Purchasing Function

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The Purpose of This Chapte

After reading this chapter, you should be able

• Describe the purchasing activities in a hospitality operati

• Determine the purchasing requirements of a hospitality operation us

value analysis and make-or-buy analy

• Outline the objectives of the purchasing function and the potential proble

that buyers encounter when pursuing those objectiv

An Overview of the

Purchasing

Function

5C H A P T E R

1



Ode to a Purchasing Agent

The Purchasing Agent stood at the Golden Gate,

His head was bending low.

He merely asked the man of fate,

Which way he ought to go.

“What have you done,” St. Peter said,

“to seek admittance here?”

“I was a Purchasing Agent down on earth,

for many and many a year.”

St. Peter opened wide the gate,

and gently pressed the bell.

“Come in,” he said, “and choose your harp.

You’ve had your share of hell!”

Author Unknown

INTRODUCTION

As we mentioned in Chapter 1, it is critical that each hospitality organization come to

grips with the purchasing function. Moreover, each operation, large or small, performs

many purchasing activities common to all. Finally, all operations, regardless of size,

strive for similar purchasing objectives. These are the unifying facts that this chapter

addresses.

The hospitality industry is made up of a surprisingly large number of small opera-

tions. For instance, the majority of foodservice operations (7 out of 10) are single-unit,independent businesses with fewer than 20 employees.1 These small establishments do

not have the resources to perform each operating activity in “textbook fashion.” The

small operator normally has to conduct some business procedures informally, and pur-

chasing may be one of them. The large company may employ purchasing specialists, but

CHAPTER 5 An Overview of the Purchasing Function104



the normal pattern is for owner-managers to squeeze the purchasing activities into their

schedules.

As we have said, every operation performs pretty much the same activities. The dif-

ference is in the degree of attention the activities receive and the thoroughness with

which they are accomplished. Large companies tend toward completeness; smaller firms

must trim somewhere. This chapter discusses these purchasing activities and purchasing

objectives. Not every organization adheres to our outline, but all hospitality managers

or owners must at least consider a definite procedure.

PURCHASING ACTIVITIES

Regardless of the size of a hospitality operation, someone must perform a certain num-

ber of purchasing activities (see Figure 5.1). The owner-manager does the best that he

or she can under the circumstances. In some cases, though, owner-managers tend to

abdicate a portion of their responsibilities by letting a supplier and/or a salesperson per-

form some activities for them. However, owner-managers should determine their own

requirements and not allow a salesperson to do this. We are not implying that some-

thing unfortunate will occur if they enlist the help of a friendly salesperson, but, realis-

tically, they must understand that the salesperson will be prone to enhancing his or her

self-interest. Plus, the salesperson may not have the owner-manager’s intimate knowl-

edge of the operation, its goals and standards.

Buyers usually perform a number of activities common to all hospitality operations.One survey of hotel purchasing agents uncovered the following key purchasing respon-

sibilities:

(1) Determine when to order; (2) control inventory levels; (3) establish quality stan-

dards; (4) determine specifications; (5) obtain competitive bids; (6) investigate vendors;

(7) arrange financial terms; (8) oversee delivery; (9) negotiate refunds; (10) handle

adjustments; (11) arrange for storage.2

A study of large foodservice firms indicated that the purchasing activities center on:

(1) Recipe development; (2) menu development; (3) specification writing;

(4) approval of buying source; (5) designation of approved brands; (6) supplier evalua-

tion; (7) negotiation with suppliers; (8) change of suppliers; (9) change of brands;(10) substitution of approved items; (11) approval of new products; (12) invoice

approval; (13) invoice payment; (14) order placement with supplier.3

To do an efficient buying job, hospitality organizations must usually perform, at a

minimum, the activities discussed in the following sections.

Purchasing Activities



Selection and Procurement PlanTypically, the person charged with purchasing responsibilities needs to work with man-

agement to determine relevant policies and procedures to guide the purchasing func-

tion. The plan should contain a description of how the organization intends to select

and procure the products and services needed to conduct normal business activity. The

plan should also explain the methods used, why they were selected, and its major goals

and objectives. Ideally, the plan should include a discussion of supplier availability, pur-

chasing trends that will have to be considered, and a procedure that allows the plan to

be revised when necessary.

