# Lesson 3.1: Managing Inventory Control and Procurement


This chapter is remixed from Basic Kitchen and Food Service Management by The BC Cook Articulation Committee.

Chapter Outline:

• Basic inventory procedures
• Systems to track and record inventory
• Receiving inventory and invoices
• Requisition systems
• Inventory record keeping
• Computerized inventory control
• Pricing and costing for physical inventory
• Factors affecting inventory levels
• Inventory turnover
• Days of inventory on hand
• Procurement Process
• Market sourcing
• Choosing suppliers
• Factors that Impact Prices
• Product Specifications
• Production Control Chart

Learning Objectives:

Inventory and Inventory Control

• Describe inventory systems and procedures used in foodservice operations
• Calculate and explain the importance of inventory valuation
• Calculate and explain the meaning of inventory turnover ratio
• List factors in determining amount of inventory to carry
• List “best practices” related to managing inventory (Eg. Frequency of performing physical inventory, etc.)

Receiving

• List critical steps in receiving process
• Explain relationship between purchasing, food specifications and receiving function
• Describe how things can go wrong…where money can be lost in the process?
• Explain purpose and importance of the supplier invoice in the receiving process

Storage and Issuing

• Define FIFO
• List best practices for issuing procedures to control costs in a foodservice operation

• Describe the key “players” in the procurement process
• Explain how inventory and purchasing functions are related
• Explain the steps in the purchasing process
• Describe characteristics of a valued “customer” buyer
• List factors to consider in choosing suppliers
• Explain concept of “good service” from a supplier/vendor.
• List factors impacting food and supply prices
• Describe importance and key components of product specifications
• Explain steps in the ordering process.
• Determine amount to order given inventory (par level and on hand amount)
• List information typically included on a purchase order
• Recognize ethical issues related to purchasing

Key Terms:

• Inventory
• Receiving
• Invoice
• Requisition
• Perpetual inventory
• Physical inventory
• Par stock
• Inventory price extension
• Point-of-Sale (POS) system
• Holding cost
• Ordering cost
• Shortage cost
• Inventory turnover
• Procurement
• Ordering
• Cherry-picking
• Vendor
• Distributor
• Broker
• Manufacturer
• Specifications
• Par levels
• Amount on hand
• Line item bid award
• Purchase order

Preface

This chapter has a sort of circular nature to it. It begins by discussing inventory and inventory control, but of course, there is no inventory if the procurement process has not been completed. The product is purchased, ordered, received, and stored, which brings us back to inventory control.

## Basic Inventory Procedures

A key component in effective kitchen management is inventory control. By knowing what supplies are on hand at a given time, the manager will be able to plan food orders, calculate food costs since the previous inventory, and make menu item changes if needed. By keeping an eye on inventory, it is possible to note potential problems with pilferage and waste.

Managing inventory is like checking a bank account. Just as you are interested in how much money you have in the bank and whether that money is paying you enough in interest, so the manager should be interested in the value of the supplies in the storeroom and in the kitchen.

An inventory is everything that is found within your establishment. Produce, dry stores, pots and pans, uniforms, liquor, linens, or anything that costs money to the business should be counted as part of inventory. Kitchen items should be counted separately from the front of the house and bar inventory and so forth.

Regardless of the size of your operation, the principles of inventory control are the same. In larger operations there will be more people and sometimes even whole teams involved with the various steps, and in a small operation, all responsibility for managing the inventory may fall on one or two key people. Effective inventory control can be broken down into a few important steps:

• Set up systems to track and record inventory
• Develop specifications and procedures for ordering and purchasing
• Develop standards and procedures to efficiently receive deliveries
• Determine the frequency and processes for reconciling inventory
• Analyze inventory data and determine any areas for improvement

Setting Up Systems to Track and Record Inventory

One of the reasons you take inventory is to determine food costs and to work out cost percentages. There are several procedures that simplify finding the value of goods in storage. These techniques are based on keeping good records of how much supplies cost and when supplies were purchased. The temptation in small operations is to treat inventory control casually. Perhaps there are only one or two people doing the purchasing and they are usually aware of the supplies that are on hand. This doesn’t eliminate the need to track purchases against sales to see if you are managing your costs as well as you can.

Almost all inventory control procedures are time-consuming. Moreover, such records must be kept up-to-date and done accurately. Trying to save a few hours by cutting back on the time needed to keep inventory records may be money poorly saved. The simplest method for tracking inventory is using a spreadsheet. A simple spreadsheet might list all of the products that are regularly purchased, with the current prices and the numbers on hand at the last inventory count. The prices can be updated regularly as invoices are processed for payment, and a schedule can be set to count the product on hand.

In large operations, the systems need to be more sophisticated as there are more people involved. Purchases might be made by a separate department, inventory records might be kept by a storeroom clerk, and the tracking and counting of inventory might be tied to a system using scanners and barcodes, which in turn may be linked with your sales system so that there is always a record of what should be in stock. No matter the depth of detail used, having a system to track inventory gives managers a good idea of supplies on hand and a tool to use to manage costs.

Incoming Inventory

The primary reason for establishing a consistent method for accepting ordered goods is to ensure that the establishment receives exactly what has been ordered. Errors frequently occur, and unless the quantity and quality of the items delivered are carefully checked against what was ordered, substantial losses can take place. When receiving procedures are carefully performed, mistakes that could cost the restaurant time and money are avoided. In addition, an effective receiving method encourages honesty on the part of suppliers and delivery people.

Invoices

The most important document in determining if the goods received are the goods ordered is the invoice. An invoice is an itemized list of the goods or products delivered to a food preparation premise. An invoice shows the quantity, quality, price per pound or unit, and, in some cases, the complete extension of the cost chargeable. Only by carefully comparing and checking can you be sure that the information on the invoice tallies with the products received. This comparison may require that items be weighed and/or counted.

Whenever possible, the receiver should check the invoice against the purchase order or purchase request slips. This will ensure that the quantity and price of the goods shipped match those listed on the order form. If the invoice is not checked against the purchase order when the goods arrive, there is the potential that you will be missing products you need or receive products that were not ordered or are in incorrect quantities.

In addition, the quality of the goods should be determined before they are accepted. For example, boxes of fresh produce and frozen foods should be opened and inspected to ensure quality. When you are satisfied that the delivery is in order, sign the invoice.

