Purchasing and Cost Control Ch.9-10

Economic Order Quantity (EOQ) Formulas

1. The EOQ in dollars is equal to: the square root of [(2 times the ordering cost in dollars times the amount of the item used in one year in dollars) divided by the annual storage cost expressed as a percentage of average inventory value]. 2. The EOQ in units is equal to: the square root of [( 2 times the ordering cost in dollars times the amount of the item used in one year in units) divided by the the annual storage cost per unit in dollars].

Commodity

A basic, raw food ingredient. It is considered by buyers to be the same regardless of which vendor sells it. For instance, all-purpose flour is often considered a commodity product, whereby any processor's product is acceptable.

Make-Or-Buy Analysis

A cost/benefit analysis whereby the buyer tries to determine if, for example, It is more economical to purchase raw foods and make a finished product in-house, or whether it may be less expensive to purchase a connivence, value-added food. The buyer usually considers the cost of food, labor, over-head, labor skill available, and so forth when making the decision.

Barter Group

A group of businesses that wish to barter for products and services and use trade dollars instead of cash money to get what they need. The group is organized and administered by a third party and a fee is usually assessed each participant whenever they make a deal. The opposite of direct bartering, whereby two or more persons get together on their own to make a deal.

Move List

A list of products that need to be sold ASAP. For instance, they may be on the verge of spoilage, or they might be discontinued items. IF vendors have items on a move list they may call you to see if you're interested in any of them. Usually the AP prices of these items are deeply discounted.

Line-Item Purchasing

A practice of buying from vendors only the individual items on a competitive bid sheet that area priced lower than those submitted by competing vendors. For instance, if a purveyor bids on 10 items, but is the lower bidder on only 1 of them, the buyer will buy only the 1 item. Sometimes referred to as a cherry picking. The opposite of bottom-line, firm-price purchasing.

Quantity Discount

A price reduction for buying a large amount of one specific type of merchandise.

Forklift Discount

A price reduction if you agree to unload your own shipments instead of requiring the drivers to do the unloading.

Freight-Damaged Item

A product that has been damaged somewhat during the shipping process.

Opportunity Buy

A purchase intended to save a great deal of money. The products are price discounted. A quantity discount is an example of an opportunity Cost.

Wholesale Club

A type of buying club. It is a cash-and-carry operation patronized primarily by small hospitality operations that do not order enough from vendors to qualify for free delivery. Buyers usually have to pay a membership fee.

Long Term Contract

Agreement that typically lasts at least one year.

Futures Contact

Agreement to purchase or sell a commodity for delivery in the future

Forecasting

An attempt to predict the future. Current and historical information is used to estimate what might happen over the near or long term. Referred to as sales forecasting when attempting to predict future sales.

Cash Discount

An award for prompt payment, for paying in advance of the delivery, or using a cash-on-delivery (COD) bill-paying procedure.

Commodity Exchange

An organized market for the purchase and sale of enforceable contracts to deliver a commodity, such as wheat, or a financial instrument, such as eurodollars, at some future date.

Exchange Bartering

Another term for barter.

Buyout Sale or Closeout Sale

Another term for blowout sale.

Buyer Fact Sheets

Another term for buyer profiles.

Storage Cost

Another term for carrying cost

Storage Cost

Another term for carrying cost.

Coupon Refund

Another term for cash rebate.

Popularity Index

Another term for menu mix percentage.

Muzz-Go List

Another term for move list.

Edible Yield Percentage

Another term for yield percentage.

Introductory Offer

Ap price discount offered by suppliers to buyers who purchase an item that is newly available in the marketplace. The discount may be in the from of a cash rebate or it might include a free item for every one the buyer purchases at the regular AP price.

Hedging

Attempting to reduce or avoid the risk of fluctuating AP prices by taking a position in the commodity futures market.

Suppliers Cost

Business expenses suppliers incur in order to operate their businesses effectively.

As-Is, Where-is Condition

Buying a product, such as a used piece of equipment, in its current condition. There usually are no guarantees. In addition, the buyer is usually responsible for the cost of packing up the product and having it delivered.

Opportunity Cost

By choosing to do somehting, you give up the option of doing something else. Fot instance, if you oay a bull to early you lose the option of investing the money and earning some interest income. The loss of income in this case is considered to be the opportunity cost.

Pre-costing

Calculating the costs of all ingredients used in a standard recipe to determine the cost for one serving.