Determine RequirementsIn most cases, the buyer helps to determine the varieties and amounts of products, serv-

ices, equipment, and furnishings that the hospitality enterprise requires. It is unusual,

though, for a buyer to make these decisions in a vacuum. Normally, they are made


FIGURE 5.1 As this chart indicates, several activities must be accomplished to fulfill the pur-

chasing function's responsibilities. Of course, the owner-manager can dictate the desired

degree of formality.

Adapted from Food Purchasing Pointers for School Foodservice.

PREPURCHASE ACTIVITIES

1.

2.

3.4.

5.

Plan menus

Determine specifications of

product qualities needed

Determine appropriate inventory levelsDetermine appropriate order sizes

Prepare ordering documents

FORMAL PURCHASING

6.

7.

8.

9.

10.

11.

12.

13.

14.

Contact vendors

Establish formal

competitive bid process

Solicit competitive bids

Evaluate bids

Award contract to

vendor

Receive shipment

Issue products to

production and service

depts.

Monitor future

contract performance

Evaluate and follow up

INFORMAL PURCHASING

6.

7.

8.

9.

10.

11.

Contact vendors

Obtain price quotes

Select vendor

Place order

Receive shipment

Issue products to

production and

service departments



collectively: the buyers consult with other management officials and with those individ-

uals who will eventually use the purchased items to decide what the operation needs. For

example, if a casino manager needs to lease staging, lighting, and sound equipment for a

special three-day music festival, the buyer will be called in to help negotiate the contract.

However, the person doesn’t need to be a lighting specialist. There are many ways the

specifications can be developed: maybe the manager will have ideas about specific equip-

ment needs, perhaps a consultant will be called in to help “spec” out the job or maybe

there are certain equipment requirements in the musicians’ contracts that must be ful-

filled. Once the specifications have been confirmed, the buyer will get two or more bids

and order the equipment with delivery and setup dates to coincide with the event. More

information on the development of specifications will be discussed in Chapter 8.

Supplier Selection

Selecting dependable suppliers who will provide consistent product and service value isa very difficult task. Generally speaking, large hospitality firms wield considerable pur-

chasing power and therefore receive the attention and value commensurate with this

power. Unfortunately, smaller firms sometimes find it difficult to enlist this type of con-

sistency; while no supplier would intentionally ignore a customer, a buyer who is not

high on the supplier’s priority list may someday be disappointed.

SourcingFor most products and services, a number of suppliers are capable of meeting a buyer’s

needs. For some items, though, especially unique products that must be purchased in

large quantities, it may be necessary for a buyer’s company to help establish a supplier.4

When a buyer establishes a supplier, the process is usually referred to as a type of

“sourcing.” (Another type of sourcing occurs when a buyer must search high and low for

the one supplier capable of handling his or her needs.) It is typically a win-win situation,

in that the buyer establishes a reliable source and the supplier enjoys a predictable

amount of business.5 It is also a good way for buyers to help establish and support minor-

ity-owned suppliers.6

Recently “e-sourcing” has become very popular.7 This type of sourcing allows buy-

ers to identify, qualify, and select suppliers over the Internet. Examples of the capabili-

ties of e-sourcing can be found at www.purchasing.com.

Maintain a Convenient and Sufficient Inventory An operation must practice optimal inventory management, which is nothing more

or less than ensuring that an appropriate inventory of all items is always on hand.

Too small an inventory may cause run-out of some items, which often produces




guest dissatisfaction. Conversely, too large an inventory ties up dollars in these items

and requires extra storage space.

An operation should strive to maintain an optimal overall level of inventory items.

But this is more easily said than done. As much as possible, though, a buyer must try to

maintain this optimal level by determining the correct order size for each item and

ordering this correct amount at the correct time.

Conduct NegotiationsSomeone has to negotiate specific as-purchased (AP) prices, delivery schedules, and

other supplier services. The general feeling in the industry is that “negotiating” should

not be a euphemism for browbeating suppliers; firm but fair bargaining builds mutual

respect. We should point out that your negotiating power is determined largely by the

amount of money you expect to spend. Keep in mind, though, that all things, at least

theoretically, are negotiable. In many cases, suppliers will provide something extra sim-ply because a buyer asks about it. Although negotiating may require a certain degree of

time and effort, the benefits can be considerable with the results showing up in the com-

pany’s bottom line. For example, you might find out that a supplier is overstocked on a

specific item that you are looking for. You could negotiate for a lower price to take a

significant amount of that product off their hands.