In most cases, the invoice is in duplicate or triplicate: you keep the original and the delivery driver retains the other copy or copies. Once you have signed, you have relieved the delivery company of its responsibilities and the supplies now belong to your company. You may, therefore, become responsible for any discrepancies between what is on the invoice and what has been delivered. It is good practice to bring any discrepancies or errors to the attention of the driver and have him or her acknowledge the mistake by signing the invoice. If a credit note is issued, that should also be marked on the invoice by the driver.

Do not sign the invoice until you are sure that all discrepancies have been taken care of and recorded on the invoice. Take the signed invoice and give it to whoever is responsible for collecting invoices for the company.

The receiving of deliveries can be time-consuming for both the food establishment and the delivery service. Often the delivery people (particularly if they are not the supplier) will not want to wait while these checks are done. In this case, it is important that your company has an understanding with the supplier that faults discovered after the delivery service has left are the supplier’s problems, not yours. Once the invoices have been signed, put the delivered products in the proper locations. If you are required to track incoming inventory, do so at the same time.

Outgoing Inventory

When a supply leaves the storeroom or cooler, a record must be kept to track where it has gone. This is often done using an internal requisition form. In most small operations, the supplies go directly to the kitchen where they are used to produce the menu items. In an ideal world, accurate records of incoming and outgoing supplies are kept, so knowing what is on hand is a simple matter of subtraction.

Unfortunately, systems aren’t always that simple. In a smaller operation, knowing what has arrived and what gets used every day can easily be reconciled by doing a regular count of inventory. In larger operations and hotels, the storage rooms and coolers may be on a different floor than the kitchen, and therefore a system is needed that requires each department and the kitchens to requisition food from the storeroom or purchasing department, much like a small restaurant would do directly from the supplier. In this model, the hotel would purchase all of the food and keep it in a central storage area, and individual departments would then “order” their food from the storerooms.

Requisitions

To control inventory and to determine daily menu costs in a larger operation, it is necessary to set up a requisition procedure where anything transferred from storage to the kitchen is done by a request in writing. The requisition form should include the name and quantity of the items needed by the kitchen. These forms often have space for the storeroom clerk or whoever handles the storeroom inventory to enter the unit price and total cost of each requested item (Figure 1). In an efficiently run operation, separate requisition forms should be used by serving personnel to replace table supplies such as sugar, salt, and pepper. However, often personnel resist using requisition forms because they find it much easier and quicker to simply enter the storage room and grab what is needed, but this practice leaves no record and makes accurate record-keeping impossible. To reduce the possibility of this occurring, the storage area should be secure with only a few people having the right to enter the rooms, storage freezers, or storage refrigerators.

Date: ____________________________

Department: Food Service

Table 10.1 Calculating Unit and Total Cost of Items
Quantity Description Unit Cost Total Cost
6 #10 cans Kernel Corn
55 lbs Sugar
44 lbs Ground Beef
6 each Kernel Corn

Table 10.1 Calculating Unit and Total Cost of Items

Not only does the requisition keep tabs on inventory, but it also can be used to determine the dollar value of foods requested by each department and so be used to determine expenses. In a larger operation where purchases may be made from different suppliers at different prices, it may be necessary to tag all staples with their costs and date of arrival. Expensive items such as meats are often tagged with a form that contains information about weight, cost per unit (piece, pound or kilogram), date of purchase, and name of supplier. Pricing all items is time consuming, but that time will soon be recovered when requisition forms are being filled out or when the stock has to be given a monetary value. In addition, having prices on goods may help to remind staff that waste is costly.

Inventory Record Keeping

There are two basic record-keeping methods to track inventory. The first is taking perpetual inventory. A perpetual inventory is simply a running balance of what is on hand. Perpetual inventory is best done by keeping records for each product that is in storage, as shown in Table 10.5.

Table 10.2 Reorder Point of Canned Peaches
Item: Canned Peaches
Reorder Point: 10

Table 10.2 Reorder Point of Canned Peaches. The table displays the first half of the full table header. The full table is made up of two halves. Each half has two tables in it, 4 total displayed. This half of the table header shows the item and reorder point.

Table 10.3 Purchase UniteSize and Par Stock of Canned Peaches
Purchase Unit Size: #10 Can
Par Stock: 15

Table 10.3 Purchase Unit Size and Par Stock of Canned Peaches. The second (right) half of the table header that displays the size of the unit being re-ordered, and the par stock.

Date In Out Balance Carried Forward From 6/15 – 3 12 – 3 9 6 – 15 – 2 13 – – – – – – – – – – – – – – – –

Table 10.4 Recording Dates of the Inventory, How Much of That Item the Business Received(in), Sold(out), and Total Balance. The second part of the first (left) table half. Displayed below the first part of the table header, this part features dates of the inventory recorded along with how many of that item the business received(in), sold(out), and total balance.

Date In Out Balance Carried Forward From ______ – – – – – – – – – – – – – – – – – – – – – – – –

Table 10.5 Recording In, Out, and Balance of the Unit Size of the Item Being Purchased. The second part to the second (right) half of the full table featured, this part features blank space intended to be used for recording in, out, and balance of the unit size of the item being purchased.

When more of the product is received, the number of cans or items is recorded and added to the inventory on hand; when some of the product is requisitioned, the number going out is recorded and the balance is reduced. In addition, the perpetual inventory form can indicate when the product should be reordered (the reorder point) and how much of the product should ideally be on hand at a given time (par stock). In large operations, this record-keeping is likely all computerized. In small operations, a perpetual inventory is usually only kept for expensive items as the time (and cost) of keeping up the records can be substantial. This system is often based on an ABC inventory analysis where “A” items are the most expensive, perhaps top 20%, “B” items in the middle 50%, and the least expensive, perhaps 30%, “C” items. “A” items are prioritized and may be carefully tracked and physically counted on a weekly or even daily basis, whereas “B” and “C” items may only be counted on a monthly basis and may not be tracked with a perpetual inventory.

The second inventory record-keeping system is taking a physical inventory. A physical inventory requires that all items in storage be counted periodically. To be an effective control, physical inventory should be taken at least monthly. The inventory records are kept in a spreadsheet or in another system reserved for that purpose. The inventory sheet (Table 10.6) can list the items alphabetically or in the order they will appear on the shelves in the storage areas.

