Purchasing & Cost Control (DHS1123) PDF

THE OPTIMAL DHS1123 PURCHASING & COST CONTROL 2  LEARNING OBJECTIVES ⦿ Explain why purchasers must carefully consider the quantities of products to purchase. ⦿ List important factors that affect the quantity of products purchased. ⦿ Calculate the correct order qu...

THE OPTIMAL DHS1123 PURCHASING & COST CONTROL 2  LEARNING OBJECTIVES ⦿ Explain why purchasers must carefully consider the quantities of products to purchase. ⦿ List important factors that affect the quantity of products purchased. ⦿ Calculate the correct order quantities and order times using the par stock method. ⦿ Calculate the correct order quantities and order times using 03 the Levinson method.  OPTIMAL INVENTORY LEVEL ⦿ A principle objective of inventory management is maintain only the necessary amount of products to serve guests without running out of anything, but not to have so much that the products suffer from spoilage or incur other storage costs. 04  IMPROPER PRODUCT QUANTITIES CREATE PROBLEMS Excessive Quantities Inadequate Quantities ◾ It ties up capital ◾ Inability to meet production ◾ It impacts cash flow requirements ◾ It can impact flexibility ◾ Need to revise production plans ◾ More space must be available to store products to compensate for stock outs ◾ Increased risk of theft and ◾ Possibility of disappointed ◾ Quality deterioration of perishable customers products ◾ The (probably) unknown ◾ Increased risk of product impact on consumer choices damage or destruction that affect sales data used for ◾ Handling costs increase future purchase forecasts 05 FACTORS AFFECTING PURCHASE QUANTITIES TRADITIONAL FACTORS ADDITIONAL FACTORS ◾ Minimum orders ◾ Estimated sales forecast ◾ Anticipated increases or decreases ◾ Consideration of volume in market prices ◾ Purchased discounts ◾ Close-outs – Tactic used by suppliers or manufacturers to quickly move ◾ Available storage space (sell) unwanted inventory by reducing selling prices. ◾ Cash flow ◾ Trial orders and samples of new items ◾ Machine parts and supplies for equipment being discontinued by the manufacturer 06  QUANTIFYING AMOUNTS TO PURCHASE ABC Analysis Par Stock Method Mini-Max Method (Safety stock method) The Levinson Approach Economic Order Quantity Just-in-time (JIT) inventory management 07  QUANTIFYING AMOUNTS TO PURCHASE 1. ABC ANALYSIS an analysis of inventory designed to increase the number of turns, or ‘A’ items are the most expensive, or the number of times in a week or a they are items crucial to an month that a particular food item is establishment’s menu and concept. used up, to minimize inventory on the shelves ‘B’ items are the mid-priced inventory items E.g. A items 50-60%; B items- 30- ‘C’ items are the cheapest. 40%; C items- 50% of total inventory. If want to decrease the total dollar amount of purchase, reduce some purchases for A items. 08 QUANTIFYING AMOUNTS TO PURCHASE 2. PAR STOCK ⦿ Most small operations ⦿ Utilized when ⦿ Account for utilize this model buyer accepts banquets, safety ⦿ Par stock level ordering stock, and stock means an procedures and needed between operation has delivery schedules order and delivery enough stock on of seller time hand to get the ⦿ Method: Decide on ⦿ Reevaluate par kitchen through order amount stock levels often; it until the next needed to bring is a trial- and-error order is product stock level process delivered. up to par. 09 EXAMPLE: TOMATO PASTE ⦿ Order place on Friday morning and delivery on Saturday morning. ⦿ Friday morning, before placing order, the buyer counts the number of cases on hand. -> 1½ cases are left. ⦿ If it is expected to that half a case will be used that day (Friday), one case will be left on Saturday morning. ⦿ The par stock is six. 10 ⦿ How many cases to order? CALCULATION BASED ON PAR STOCK APPROACH Approach 1: Approach 2: The buyer then subtracts what The buyer subtracts what is on he or she feels will be on hand hand- 1 ½ cases on that day Saturday morning from the par and order 4 ½ cases (6 stock [6 minus (1.5-0.5)] minus 1 ½ cases). and orders five orders. 