Research ActivitiesBuyers often find it necessary to conduct research projects. Purchasing is a very dynam-

ic activity, and, while the general principles and procedures remain the same, their appli-

cations may have to be altered to meet perceived trends. Similarly, product availability,

prices, supplier services, and customer tastes may change quickly. The wise buyer will

undertake research projects in order to improve future operations.

Value Analysis

One of the more common research activities, and one that is typically done on a regu-

lar basis, is value analysis. This involves examining a product in order to identify unnec-

essary costs that can be eliminated without sacrificing overall quality or performance.

For example, a buyer who habitually purchases whole milk for cooking purposes may

want to research the possibility of using less expensive, low-fat milk instead. If therecipes can be prepared with the less expensive milk without a discernible loss of quali-

ty, the buyer will recommend using the more economical low-fat product.

Value analysis usually centers on the perceived value equation noted in Chapter 4.

Although the typical value analysis procedure may not be quite this formal, the ultimate




purpose of this research activity is to increase value by manipulating quality, supplier

services, and edible-portion (EP) cost.

A buyer performing value analysis on a product or service should make no changes

without consulting the person who uses that product or service. There may be good

reasons, for example, why the EP cost is a little higher than it could be—reasons

known only to the user. Value analysis usually works best when it becomes a coopera-

tive venture.

Forecasting

Forecasting can involve many things, but, usually, the buyer is most interested in pre-

dicting the kinds of products and services that will be available in the future and what

their prices will be. Buyers often center their forecasting efforts on picking the brains of

friendly suppliers and salespersons. Informal chats can yield accurate and useful infor-

mation quickly and easily.Today, supply availability and future pricing can be tracked with one or more online

services. For instance, the National Restaurant Association (NRA) provides Restaurant

Trendmapper (http://www.restaurant.org/trendmapper). This subscription-based

online information service provides current analysis of the U.S. restaurant industry,

including current commodities pricing.

What-If Analysis

Many buyers use computer spreadsheet software to develop mathematical models that

can test various “what-if” proposals. For instance, a simple model buyers can use pre-

dicts the overall effect that an increase in the purchase price of one food item will haveon the overall food cost. Suppose that the price of prime rib will increase 10 percent and

that prime rib represents 50 percent of a restaurant’s overall food cost. We want to know

what will happen to the overall food cost as a result of this increase. The model equa-

tion to use in this case is:

Increase in overall food cost = Percentage price increase for the ingredient

× The ingredient’s percentage of overall food cost

= 10% × 50%

= 0.10 × 0.50

= 0.05 or 5%

Other, more complicated formulas can be developed to show, for instance, the effect of

a purchase price increase on overall profits.




Any model is an attempt to predict the future. Some models may be based on

shaky estimates, but this has not curtailed their use. Most, if not all, operations rely

on models and some of these models become highly sophisticated mathematical

devices.

Make-or-Buy Analysis

At times, management may consider making a product in-house instead of buying it

already prepared, even though several types of value-added products on the market can

serve an operator’s needs.

Make-or-buy analysis is one of the most critical types of research projects in which

a buyer can become involved. There is a lot to lose when the wrong decision is made.

Usually, each situation has several advantages and disadvantages.

For instance, value-added products usually offer the following advantages:

(1) consistent quality; (2) consistent portion control; (3) an opportunity to servediversified menu items, regardless of the employee skill level, and, thereby, to attract

patrons who enjoy diversity; (4) operating efficiencies, such as less energy needed to

reconstitute, rather than prepare from scratch, a menu item; (5) less food-handler

supervision, which gives the supervisor more time for merchandising, promoting, and

otherwise increasing sales volume; (6) reduced employee skill requirements; (7) reduc-

tion in leftovers; (8) reduction of raw-materials inventory, which implies smaller stor-

age costs; (9) reduction in ordering costs since you are not ordering and receiving sev-

eral raw ingredients; (10) an increase in edible yields since usually there is no waste

with convenience items; and (11) with convenience-foods usage, a possible reduction

of the size of the storage and the kitchen facility, which leads to more room for diningpatrons.

The major disadvantage of convenience foods is, of course, their high price.8

Since most or all of the economic form value is included, the buyer expects to pay

more for a value-added food than for the individual ingredients needed to produce

the item in-house. However, there is no average rule of thumb to indicate whether

the difference between these two prices favors the buyer or the food processor.

Suppose, for example, that we cannot quite decide which alternative is better: cutting

our own steaks from a side of beef or buying precut, portion-controlled steaks. The

AP price of the uncut sides is cheaper. But considering the waste involved, addition-

al labor costs, and investment in equipment, the precut steaks might represent the

better EP cost.