Month: March

Table 10.6 Physical Inventory Form
Product Unit Count Unit Price Total Value
Lima Beans 6 #10 Can 4 1/3 $23.00$99.60
Green Beans 6 #10 Can 3 5/6 $28.95$110.98
Flour 55 lbs 3 $14.85$44.55
Rice 110.2 lbs 1 $32.50$32.50
Total $593.68 Table 10.6 Physical Inventory Form. The table displays a product and its unit, count, unit price, and total price. four items are listed, then a total of all the products. called a physical inventory form. In addition to the quantity of items, the inventory usually has room for the unit cost and total value of each item in storage. The total values of the items are added together to give the total dollar value of the inventory. This is also known as extending the inventory. The total value of the inventory is known as the closing inventory for the day the inventory was taken. This amount will also be used as the opening inventory to compare with the next physical inventory. If the inventory is taken on the same day of each month, the figures can be used to accurately determine the monthly food cost. The physical inventory is used to verify the accuracy of the perpetual inventory. For example, if 15 whole beef tenderloins are counted during a physical inventory, but the perpetual inventory suggests that there should be 20 tenderloins on hand, then a control problem exists and you need to find the reason for the variance. Computerized Inventory Control Most people today use computerized systems to calculate, track, and extend inventory. These systems enable the restaurant to have much tighter and more accurate control over the inventory on hand and the costs of that inventory. Having access to information such as ordering history and the best price paid is just one of the benefits of these systems. They can also help the purchaser predict demand levels throughout the year. These programs in many cases are also integrated with the point-of-sale (POS) system used to track sales, and can even remove an item from a computerized inventory list when the waiter registers the sale of any menu item on the restaurant terminal. That is if a customer orders one chicken dish from the menu, all the items required to make one portion of the chicken are discounted from inventory. This provides management with a constant up-to-date perpetual inventory of most inventory items. Smaller operations will use a spreadsheet application to manage inventory, so you should also be familiar with a program like Microsoft Excel if you are responsible for ordering and inventory. The information required for the program to do the calculations properly is available from the invoices received with your supplies. That is, the quantities and prices of the goods you most recently received should be entered into the computer program either by you or by the restaurant’s purchaser. These prices and quantities are automatically used to calculate the cost of the goods on hand. This automated process can save you an enormous amount of time and, if the information entered into the computer is accurate, may also save you money. In any inventory system, there is always a possibility for error, but with computerized assistance, this risk is minimized. Pricing and Costing for Physical Inventory The cost of items purchased can vary widely between orders. For example, cans of pineapple might cost$2.25 one week, $2.15 the second week, and$2.60 another week. The daily inventory reports will reflect the changes in price, but unless the individual cans have been marked, it is difficult to decide what to use as a cost on the physical inventory form. There are several different ways to view the cost of the stock on the shelves if the actual cost of each item is difficult to determine. Most commonly, the last price paid for the product is used to determine the value of the stock on hand. For example, if canned pineapple last cost $2.60 a can and there are 25 cans on hand, the total value of the pineapple is assumed to be$65 (25 x $2.60) even though not all of the cans may have been bought at$2.60 per can. Another method for costing assumes the stock has rotated properly and is known as the FIFO (first-in-first-out) system. Then, if records have been kept up-to-date, it is possible to more accurately determine the value of the stock on hand. Here is an example showing how the FIFO system works.

##### Example

The daily inventory shows the following:

Opening Inventory 15 cans @ $2.15 =$32.25
Received on 8th of month 24 cans @ $2.25 =$54.00
Received on 15th of month 24 cans @ $2.15 –$51.60
Received on 23rd of month 12 cans @ $2.60 –$31.20

If the stock has rotated according to FIFO, you should have used all of the opening inventory, all of the product received on the 8th, and some of the product received on the 15th. The 25 remaining cans must consist of the 12 cans received on the 23rd and 13 of the cans received on the 15th. The value of these cans is then

12 cans @ 2.60 = $31.20 13 cans @ 2.15 =$27.95

Total = $59.15 As you can see, the choice of costing method can have a marked effect on the value of the stock on hand. It is always advisable to use the method that best reflects the actual cost of the products. Key Point – Once a method is adopted, the same method must be used consistently or the statistical data generated will be invalid. Costing Prepared or Processed Items When you are building your inventory forms, be sure to calculate the costs of any processed items. For instance, sauces and stocks that you make from raw ingredients need to be costed accurately and recorded on the spreadsheet along with purchased products so that when you are counting your inventory you are able to reflect the value of all supplies on the premises that have not been sold. Costs Associated with Maintaining Inventory It should be obvious by now that it is important to maintain an inventory of many types of products in a foodservice operation. There are, however, costs associated with procuring and maintaining that inventory, including holding costs, ordering costs and shortage costs. Holding cost represents the cost of storing the material (electricity, insurance, security, data processing, handling), financial costs reflect the money that is tied up in inventory, and then there are costs related to deterioration and damage. Ordering costs are any costs associated with ordering and receiving inventory. These costs consist of salaries of the purchasing and accounting departments, wages in the receiving area, and transportation. For example, if you purchase your weekly food and supplies from four different vendors, you have to place orders with four different salespeople, receive four different trucks, process four different purchase orders and pay four different invoices. If you purchase from only one weekly supplier, these functions are reduced accordingly. This area can also represent a cost-saving, since it may not take any longer to order and process payment for 200 cases than it does to do the same for two cases of a particular item. Shortage costs are those that occur when the demand exceeds the supply. Shortages may occur when there is an unexpectedly high demand before new stock items are received. Although some shortages are inevitable, customers are not always understanding when they don’t receive the meal they anticipated. While they may not voice their dissatisfaction to the foodservice department, they may tell their friends that the menu you print in your operation is not always the one that is served. This type of comment leads to a negative view of your foodservice operation. Shortages may also lead to paying a higher price for a needed item from another supplier. Factors Affecting Inventory Levels There are a variety of factors that affect how much inventory should be kept on hand some of which were mentioned previously in the forecasting chapter. The menu, the frequency of deliveries and lead time needed from order to delivery, the amount of storage space, including cold storage, the location and size of the operation are all examples of factors to consider. Some smaller operations may need to carry higher inventory levels in order to reduce the number of deliveries so that each delivery is large enough to make it worthwhile for a supplier to run a truck to the operation or to avoid shipping costs Some operations can operate with a “just in time” inventory – based on the working stock needed for the menu. Many operations will be graded on how much inventory they are carrying. Even though the inventory has value, tying up your money in inventory is not wise. It does not gain interest, as your money would if it were invested in other places. The quality of many products will degrade over time, and you may be forced to throw it away. Too much product can also lead to increased theft. Employees will be more tempted if they see that we are carrying an excess of something. Inventory Turnover When accurate inventory records are kept, it is possible to use the data in the records to determine the inventory turnover rate. The inventory turnover rate shows the number of times in a given period (usually a month) that the inventory is turned into revenue. Inventory turnover of 1.5 means that the inventory turns over about 1.5 times a month, or 18 times a year. In this case, you would have about three weeks of supplies in inventory at any given time (actually 2.88 weeks, which is 52 weeks/18). Generally, an inventory turnover every one to two weeks (or two to three times per month) is considered normal. A common method used to determine inventory turnover is to find the average food inventory for a month and divide it into the total food cost for the same month. The total food cost is calculated by adding the daily food purchases (found on the daily receiving reports) to the value of the food inventory at the beginning of the month and subtracting the value of the food inventory at the end of the month. That is, average food inventory = (beginning inventory + ending inventory)/2 cost of food = beginning inventory + purchases – ending inventory inventory turnover = (cost of food)/(average food inventory) ##### Example A restaurant has a beginning inventory of$8000 and an ending inventory of $8500. The daily receiving reports show that purchases for the month totaled$12 000. Determine the cost of food and inventory turnover.