Fixed-Priced Contract

Contract that does not allow price fluctuations.

Variance

Difference between what is expected and what actually happened. Typically used to refer to the difference between the standard cost and the actual cost.

Portion Factor (PF)

Equal to (16 ounces divided by the number of ounces needed for one serving). Alternately, equal to (1,000 milliliters divided by the number of milliliters needed for one serving).

Actual Cost of Food Sold

Equal to (beginning inventory + purchase - ending inventory) +/- any adjustments, such as employee meals, complimentary items given to guests, and so forth.

Portion Divider (PD)

Equal to an item's (portion factor (PF) multiplied by its edible yield percentage).

Inventory Turnover

Equal to: (actual cost of products used, or sold, divided by the average inventory value kept at the hospitality operation).

Product Cost Percentage

Equal to: [( cost of a product divided by its selling price) multiplied by 100]. A typical example would be the food cost percentage.

Carrying Cost

Expenses, such as insurance, security, and spoilage, associated with holding inventory in storage.

Safety Stock

Extra stock kept on hand to avoid running a=out and disappointing guests.

Used Merchandise

FFE that are not new; the have been used by others but may still ahve some useful life left. These items are typically sold as-is, with no guarantee.

Demonstration Model

FFE used by the purveyor or manufacturer for display purposes. Usually can be purchased at a discount

Competitive Pressure

Force produced and exerted by companies on one another, to lower prices and/or to provide better products and services.

Itemized Bill

IInvoice that indicates each item's AP price and extended price, as well as all other costs, such as delivery charges, associated with the purchase.

Levinson Approach to ordering

Method of determining the appropriate order sizes. Takes into account forecasted sales, portion sizes, and yield percentages when calculating the amount of products to order.

Par Stock Approach to ordering

Method used to determine the appropriate amount to order. Involves setting par stocks for all items and subtracting the amount of each item on hand to calculate the order sizes.

Bottom-Line, Firm-Price Purchasing

Method used when the buyer focuses on the total dollar amount of a purchase instead of on each item's AP price. If shopping around, the buyer will not pick and choose among several vendors. He or she will buy from the one that quotes the lowest total dollar amount of the entire purchase and will not purchase anything from the other competing vendors. The opposite of line-item purchasing.

Panic Buying

Occurs when a buyer is in a pinch and will pay any price to get the stuff RIGHT now.

Cash Rebate

Occurs when a vendor charges the full AP price for an item, but later on, after you provide proof-of-purchase documentation, he or she will send you a check for a small amount of money, or will credit this amount to your next bill.

Buyer Pricing

Occurs whenever a buyer does not have a clear-cut specification; the vendor then helps the buyer determine what he or she needs. Will also occur whenever you engage in panic buying. This method will significantly increase your cost of goods sold.

Economical Packaging

Packing methods and packaging materials used that will reduce overall product costs.

Lead Time

Period of time between when you place an order with a vendor and when you receive it.

Promotional Discount

Price discount awarded to the buyer if he or she allows the vendor to promote the product in the hospitality operation. Or if the hospitality operation agrees to personally help promote the sale of the product to its customers.

Salvage Opportunity

Purchase of a product that is damaged, hence sold for pennies on the dollar. Buyers must be willing to gamble that the product is usable because the item is generally sold as-is, with no guarantee.

Blanket Order

Purchase order that contains several different products.

Delivery Schedule

Purveyor's planned shipping times and dates.

Monopolistic Competition

Refers to a competitive environment where each competitor is affected by supply and demand conditions since their businesses are very similar. However, each competitor is able to differentiate their products and/or services enough to establish a competitive advantage. Typical economic conditions faced by vendors and businesses.

Supply and Demand

Refers to a cpmpetitive environment that exists for producers of commodity items if supply exceeds demand, AP prices will decrease. If demand exceeds supply, AP prices will increase.

Derived Demand

Refers to the notion that a buyer's demand for certain products and/or services is contingent on the needs and desires of the customers they buyer's company serves.

Blowout Sale

Refers to the sale of old, defective, or discontinued merchandise that is usually sold at a huge discount.

Economic Value

Represents the increase in AP price that occurs as a product journeys through the distribution channel. For example, 10 pounds of pre-portioned steak is more valuable, and more expensive, than 10 pounds of meat that has to be processed further in a restaurant's kitchen.

Actual Cost

See actual cost of food sold.

Cherry Picking

See line-item purchasing.