There is no simple way to tell whether you should “make” or “buy.” You need to

consider so many qualitative and quantitative factors that the decision necessarily

involves a great deal of research and analysis.




Plant Visits

Purchasing agents and buyers usually take the time to visit suppliers’ facilities. Most

industry members recommend this practice, particularly when there is some question

about a supplier’s ability to fulfill a need. In addition, a supplier who runs a sloppy store,

experiences labor management difficulties, or keeps erratic hours may be undependable

and, therefore, undesirable.9

Maintain Supplier Diplomacy A buyer works continually with suppliers and salespersons; meanwhile, several other

suppliers may wish for the buyer’s business. Keeping every potential supplier content is

impossible; a buyer should not even try it. Nevertheless, diplomatic, cordial relations

help a buyer get along with suppliers and earn the best value from each.

Some operations concentrate heavily on maintaining amicable relations with all rep-

utable suppliers and many of these companies insist on instituting a trade relationsfunction within the organization.10 The objective of trade relations is to spread the pur-

chase dollar among as many suppliers as possible. The goodwill generated throughout

the channel of distribution from trade relations might sometimes prove valuable in the

long run—and in short-run emergencies. (Several operations purchase from only one or

two purveyors for other reasons. In Chapter 12, we discuss the potential advantages of

“one-stop” shopping.)

Educate Suppliers

Buyers must attempt to keep all potential suppliers informed about anything that canhelp improve their performance. Suppliers who stay abreast of your changing needs can

provide the service to match those needs. Moreover, a buyer can continually test a sup-

plier’s flexibility and capability.

Another dimension of this issue is the advisability of buyers maintaining close con-

tact with suppliers and salespersons to “pick their brains.” This is a time-consuming

activity, but many people in the industry think that it is absolutely necessary if a buyer

hopes to maintain his or her knowledge of the rapidly changing hospitality market.

Purchase, Receive, Store, and Issue ProductsSomeone must be responsible for a product until it is ready to be used. No chef, for

example, will take responsibility for expensive meat cuts before they actually come with-

in his or her domain. In some cases, a buyer assumes the duties of selecting the suppli-

er, purchasing and receiving the products, and, often, storing and eventually issuing

them to the various departments.




Some firms do not like to link these activities together, especially the buying and

receiving activities. These companies tend to relieve a buyer of the receiving activity and

place this function under the direct supervision of the accounting department. This

approach establishes a measure of control. The physical separation of these two activi-

ties substantially reduces the possibility of theft whereby a buyer would purchase items

and upon delivery take them for personal use rather than placing them in the compa-

ny’s inventory.

Disposal of Excess and Unsalable Items At times, because of menu changes, overbuying, and obsolescence, a hospitality organ-

ization finds itself overstocked with certain products. Sometimes, too, when it purchas-

es a new piece of equipment, it must dispose of the old piece. Buyers are usually expect-

ed to shoulder these responsibilities and trade the items, sell them, or give them away.

Since buyers involve themselves directly in the marketplace, it is logical to expect themto fulfill these duties.

RecyclingIn addition to disposing of excess and unsalable items, buyers may be responsible for

ensuring that recyclable materials are gathered efficiently and delivered to an approved

recycling center. Buyers who can sell these items may also have the additional responsi-

bility of accounting for the receipts. (See Figure 5.2.)


FIGURE 5.2 Recycling logo.



Develop Record-Keeping ControlsThe activities of purchasing, receiving, storing, and issuing normally require some sort

of control. Large firms and, to a much lesser extent, small ones strive to maintain a sys-

tem of overlapping receipts connecting these activities. For example, as a product movesfrom one activity to the next, a variety of computerized and/or noncomputerized forms

(bills, receipts, inventory records, issue slips, etc.) may trace its movement. The objec-

tive of using these forms is to enable management to locate and monitor the product as

it moves through the operation. (Chapters 13, 14, and 15 provide thorough discussions

of these internal controls.)

A buyer may help design these forms. Alternately, the accounting department may

take charge of this duty as part of its overall responsibility for controlling all of the com-

pany assets. It is customary, though, for a buyer to contribute to the development of

these forms.

