Saturday, January 3, 2009

Why Select A Prime Vendor For Your Business

The Easiest Way to Cut Your Food Cost 10%
by Bill Marvin, The Restaurant Doctor

While there are few absolutes in this business this is one - "Engaging in ongoing competitive bidding practices to get the lowest prices actually leads to higher food costs, not lower."

That's right. Contrary to what most of us, who have grown up in this business have been taught, having an ongoing purchasing process that revolves around using lots of vendors, comparing bids, price shopping and buying from the lowest bidder NOT only doesn't save you any money but ends up costing you in several ways.

To prove my point, how many professionally managed, large chain operators employ ongoing competitive bidding practices? ZERO, NONE, NADA! Every large chain uses one primary purveyor to supply 80% - 100% of it's food products. How many independent operators do this? Probably less than 10%, easily less than 20%.

And who makes more money at the restaurant level, the typical chain or independent restaurant? According to industry averages published by NRA the average independent nets about a nickel or 5% of sales before federal and state income taxes. Having worked with several chain operators and from perusing the annual reports and 10-Ks of many publicly held chains, the average restaurant level net income before corporate overhead and income taxes is around 12% - 15% of net sales.

The fact that chain restaurants are 2 to 3 times more profitable than independent operations may not be entirely due to purchasing practices but I'm sure it's a factor, possibly a big one.

Distraction from High-Return Activities
Another factor to consider is the amount of time it takes to constantly evaluate bids, deal with lots of vendors and put away lots of deliveries, lots of small deliveries, that is. Using a prime vendor frees up management time that can be better spent on high return activities like taking better care of your customers and developing your people. In my mind, trying to save 25 cents on a case of green beans is hardly a high return activity worthy of much owner or management time.

A Case In Point
When I took over as the Food & Beverage Director of the U.S. Olympic Training Center (OTC) in Colorado Springs they were using lots of suppliers. As many as 15 to 20 vendors a week.

Sensing the need to do something different, I invited the major vendors in the area to submit a proposal if they were interested in being considered as a prime vendor. In short, the program would be a year-long, non-contractual agreement whereby the OTC would agree to purchase a major portion of its total food purchases (50% to 70%) from one supplier in exchange for a fixed "mark-up" (not price) on their products.

In a notice to the prime vendor candidates, I included a quote sheet (called the Prime Vendor Quote Sheet below) outlining the products and specification of the OTC's principle products and the quantities purchased in a typical week. Each vendor was asked to quote their current prices on those products and how they would determine their mark-up on each product (cost plus a percentage or cost plus a fixed amount per unit) over the term of the prime vendor program, which in this case was 1 year.

We noticed these benefits as a result of going on the prime vendor program:
1. Reduction in food cost: Immediately after implementing the prime vendor program, the OTC's food cost per meal dropped 10% while maintaining the same menu using the same ingredients.
2. Fewer vendors and invoices to deal with. Instead of dealing with nearly 20 vendors and lots of deliveries and invoices, the number of vendors dropped to 5 or 6. Fewer people and paperwork to deal with.
3. Less purchasing activities: Prior to the prime vendor program, the OTC had a full time purchasing clerk. That position was no longer needed and was phased out.
4. Better vendor service. The prime vendor became much more responsive to special requests and to situations that required immediate action.
5. Improved product consistency. Food was now coming from one source, not the low-bidder of the week. This meant better food quality and consistency.
6. Closer vendor relationship. There was now the incentive for the sales rep to provide more attention, and to maintain a good working relationship.

Bill Marvin, The Restaurant DoctorTM is an advisor to service-oriented organizations around the world. For more information, visit Bill's website at or email him at

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