Cost of food = $8000 +$12 000 – $8500 =$11 500

Average food inventory = ($8000 +$8500)/2 = $8250 Inventory turnover =$11 500/$8250 = 1.4 The turnover rate in the example would be considered low and would suggest that the business has invested too much money in inventory. Having a lot of inventory on hand can lead to spoilage, high capital costs, increased storage space requirements, and other costs. Inventory turnover rates are not exact, for a few reasons. One is that in many food operations, accurate inventory records are usually kept only for more expensive items. Another is that the simple food cost used in the calculation does not truly reflect the actual food cost. (Food costs are discussed in another chapter in this book.) In addition, not all inventory turns over at the same rate. For example, perishables turn over as quickly as they arrive while canned goods turn over more slowly. Even though turnover rates are not exact, they do give managers at least a rough idea of how much inventory they are keeping on hand. Calculating Days of Inventory on Hand There are two approaches to use to find the days of inventory on hand. If you select the first method, divide the average inventory for the year or other accounting period by the corresponding cost of goods sold (COGS); multiply the result by 365. The cost of goods sold is reported on the firm’s income statement. Compute the average inventory by adding the amount of inventory at the end of the previous year to the value of inventory at the end of the current year and dividing by two. Inventory figures are stated on the company’s balance sheet. Suppose the company reports COGS of$2.5 million and an average inventory of $250,000. Divide$250,000 by $2.5 million, and multiply by 365. You have 36.5 days of inventory on hand. Procurement Process The major goal of the procurement process is to assure the availability of food and supplies in the quantity and quality consistent with operational standards at the most favorable price. The purchasing process is an essential part of every food service operation. All competent cooks should be skilled in buying the appropriate ingredients, in accurate amounts, at the right time, and at the best price. Every kitchen operation has different purchasing procedures. But there is one rule that should always be followed: • Buy only as much as it is anticipated will be needed until the next delivery. This will ensure that foods stay fresh and will create a high inventory turnover. All foods deteriorate in time, some more quickly than others. It is the job of the purchaser to ensure that only those quantities that will be used immediately or in the near future are purchased. The quality of the food and materials purchased is a major factor in determining the quality of the menu served in any foodservice operation. Food items can be purchased in many stages of preparation from raw to ready-to-serve. The food buyer must purchase the appropriate market form to meet the menu requirements and operation’s quality standards. Food and materials are a major expense in the restaurant or foodservice department’s budget. To meet budgetary goals, a foodservice operation must have a well-organized purchasing program that provides a complete supply of food items, in the amounts needed, at a fair price. Purchasing is defined as the determination of needs and the placement of the orders with suppliers. The purchasing process can be divided into two activities: buying and ordering. Buying involves decisions regarding where to place orders on the basis of quality, price, and service. Buying is a management function. Therefore, the foodservice manager or director usually assumes responsibility for deciding on the suppliers from which to purchase food and supplies. Ordering is the determination of the quality and quantity of food and supplies required to satisfy menu requirements, at a price within budgetary guidelines. Ordering is usually a supervisory function, and a foodservice supervisor is often given responsibility for ordering. Ordering may also be done by a skilled employee such as an experienced cook, especially in smaller operations. The individuals responsible for ordering must be familiar with menu requirements; the quantities of food needed; market forms of food; grades and standards; seasons for foods; the food marketing system; and reliable sources of market information. In addition, a food buyer must have some knowledge and understanding of legal responsibilities and ethical practices. Sound business principles and well-stated purchasing policies are the foundation of a good purchasing program. Fairness, honesty, and trust between the food buyer and the supplier are essential to a good working relationship. The customer and the supplier depend on each other. The foodservice cannot operate without the merchandise, and the supplier must have a market for his goods. Therefore, a satisfactory “deal” is one that benefits both parties. The customer, however, needs more than just the product offered by the supplier: (s)he needs the supplier’s expertise and his/her reliable service. To ensure himself/herself the benefits of the buyer/supplier relationship, the buyer should try to be a valued customer. Reliable vendors will always try to protect their valued customers by extending them with the best possible quality, price, and service. Three Ways to Increase Your Value A customer can increase his/her value to a supplier in at least three important ways. First He/she should place orders of a reasonable size. Because delivery services cost money, most suppliers establish minimum size requirements for orders. In other words, the order has to be big enough to make it worth the supplier’s while to deliver. The buyer should learn what these minimum size requirements are and try to stay above them. Of course, a good supplier will usually help out in an emergency that requires a rush delivery or a small order, but don’t ask for these special favors too often or you’ll end up paying for it. Second A customer should not place his/her orders too often. In fact, spacing-out orders help assure that they are kept to acceptable sizes. Very frequent or small orders indicate inexperience and poor planning on the part of a buyer. Careful planning and accuracy in estimating needs are necessary to build a good relationship with a supplier. If the foodservice operation is large enough, the supplier may be willing to make frequent deliveries, but will usually pass added expenses on to the buyer as the price for the buyer’s inefficiency. The acceptable frequency of delivery varies from place to place and is determined principally by the accessibility of the goods and the distance the supplier has to travel to make his deliveries. In large cities, for example, daily deliveries are common. Nevertheless, if a buyer does a fairly small volume of business with a supplier, the buyer should try to place orders only two or three times a week to minimize the supplier’s expenses. In rural areas deliveries may be made only once or twice a month, so that it may be necessary for the foodservice operation to maintain an inventory somewhat larger than would normally be desirable. (It is, of course, economically advantageous to keep the inventory as low as possible. Large inventories involve investment insurance, storage, and spoilage expenses.) Third A customer should not spread his/her business among too many suppliers. The wise buyer will confine business to a limited number of suppliers who provide acceptable service. This is not to say that the buyer should never order from other companies. It does mean, however, that a few suppliers in each food category should receive the lion’s share of the business. A buyer may occasionally order from other suppliers, especially if they have something new or interesting to offer, but it is wise to check with the current supplier first before looking elsewhere. “Cherry picking” should be avoided. This is a practice of buying each item from whichever supplier has the lowest cost, no matter the size of the overall order. In some smaller operations, the buyer may choose to use one supplier in each food category; in most cases, it is wise to have more than one supplier. Market Sourcing Sources of supply vary considerably from location to location. Large cities have a greater number and variety of suppliers than do small towns and isolated communities. Purchasers should establish contact with available suppliers/vendors such as wholesalers, distributors, local producers and packers, retailers, cooperative associations, as well as brokers, and food importers. In most instances, the person in charge of buying will contact several suppliers to obtain the necessary foods. Some wholesalers diversify their product lines in order to meet all food-related kitchen needs. Food products are obtained from various sources of supply. For example, a packing house supplies meat and meat products, while a food wholesaler supplies dry goods. Once the business is established with a supplier, all transactions should be well documented and kept readily available on file. There are two major food categories: perishables and non-perishables Perishables Perishable items include fruits, vegetables, fresh fish and shellfish, fresh meats, poultry, and dairy products. As a rule, perishables are bought frequently to ensure freshness. Frozen foods, such as vegetables, fish and meat products, have a longer lifespan and can be ordered less frequently and stored in a freezer. Non-perishables Non-perishable items include dry goods, flour, cereals, and miscellaneous items such as olives, pickles, and other condiments. These can be ordered on a weekly or monthly basis. Keep in mind that just because something does not go bad isn’t a reason to buy it in quantities larger than you need. Every item in your inventory is equal to a dollar amount that you could be saving or spending on something else. Consider that a case of 1000 sheets of parchment paper may cost$250. If you have a case and a half sitting in your inventory, but only use a few sheets a day, that is a lot of money sitting in your storeroom.