Organize and Administer the PurchasingFunction

Where applicable, the person in charge of purchasing must plan, organize, staff, direct,

and control the purchasing function, especially in large companies that maintain a sepa-

rate purchasing department. In addition, purchasing must be coordinated with other

company activities, including accounting, marketing, production, and service. The pur-

chasing agent, then, must not only see to it that products and services are efficiently and

effectively purchased, received, stored, and, where appropriate, issued, he or she must also

have the managerial competence to organize and administer these activities expeditiously.

Self-Improvement All buyers should continually strive to improve their buying performance. Association

meetings, seminars, plant visits, trade show visits, and continuing education courses are

among some of the more traditional self-improvement methods available. Full-time

buyers should seriously consider obtaining the Certified Purchasing Manager (CPM) or

at least the Accredited Purchasing Practitioner (APP) designation from the Institute of

Supply Management (ISM). Information on these programs can be found at

www.ism.ws/Certification. The Certified Foodservice Professional (CFSP) program cer-

tification, offered through the North American Association of Food Equipment

Manufacturers (NAFEM [http://www.nafem.org/cfsp) is available to qualified purchas-

ing professionals specializing in the equipment side of the business.

Many hospitality operations reimburse their employees for this kind of self-

improvement by paying for tuition charges, the cost of books, seminar fees, and travel




expenses. In addition, some operators provide in-house training. In the long run,

employees who increase their competence usually return management’s investment

many times by improving their productivity and increasing their readiness to assume

more responsible positions within the firm.

Help CompetitorsHelping the competition does not always seem to be a logical part of a purchasing

agent’s duties. An operation is unlikely to go out of its way to aid competitors; never-

theless, competing buyers are in a position to help each other in mutually beneficial

ways.

The type of help we refer to consists, for one thing, of lending products to competi-

tors when a crucial need arises. If we run out of a product we desperately need, we try

to borrow it from a neighbor. Moreover, in the role of a lender, we have little to gain by

refusing such a service: it is unlikely that a competitor’s customers will flock to our doorsimply because the competitor temporarily cannot serve them a particular item.

When we do lend, we set up a reciprocal arrangement by which we feel justified in

borrowing. Of course, management needs to make the ultimate decision about these

types of loan arrangements. Lending and borrowing are reasonable activities that often

come under a buyer’s purview.

A buyer might also help a less knowledgeable colleague gain the advantage of the

more seasoned buyer’s experience. Such cordial, professional relations will tend to make

everyone’s life a bit easier and will significantly increase the industry’s ability to serve its

customers more effectively and efficiently.

Other Activities As hospitality companies continue to downsize their managerial ranks, those managers

remaining often need to shoulder nontraditional duties. In today’s business environ-

ment, managers should be prepared to adapt to any situation. For instance, a purchas-

ing manager working at company headquarters may have to take on responsibility for

the mailroom operation. Similarly, a buyer working at a large hotel may have to oversee

a retail gift shop.

PURCHASING OBJECTIVES

Industry experts suggest several goals for the purchasing function. Continuing research

into this issue shows that five major objectives must be achieved.




Maintain an Adequate SupplyNo hospitality operator enjoys running out of products. Stockouts (running out of an

item) are intolerable—they hinder an operator’s customer service goals. Thus, an ade-

quate stock level, one that prevents running out of items between deliveries, is crucialto good management. A more thorough discussion of inventory management will be

presented in Chapter 9.

Minimize InvestmentThis objective seems to conflict with the first. How can buyers maintain an uninterrupt-

ed supply while, at the same time, minimize the number of dollars tied up in invento-

ry? This question suggests that buyers must find some kind of trade-off between the

investment level and the risk of running out. Most operators expect a buyer to compro-

mise by optimizing the investment level and, at the same time, ensuring a continual

flow of products.

Maintain QualityMaintaining quality is not quite the same as establishing the firm’s desired level of

quality. Some buyers have comparatively little to say about the quality of products

they must purchase. They do, however, have a major responsibility to make sure that,

once set, the quality standards vary only within acceptable limits. For some products,

such as liquor and soap, brand names assure uniform quality. Unfortunately, the

quality of fresh foods can change drastically from day to day and from one supplier

to the next. This situation can make it particularly difficult to maintain quality stan-dards. In addition, occasional overbuying or a sudden breakdown in storage facili-

ties, particularly refrigeration facilities, can wreak havoc on quality standards.

Regardless of the associated difficulties, however, operators insist that their buyers

maintain quality control.

