maintenance, while providing the operator access to the system via a web browser – significantly reduce the total cost of ownership for software and allow operators with few IT resources to take advantage of the same best of breed systems used by their larger brethren.

Take, for example, spend management. Food service companies can ensure they are capturing the full value of their contracts, easily monitoring and enforcing unit compliance with order guides while identifying contract price variances, purchases eligible for rebate, opportunities for SKU rationalization, and other cost savings. There are IT platforms that automatically receive, standardize, translate and analyze product and price information reported by distributors, making the information available in intuitive applications that leverage task-based workflows, dashboards, thresholds, and alerts to ensure managers are focusing on key business issues. Such platforms can be used stand-alone or in conjunction with an integrated suite of solutions that includes procurement, promotion management, quality and compliance management, product information management, business intelligence and trade spend management.

So what’s easier? Growing sales by millions of dollars or making a small investment in technology that can drive the same bottom line impact? Advances in technology, taken in conjunction with the introduction of on-demand or hosted solutions that don’t require extensive IT resources to employ, are giving foodservice operators access to the tools and information they need to significantly improve the means by which they manage their businesses. Those who avail themselves of these tools will not only reduce costs and improve operations but also enjoy a significant competitive advantage. Those who don’t will find themselves running just to keep up.

Jeff Smith is vice president of market for Instill Corp., a Redwood City, Calif.-based provider or IT services for the food service industry. Reach him at (650) 551-5600.

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