Choosing Suppliers

When selecting a supplier, it is not enough to consider only the prices, since these, after all, do not necessarily reflect the quality and reliability of goods and services offered by the supplier.

In the very competitive business of foodservice, the quality of one’s product is always of paramount importance. From the buyer’s standpoint, however, quality does not necessarily always mean “the best.” In terms of purchasing, quality means getting the best quality commensurate with the intended use of the product. If, for example, the menu includes soup, the buyer would purchase less expensive, skinless tomatoes rather than the higher quality, more expensive whole tomatoes with skins, which are much too expensive to be used in soup. Similarly, meat that is to be served as an expensive steak should be the best meat available, whereas meat for Swiss steak can be obtained from a variety of inexpensive cuts—and the choice may well depend on their relative cost.

In addition to the criterion of intended use, buyers must consider the product’s own characteristics rather than just the recognition of the supplier’s brand name. Some packers spend a great deal of money on their brand-name promotions, but a buyer should never let the brand name alone influence his or her purchasing decisions unless (s)he, in turn, intends to advertise the product to customers by the brand name. (S)he must study the products carefully to determine which provides the best quality for the money. In any market, it takes time to learn which suppliers and labels yield the best results, but in the long run, it is time well spent.

Although most buyers are aware of the importance of considering the price of the product they are buying, they often fail to put a price into a proper perspective with other factors that affect the suitability of particular products. Consequently, they put too much emphasis on buying the cheapest product and may, as a result, actually end up paying more in terms of cost-per-portion and preparation time. For example, in one particular market area, there were three suppliers of a roast round of beef. Two of them consistently offered an inside round at a lower price than the third, but careful yield-testing of the product—that is, determining how many portions were obtained for the total dollar cost—indicated that the company with the highest price was really offering the best buy. Their roasts had the excess fat and bones trimmed more closely than those of the other suppliers.

Canned products should also be evaluated according to the price-yield ratio. One brand may have prices considerably lower than its competitors’ but may contain substantially less fruit or vegetables, with more juice or water making up the weight. Or the quality itself may be inferior. This is not to say, of course, that lower-priced commodities are always inferior, but rather that buyers should conduct tests to determine quality and yield for themselves.

The only way to judge canned products effectively is by opening a can and inspecting the contents. If the buyer finds, for example, that a can of peaches contains fruit with several bruises, (s)he will know that those peaches are not suitable for use in a salad, where appearance is an important factor. Consequently, (s)he will reject that particular product as unsatisfactory for its intended use. To measure the yield of a canned product, the buyer should determine the net drained weight of that product—the weight of the fruit or vegetable after the liquid has been drained off. The cost-per-can divided by the net drained weight in ounces gives the cost per usable ounce. Therefore, when a buyer considers the price of a product, (s)he must consider the price in relation to the amount of the actual product, not just price per weight or volume.

Furthermore, shopping for price alone can cause a loss of trust between the salesperson and the buyer. Salespeople may bypass “price shoppers” on the really good buys because they are not considered to be good customers.