11 QUANTIFYING AMOUNTS TO PURCHASE 3. MINI-MAX METHOD (SAFETY STOCK METHOD) ⦿ Establishing the minimum and maximum inventory level they need to meet the needs of their operation without over-stocking ⦿ The minimum is normally the lowest amount of product that must be on the shelf during a normal order cycle. ⦿ The maximum inventory level consists of the safety stock plus the correct ordering quantity, or how much is used within an order period. 12 QUANTIFYING AMOUNTS TO PURCHASE 4. LEVINSON APPROACH ⦿ takes into account forecasted sales, portion sizes and yield percentages planning an order ⦿ Based on historical data ◾ Forecast expected number of guests ◾ Forecast orders of specific menu items based on popularity index ◾ Determine raw pounds of each ingredient needed for projected sales  Calculate portion factor  Calculate portion divider 13  QUANTIFYING AMOUNTS TO PURCHASE 4. LEVINSON APPROACH ⦿ Accept suppliers’ ⦿ Forecast the ⦿ Adjust for stock on ordering amount of hand, etc. procedures and product that will ⦿ Revise often delivery schedules be needed between ⦿ Determine best deliveries time to order (dairy products ⦿ Calculate order may be ordered size daily) 14 QUANTIFYING AMOUNTS TO PURCHASE 4. LEVINSON APPROACH ⦿ Portion Factor (PF) is a term used to describe the number of portions served per As Purchased (AP) units. Each item will have its own unique portion factor. Unit of purchase/ Portion size = Portion Factor ⦿ E.g. bone in, prime rib roasts are purchased by the kilogram. If we serve a 180-grams portion of prime rib, our portion factor is:- 1000 gm/ 180 gm = 5.55 15  QUANTIFYING AMOUNTS TO PURCHASE 4. LEVINSON APPROACH ⦿ If we offer a different size portion of the same item, each portion size has its own portion factor. Each item will have a unique portion divider too. ⦿ The portion divider, is an integer and/ or mixed number that describes the relationship between a product’s portion size and the product’s yield percentage. ⦿ In short, it describe the product as an EP (edible portion) or AS (as served) unit. Portion Factor x Yield percentage = Portion divider ⦿ The yield percentage on the bone in prime rib is 50%, the portion divider is: 16 5.55 (portion factor) x 50% = 0.27 QUANTIFYING AMOUNTS TO PURCHASE 4. LEVINSON APPROACH We are catering a prime rib dinner for 250 guests. What is the AP weight we should purchase for the bone-in prime rib roast? Order size= # covers/ portion divider Order size = 250/ 0.27 = 67.5 kg 17  QUANTIFYING AMOUNTS TO PURCHASE 4. LEVINSON APPROACH ⦿ EXAMPLE Compute the number of raw (AP) pounds needed for steak for a banquet for 500 people. The serving size is 180 gm; edible yield is 100%. Compute PF = 1000 gm/ amount of ingredients needed for one serving (in gram) = 1000 gm / 180 Reverse calculation: = 5.55 = 90 x 1000 = 90,000 gm Order Size = number of portions / PD = 500 / 5.55 Servable size = 90 kg = 90,000 gm / 500 18 = 180 gm  QUANTIFYING AMOUNTS TO PURCHASE 4. LEVINSON APPROACH Reverse calculation: = 112.6 x 1000 ⦿ EXAMPLE 1st Approach Compute the number of raw (AP) pounds needed for steak for a = 112600 gm banquet for 500 people. The serving size is 180 gm; edible yield is 80%. Servable yield = 112600 gm x 0.8 Compute PF = 1000 gm/ amount of ingredients needed for one = 90 080 gm serving (in gram) = 1000 gm / 180 = 5.55 Servable size = 90 080 / 500 Compute PD = PF x edible yield percentage = 180 = 5.55 x 0.8 = 4.44 Order Size = PF x edible yield percentage 19 = 500 / 4.44 = 112.6 kg QUANTIFYING AMOUNTS TO PURCHASE 4. LEVINSON APPROACH ⦿ EXAMPLE 2nd Approach Compute the number of raw (AP) pounds needed for steak for a banquet for 500 people. The serving size is 180 gm; edible yield is 80%. Servable yield = 80 x 1000 = 800 100 Total serving yield = 500 people x 800 = 400 000 Order size = 400 000 / 800 = 500 20 QUANTIFYING AMOUNTS TO PURCHASE 4. LEVINSON APPROACH ⦿ EXAMPLE 3rd Approach Compute the number of raw (AP) pounds needed for steak for a banquet for 500 people. The serving size is 180 gm; edible yield is 80%. Total Serving = 500 pax x 180 gm = 90 000 gm (EP) Total serving yield = 90 000 / 0.8 = 112 500 Order size = 112 500 / 1000 gm = 112.5 kg 21  QUANTIFYING AMOUNTS TO PURCHASE 4. LEVINSON APPROACH Reverse calculation: = 14.48 x 1000 ⦿ Compute the number of liters (l) needed to serve 250 = 14480 customers. The serving size is 55ml; servable yield is 95%. Servable yield Compute PF = 1000 ml/ one serving (in ml) = 14480 x 0.95 = 1000 gm / 55 = 13756 = 18.18 Servable size Compute PD = PF x edible yield percentage = 13756/ 250 = 5.55 x 0.95 = 55ml = 17.27 Number of liters needed = number of portions / PD = 250 / 17.27 22 = 14.48 l (approx. 15 l)  EXERCISE ⦿ Given the following data, compute the number of cases needed to serve 1575 customers. ⦿ Ingredient: iceberg lettuce ⦿ Serving size: 110 gm ⦿ Edible yield: 75% ⦿ Minimum weight per pack: 0.25 kg PF= 1000/4 = 250 PD= 250 X 0.75= 187.5 No. of raw (AP) pounds needed= 1575/187.5= 8.4 kg Number of cases needed = 8.4 kg/ 0.25 kg per case 23 = 33.6 packs (approximately 34 packs) QUANTIFYING AMOUNTS TO PURCHASE 5. ECONOMIC ORDER QUANTITY (EOQ) ⦿ Utilized in large and multi-unit foodservice operations ⦿ A mathematical model for determining the optimal order amount ⦿ Weighs total annual cost of storage and purchases against order size ⦿ takes into account storage costs, carrying costs and ordering costs when planning purchases 24 QUANTIFYING AMOUNTS TO PURCHASE 5. ECONOMIC ORDER QUANTITY (EOQ) ⦿ Takes into consideration 1) Storage costs/ carrying cost ◾ expenses associated with holding inventory in storage  Insurance  Security  Spoilage 2) Ordering cost ◾ money spent to make an order, receive it, and store it such as labour needed, administrative cost such as faxing, phone charges, etc) 25 QUANTIFYING AMOUNTS TO PURCHASE 5. ECONOMIC ORDER QUANTITY (EOQ) To calculate the EOQ, dollar/ringgit value: = 2 x Ordering cost (in Amount of ringgit) x item used in per order one year (in ringgit) Storage costs, per year, as a percentage of average dollar value of inventory 26 QUANTIFYING AMOUNTS TO PURCHASE 5. ECONOMIC ORDER QUANTITY (EOQ) To calculate the EOQ, number of units: = 2 x Ordering cost (in Amount of ringgit) x item used in per order one year (in units) Storage costs, per year, for one unit of this particular item (in ringgit) 27  QUANTIFYING AMOUNTS TO PURCHASE 5. ECONOMIC ORDER QUANTITY (EOQ) ⦿ An operation uses 600 cans of tomato paste per year, the ordering cost per order is RM3, the annual storage cost is 15% of the value of the tomato paste, and the cost of the tomato paste is RM8 per can. How many cans should the buyer purchase at one time/ EOQ? EOQ (in dollars) = 2XRM3.00XRM4800. = 00 RM440.000.15 EOQ (in 2XRM3.00X units)= 600units RM1.20 (RM8x15%) = 55 units 28 QUANTIFYING AMOUNTS TO PURCHASE 6. JUST IN TIME (JIT) INVENTORY MANAGEMENT ⦿ to ensure that the moment the inventory level of a particular product reaches zero, a shipment of that item arrives at your back door. 29  THANK YOU! QnA