Supplier Services

Services, such as free delivery, generous credit terms, and others, provided by vendors to buyers who purchase their products.

Odd-Hours Delivery

Shipments delivered at times of the day or week when a receiving agent is not usually scheduled to work. Buyers who agree to these types of deliveries nay receive a discount.

Volume Discount

Similar to a quantity discount. The buyer agrees to purchase a huge volume of goods; however, unlike a quantity discount, he or she buys more than one type of merchandise.

Ordering Procedures

Standardized process used by the the buyer to ensure that the correct amounts of needed products are ordered at the appropriate time.

Just-In-Time (JIT) Inventory Management

System that attempts to ensure that the moment the inventory level of a particular product reaches zero, a shipment of that item arrives at your back door. The main objective is to reduce carrying charges to their lowest possible level.

Use Tax

Tax charged by the state where the buyers hospitality operation is loocated (i.e, home state), on products purchased from out of state. Similar to the sales tax charged by the home state. Charged by the home stat to prevent companies from going elsewhere to avoid paying sales tax to their home states.

Sales Taxes

Taxes a company must pay to state and local governments for things purchased, such as cleaning chemicals, that will not be resold to customers.

Ordering Cost

The Amount of money spent to make an order, receive it, and store it. Includes things such as labor needed to perform the work and administrative costs such as faxing, photocopying, and cell phone charges.

Optimal Inventory Level

The amount of inventory that will adequately serve a hospitality operations needs without having to incur the costs associated with excess inventory.

Stockout Cost

The cost incurred when you do not have a product guests want. While the cost cannot always be calculated, i the long run there will usually be a negative impact on your bottom line. For example, the guest leaves without buying anything. Or the guest stays and orders something else, but never comes back.

Landed Cost

The cost used by the vendor in a cost-plus buying arrangement.

Profit Markup

The difference between the vendor's cost of a product and its sales price. Alternately, the difference between the EP cost of a menu item and its menu price.

Standard Cost

The expected cost. Sometimes referred to as the "potential' cost, the "planned" cost, the "budgeted" cost, or the "theoretical" cost. Typically used to help set menu prices, sleeping room prices, and so forth. Also used to compare to the actual cost incurred to determine if management is achieving its budgetary goals.

Menu Price Calculation

The food cost of a menu item divided by its food cost percentage. Alternately, the beverage cost of a menu item divided by its beverage cost percentage.

Reorder Point (ROP)

The lowest amount of stock on hand that you feel comfortable with, the point that you will not go below before ordering more stock.

Par Stock

The maximum amount of a product you want to have on hand. When reordering the product you want to buy just enough to bring you up to par.

Conventional Profit Markup

The most typical percentage (or dollar amount) added to the cost a company pays for an item it sells, to compute the company's sales price.

Correct Order Size

The order size that minimizes the ordering costs, inventory storage costs, and stockout costs.

Correct Order Time

The order time that minimizes the ordering costs, inventory storage costs, and stockout costs.

Break Point

The point at which a vendor will accept a lower price. For instance, if you buy from 1-50 cases, the AP price may be $5 per case, but if you purchase more than 50 cases, the AP price may be $4.75 per case. In this example, the break point is 50.

Capital Cost

The rate of return (e.g., interest income) The capital could be expected to earn in an alternative investment of equivalent risk.

Credit Terms

The type and amount of financing a vendor will provide, along with the prescribed type of bill-paying procedure that must be followed. Also included are things such as a description of late fees, penalties, and so forth.

Quality Standard

The type of quality you consistently use and that the hospitality operation is known for. Buyers typically communicate this standard to vendors by specifying brand names and government grades.

Sacred Hours

Time of the day when you would not want to accept deliveries. Usually these hours are from 11:30 A.M. to 1:30 P.M.

Negotiation

To come to terms or to reach an agreement through discussion and a willingness to compromise.

Cost-Plus Purchasing

Under this purchasing procedure, a product's AP price is equal to the supplier's cost of the product plus an agreed-upon profit markup.

Buyer Profiles

Vendor files that contain information about current and potential customers. Typically used by sales reps to help them prepare the best possible sales presentation.

Product's Usage Pattern

When referring to food and beverages, it is the rate at which the products are produced and served to customers. When referring to nonfood and non-beverage supplies, it is the rate at which the products have been exhausted and are no longer available.

Direct Bartering

When two persons trade between themselves rather than through a barter group.