The food buyers’ objective should be to purchase food and supplies from reputable suppliers who meet the following essential criteria:

• They must offer a competitive price structure for a specified quality.
• They must be able to provide good delivery service
• products must arrive in good condition;
• drivers must be courteous
• food and supplies must be delivered on schedule
• They must have specified items in stock, thus avoiding shorts.
• They must be able to provide new product information; nutritional information related to food purchased; and information on market conditions affecting you.
• Rather than favors, the concept of “good service” refers to a positive attitude on the part of the supplier and the ways in which this attitude benefits the entire foodservice operation–not just the individual employee. The supplier who gives good service is the one who will deliver as frequently as the foodservice operation needs deliveries and at conveniently scheduled times (not during meal service periods).
• has courteous delivery agents who are willing to transport deliveries to the receiving area and check the accuracy of the order.
• consistently provides the quality that the buyer has asked for, or informs the buyer when the quality of the product falls below his or her normal standards and provides the option of canceling the order or accepting the best deal possible.
• keeps prices in line with the market, even without being checked on.
• provides new product information and nutritional information relating to food purchased.
• keeps the buyer informed of market conditions so (s)he can stock up on a required item or alter his or her menu.
• is concerned about the reputation of his or her firm and strives to maintain high standards and quality service.

Service, then, is the kind of consideration the buyer can expect from one who is conducting a business, values clients, and works hard to keep them satisfied. Friendship is a wonderful thing, but service is what you are paying for.

You should keep in mind, however, that this is a two-way street. You expect good service, but you should also show consideration to the supplier. In the case of an emergency such as a strike, bad weather conditions, or a move to a new warehouse, the supplier may ask you to modify your schedule somewhat. Try to be understanding and cooperative since you will also expect equal consideration.

Factors That Impact Prices

Food products, in particular, fluctuate in price over the year, due to many factors:

• Seasonality: When food is in season, there is more of it available in the local food supply, bringing prices down. Additionally, foods in season are usually of higher quality and have a longer shelf life than those that are out of season and need to be transported long distances to market.
• Weather: Severe weather can have a huge impact on the cost of food. Drought, flooding, and unseasonable frost have all affected major produce-supplying areas of the world in recent years, causing a rise in prices for many items.
• Cost of transportation: If the cost of fuel or transportation rises so does the cost of food that needs to travel to the market.
• Commodity prices: A number of foods are traded on the commodity market, such as meats and grains. These prices fluctuate as buyers who trade in these products in large volumes buy and sell, much like the stock market.

• When is the item to be used?
• Which supplier has the best price and the best quality? Where an item is purchased should be determined by the price and the quality of the available supplies. When ordering supplies, it is advisable to get prices from at least three sources, then purchase from the supplier who quotes the best price for a comparable quality.
• When will the item be delivered? Depending on the distance of the food service establishment from the supplier, the delivery may take hours or days. Remember, it is extremely difficult to maintain food quality and consistency if you do not know when your order will be delivered. For this reason, menu planning and a running inventory are two of the most important aspects of purchasing procedures.

Product Specifications

Specifications should be written for nearly every item that is purchased. This is critical is the foodservice operation receives federal funding as is the case for some education and healthcare facilities. Writing specifications can be a demanding and time-consuming job, especially for many different food and supply items, equipment, chemicals, and so on.

Meat, seafood, poultry, processed fruits and vegetables, and fresh fruits and vegetables can be ordered under different specifications. For example,

• Meats can be ordered by grade, cut, weight/thickness, fat limitation, age, whether fresh or frozen, and type of packaging.
• Seafood can be ordered by type (e.g., finfish/shellfish), species, market form, condition, grade, place of origin, whether fresh or frozen, count, size, and packaging,
• Poultry can be ordered by type, grade, class (e.g., broiler, fryer), style (e.g., breasts, wings), size, whether fresh or frozen, and packaging.
• Processed fruits and vegetables can be ordered by grade (sometimes), variety, packaging size and type, drained weight, count per case, packing medium, and whether canned or frozen.
• Fresh fruits and vegetables can be ordered by grade (sometimes), variety, size, weight per container, growing area, and count per container

Table 10.7 shows an example of a purchasing specification sheet for beef that might be kept in a commercial kitchen or receiving area.

Table 10.7 A Sample Purchasing Specification

Beef

Weight, Size, and Cut Specifications

Prime rib

Choice

15 lb, fully trimmed

New York strip

Prime

13 lb, Bone out, fully trimmed, max 6 in. width, min 2 in. depth

Tenderloin

Prime

6 lb, fully trimmed to silverside

Roast sirloin

Select

15 lb, boneless butt

Short loins

Prime

13 lb, fully trimmed, 2 in. from eye

Table 10.7 A Sample Purchasing Specification. The table shows different kinds of beef with their grade, weight, and cut specifications.

The following websites are useful resources for additional information on food product specifications

These books are great resources for purchase specifications:

The Visual Food Encyclopedia

The Visual Food Lover’s Guide: Includes essential information on how to buy, prepare, and store over 1000 types of food

Chef’s Book of Formulas, Yields and Sizes

In most restaurant kitchens, purchasing and ordering are done by the chef and sous-chefs, although in larger hotels there may be purchasing departments assigned this responsibility. In most self-operated on-site foodservice operations, the foodservice manager/director is responsible for purchasing, though if the foodservice is contracted to managed services, the operation will likely be part of contract buying. Most kitchens will have a list of suppliers, contacts, delivery dates and schedules, and order sheets with par stock levels to make purchasing easier. For a special function or event, such as a banquet, it may also be necessary to determine the required supplies for that function alone.

Production Control Chart

To calculate the quantities of food items to be ordered for any size banquet, a portion control chart must be consulted first. Most establishments will have a portion control chart similar to the one shown in Table 10.8. The chart indicates the portions to be used per person for any given menu item.

Table 10.8 Portion Control Chart.
Food Item Menu Item Portion Size
Shrimp Shrimp cocktail 80 g (2.82 oz.)
Lemon Shrimp cocktail 1 wedge (6/lemon)
Cocktail sauce Shrimp cocktail 60 mL (2.11 oz.)
Dressing Tossed salad 60 mL (2.11 oz.)
Prime rib, raw, trimmed ready Prime rib 500 g (17.6 oz.)
Potato Baked potato 1 each (100 count)
Green beans Green beans 80 g (2.82 oz.)
Carrots Carrots 80 g (2.82 oz.)
Strawberries Fresh strawberries 100 g (3.52 oz.)
Whipping cream Berries and cream 60 mL (2.11 oz.)
Coffee Coffee 500 g (17.6 oz.) for 75 people
Coffee creamCoffee60 mL (2.11 oz.)

Table 10.8 Portion Control Chart. The table displays a food item, a menu item containing that food, and the portion size of the food item.

One use for a portion control chart is to estimate the quantity of major ingredients and supplies needed to produce a predicted number of menu servings.

##### Example

You need to prepare shrimp cocktails and prime rib for a 100-person banquet. Using the portion control chart in Figure 5, you can quickly determine what amounts of major ingredients (Figure 6).

Table 10.9 Calculating Purchase Amounts
Required Servings Amount to Order
100 x 80 g shrimp 8000 g or 8 kg (17.6 lbs.) shrimp
100 x 1 wedge of lemon 100 wedges = 17 lemons (6 wedges per lemon)
100 x 500 g prime rib raw oven ready 50 kg (110 lbs.) prime rib

Table 10.9 Calculating Purchase Amounts. The table displays how one would calculate the cost of shrimp cocktails for a one hundred person banquet.

Purchasing policies and procedures vary depending on the ownership and size of the organization. In health care facilities and large school districts, it is common to have centralized purchasing of all materials and supplies—including food—done by one department.

Some restaurants and hotels, particularly those belonging to chains, will have contracts in place for the purchasing of all products or for certain items. This may mean that the property can only purchase from a specific supplier, but in return, it will have negotiated set pricing for the duration of the contract. This has advantages and disadvantages. On the positive side, the contract price remains stable and the job of managing food costs becomes more consistent since there are no price fluctuations. On the negative side, contract buying takes away the opportunity to compare prices between suppliers and take advantage of specials that may be offered.

Centralized purchasing is also used by management companies that operate a chain of nursing homes and small hospitals or a number of school districts or a combination of all the aforementioned organizations. In this case, the unit managers may be responsible for ordering only dairy and bread directly from suppliers and ordering the remaining products through the management company’s central purchasing system. In a large segment of the industry, however, foodservice managers/directors decide on the purchasing methods that best suit their needs.

Informal purchasing is basically working with suppliers to identify the appropriate products, ordering the correct quantities, and then receiving and storing the product. Getting the best price for the quality of the product desired is just as it’s called – informal.

Line item awards simply choose and purchase from the supplier with the lowest price. This is why it’s important to develop tight specifications for products and inspect the product carefully when receiving. You have to make sure you are getting exactly the product you want and checking that is what is delivered. Line item bidding works in very large operations purchasing large quantities of products, but it may be difficult for smaller operations to make sure their delivery is large enough to be the “valued customer/buyer” desired.

A “market basket” approach groups similar items, or items that would logically be purchased from a single supplier, such as produce. The amount of each product is forecasted and is multiplied by the bid price from each bidding supplier to get an extended price for that product. This extended price is calculated for all items in the market basket and the bid (business) is awarded to the supplier with the overall lowest price for the whole group of products. See the following example where the entire bid/order would be awarded to Supplier C.

Table 10.11 Food Product’s Forecasted Amount and Purchasing Information for Three Different Suppliers
Product Fore-cast Amt. Supplier A Total $Supplier B Total$ Supplier C Total $Romaine Lettuce, cs 3$24.00/cs

$72$25.00/cs

$75$22.00/cs

$66 5×6 Tomatoes, cs 1$30.00/cs

$30$32.00/cs

$32$31.00/cs

$31 Cucumbers, cs 2$12.00/cs

$24$13.00/cs

$26$10.00/cs

$20 Red Peppers, cs 4$32.00/cs

$128$31.00/cs

$124$30.00/cs

$120 TOTAL BID$254

$257$237

Table 10.11 Food Product’s Forecasted Amount and Purchasing Information for Three Different Suppliers

Another type of buying is called cost-plus buying. This is a purchasing procedure commonly used by large food chains. An arrangement is made with a supplier to purchase all of a certain kind of food at a specific percentage mark-up over the supplier’s cost. The advantage of this method is that the mark-up is smaller than it would otherwise be. In addition to the cost savings realized for a lower mark-up, the purchasing agent saves time contacting other suppliers to get price quotations. The disadvantage of this system is that it is usually impossible for a purchasing agent to verify the supplier’s cost unless the supplier agrees to unannounced inspections of the firm’s books.

Another variation of cost-plus buying is the use of a prime vendor. The advantages and disadvantages of prime vendor purchasing are the same as cost-plus; however, some organizations need to be cautious in their use of these methods because of the purchasing regulations they are required to follow. This is particularly true of school systems since they are public institutions supported by taxpayers and must use competitive bidding.

It is important for foodservice managers, especially those in smaller operations, to understand the benefits of a group or cooperative purchasing. Cooperative buying involves similar operations joining together to purchase products. It is commonly referred to as group purchasing. The organization of these units may be based on a number of considerations: membership in a regional hospital or educational association or council, the proximity of other institutions wishing to participate, a common religious affiliation or some other allegiance, or membership in a national purchasing program.

The obvious benefit of group purchasing is that it enables a relatively small facility to reap the same cost benefits it would enjoy if it were receiving mass purchasing discounts. In order to realize volume discounts, however, the group must agree to minimize the number of different items ordered. This tends to limit flexibility in menu planning. Often facilities that belong to a group purchasing program also go to a local secondary supplier.

Institutions can increase their food cost savings and tighten their control over group purchasing procedures by designating a representative–preferably someone with purchasing experience–to keep an eye on the group’s policies and standards. Collectively, members of the group can develop purchasing specifications to be used, in turn, by their purchasing agent in obtaining bids or quotations from food vendors. The formulation of these specifications would, in fact, be an obvious fringe benefit to the small operation with no specifications of its own to define the quality of food it requires. The membership representative might also participate in taste panels, yield tests, and examination of can contents—activities that encourage more objective and thorough purchasing decisions but are inconvenient and impractical for a single facility to conduct on its own.

Purchase Order Chart with Par Levels

The primary purpose of using a purchasing standard is to ensure that sufficient quantities of all food are on hand to meet daily requirements. To establish and maintain these standards, food inventory must become a daily routine. Having set par levels (the amount you should have on hand to get through to the next order) will help in this regard.

There are three main things you need to know:

• Amount required (par level)
• Amount on hand
• Amount to order

To find the amount to order, subtract the amount on hand from the amount required (Figure 7).

Par stock is a term used to describe the amount of a particular item required to meet an operation’s needs during a specified period of time. Once a buyer determines that amount, a par stock can be established and used as an ordering guide.

In some cases, you may have to order a minimum amount based on the package size, so will need to round your quantity up (such as the whole tub of garlic and full cases of mushrooms, apples, and lettuce in Figure 7).

Table 10.12 Calculating the Actual Order Amount of Different Meats
Meat Amount Required (Par Level) Amount on Hand Amount to Order Actual Order
Corned beef 10 kg 2 kg 8 kg 8 kg
Ribs of beef 20 kg 5 kg 15 kg 15 kg
Ground beef 10 kg 10 kg 10 kg
Veal liver 5 kg 500 g 4.5 kg 4.5 kg
Pork loin 10 kg 3 kg 7 kg 7 kg

Table 10.12 Calculating the Actual Order Amount of Different Meats

Table 10.13 Calculating the Actual Order Amount of A Sole Fillet Fish
Fish Amount Required (Par Level) Amount on Hand Amount to Order Actual Order
Sole Fillet 25 kg 5 kg 20 kg 20 kg

Table 10.13 Calculating the Actual Order Amount of A Sole Fillet Fish

Table 10.14 Calculating the Actual Order Amount of Different Vegetables
Vegetable Amount Required (Par Level) Amount on Hand Amount to Order Actual Order
Garlic, peeled 2 kg tub 250 g 1.750 kg 2 kg tub
Mushrooms 5 kg case 500 g 4.5 kg 5 kg case
Lettuce 2 cases (24/case) 12 (1/2 case) 1 1/2 cases 2 cases

Table 10.14 Calculating the Actual Order Amount of Different Vegetables

Table 10.15 Calculating the Actual Order Amount of Different Fruits
Fruits Amount Required (Par Level) Amount on Hand Amount to Order Actual Order
Apples 2 cases 1/2 case 1 1/2 cases 2 cases
Strawberries 10 kg 10 kg
Oranges 1 Case 2 Cases

Table 10.15 Calculating the Actual Order Amount of Different Fruits

Integrating these par levels into your regular ordering sheets or your ordering system will make it very easy to manage inventory coming in. More and more suppliers are moving to online ordering systems, which have current prices, case sizes, and often your purchase history available to you when placing an order. Online ordering can often be more convenient as the person placing the order does not have to make a call into an order desk during regular office hours.

Ordering Process

The amount of food to order depends on the number of people to be served (including customers, patients, employees and staff, students, retail operations, and catering), the portion size, and the number of times an item is on the menu. For example, canned tomatoes could be used in a number of menu items during the order period. Other factors that affect the purchase amount include the amount of food on hand, the frequency of food deliveries, and the storage space available for inventory, as previously discussed.

Steps in the Ordering Process

 Step 1: Make a list of all the food items required for the menu. Estimate the demand for each menu item based on records of past experience. Step 2: Refer to standardized recipes to determine the required amounts of various ingredients. Step 3: Translate quantities needed into purchase units, e.g., No. 10 cans. Step 4: Take inventory of food on hand and subtract this amount from the total amount required to determine the amount to purchase.

Table 10.16 The Four Steps in the Ordering Process

Once the supplier is chosen and the order compiled, typically a purchase order is prepared. The purchase order lists information for both the purchasing organization and the supplier, the products ordered, with the amounts, bid price and extended price and the total for the purchase order. Several copies are typically prepared so that the purchaser, supplier, accounting office and receiving clerk all have copies.

Receiving

When the quality and quantity of incoming merchandise is not carefully inspected, the benefits of detailed purchase specifications and careful buying practices are eliminated. A key player in this procedure is the staff member who handles the receiving in your facility. In large operations, this may be a receiving clerk whose job is to concentrate solely on the receiving (and often storage) activity. In smaller operations receiving may be handled by the foodservice manager or a head cook or lead worker in a kitchen.

Obviously, training for completing the receiving and storage tasks is extremely important and must emphasize accuracy and conscientious adherence to proper procedures. Training may be completed on-the-job and should include the following functions:

• checking the quality, quantity, and weight of the incoming deliveries against the purchase order and specifications; (It is not possible to check each piece of fruit, for example, so a random inspection is recommended to assure quality.) Hint: Occasionally turn the case over and check the bottom layer or produce!
• inspecting for the specified quality;
• recording deliveries received in the daily record;
• monitoring critical control points for all potentially hazardous foods;
• knowing what action to take if a problem occurs with a delivered product;
• following procedures and preparing paperwork for returning unsatisfactory merchandise;
• handling invoices;
• marking cartons for storage;
• delivering merchandise to the storeroom or kitchen for storage or use; and
• proper procedures for storing food and rotating inventory.

Storage

Foodservice storage forms an important link between receiving and food preparation in all foodservice operations. Thus, the quality of the storage system directly affects the quality of the product used in food preparation. The amount of storage required depends on the frequency of deliveries and the turnover of the product. Storage is vital for another reason: it is one part of the operation where management can exert effective control without appreciably increasing time and personnel costs. In other words, good storage management, in the form of effective controls on shrinkage, theft and pilferage, and unnecessary food handling, can help keep foodservice costs down. Now we’re back to controlling inventory!

Professional Ethics

The Managing Procurement and Inventory Control Circle is Completed

As you read this chapter you may have thought, “I think I already learned something about this!”, and you would be correct. The entire procurement process flows from one aspect of the foodservice operation to another and then back or around again. Inventory control underlies the entire process. The overall lesson is to understand that managing and controlling inventory, purchasing, buying, ordering, receiving, storage and everything in between is critical to controlling costs in any foodservice operation.

## Review Questions:

• Why is it important to understand the various “players” and their roles in the procurement process?
• How are inventory, inventory records and the procurement process related?
• What are the characteristics of a valued “customer” buyer?
• What factors should be considered, along with prices, in choosing suppliers?
• What factors impact food and supply prices for foodservice operations?
• Why are product specifications an important part of the procurement process?
• What are some ethical considerations that interface with the procurement process?

## Review Exercises

The original version of this chapter contained H5P content. You may want to remove or replace this element.

The original version of this chapter contained H5P content. You may want to remove or replace this element.

The original version of this chapter contained H5P content. You may want to remove or replace this element.

## References

Author, The BC Cook Articulation Committee, Sep 2015. Basic Inventory Procedures. In Pressbooks Edition 1.0. Basic Kitchen and Food Service Management.

Lesson 3.1: Managing Inventory Control and Procurement is shared under a CC BY 4.0 license and was authored, remixed, and/or curated by Beth Egan (Pennsylvania State University) via source content that was edited to conform to the style and standards of the LibreTexts platform; a detailed edit history is available upon request.