Obtain the Lowest Possible EP Cost As we mentioned earlier, the AP price is only the beginning. Unfortunately, some buy-

ers are entranced by a low AP price and tend to overlook the fact that the EP cost is the

relevant price consideration. Many operators think in terms of steak price per pound or

liquid detergent price per gallon. What should be paramount in their thinking is the

steak cost per servable pound or the liquid detergent cost per square foot of dirty tile.

In other words, the EP cost is most critical, and management understandably expects its

buyers to recognize this fact and endeavor to achieve the lowest possible EP cost and,

ultimately, the best possible value.

Purchasing Objectives



Maintain the Company’s Competitive Position As far as we have been able to determine, management’s main concern here is to get the

same, or a better, deal from a supplier than any other comparable hospitality enterprise.

Unfortunately, this goal is difficult to achieve. Although EP cost and quality may bemore or less uniform, suppliers often apply their supplier services unevenly among buy-

ers. You may recall that these supplier services add to the overall value of a product or

service, provided that the quality and EP cost remain constant. If we receive fewer sup-

plier services, theoretically, we receive less value for our money. This value loss places us

at a competitive disadvantage.

PROBLEMS OF THE BUYER

Buyers encounter several problems while working to attain their objectives. Some of

the major problems are:

1. Backdoor selling, whereby a salesperson bypasses the appointed buyer and goes

to some other employee, such as the dining room hostess, to make a sales pitch.

The hostess then puts pressure on the buyer to consummate a sale.

2. Excessive time may be spent with salespersons. Most operators set aside certain

periods during the week to receive sales presentations. On the one hand, these

may be wastes of time, but occasionally you need to spend time with others in

order to pick up a good bit of advice or information.

3. A variety of ethical traps await the buyer.4. Sometimes the buyer has full responsibility for purchasing, yet may lack the

commensurate authority needed to act accordingly.

5. The buyer might have full responsibility, but does not have enough time to do

the job right. This is particularly true for part-time buyers.

6. Sometimes the buyer finds it difficult to work with other department heads and

to coordinate their needs.

7. Sometimes department heads, or other users of products and services, make

unreasonable demands on the person in charge of buying.

8. Late deliveries and subsequent problems with receiving and storage can ruin the

most efficient purchase.

9. Other company personnel do not always consider purchasing a profit-making

activity. Actually, a penny saved in purchasing goes directly to the bottom line

of the income statement, whereas the typical hospitality operation must sell

about 50 cents worth of product or service to realize a 1-cent net profit, since

considerable expense must be incurred in the generation of this 50-cent sale.




10. Suppliers do not always have what the buyer orders, sending a substitute that

may or may not be acceptable.

11. Some suppliers may not be interested in the buyer’s business if it is a “small stop”

(i.e., does a small amount of business). No salespersons will intentionally avoid

the buyer, but, realistically, they must service the large customers first. This

means that the small buyer may not be on the top of their list of priorities.

12. Receiving and storage inadequacies make it difficult to protect the merchandise

after it is purchased. Regardless of the energy expended to procure the best pos-

sible value, the effort could be wasted if these inadequacies result in excessive

spoilage, waste, and/or theft.

13. When suppliers do not have something that a buyer has ordered, they may note

on the delivery slip that the item is “back ordered.” This means that the buyer

will usually receive the item when the next regularly scheduled delivery occurs

and be charged for it at that time. The major problem here is that the buyer doesnot have the item ready for today’s customers.

14. Returns and allowances occur because some delivered merchandise will be

unsuitable for one reason or another. The hospitality operator must then ensure

that fair credit is received for the rejected items and that this credit is ultimate-

ly reflected on the suppliers’ bills. This takes time and effort, two attributes that

most individuals have in short supply. Furthermore, as with back orders, there

are the stockout problems that must be solved to avoid customer dissatisfaction.

EVALUATION OF THE PURCHASING

FUNCTION

The purchasing function involves a great variety of activities and objectives. As noted earli-

er, all buyers, full-time or part-time, perform most of these activities, one way or another.

Buyers also attain, or fail to attain, what we have outlined as the major purchasing objectives.

How much should we be willing to spend to discharge the purchasing activities con-

scientiously enough in order to achieve these major objectives? This is an especially dif-

ficult question because, on one hand, buyers’ salaries and receiving and inventory man-

agement costs are highly visible to management, but, on the other hand, the benefits

associated with these costs are not so visible. A look at the income statement reveals

immediately most of the costs of maintaining a top-flight purchasing function; unhap-

pily, the benefits do not leap out quite so dramatically.

In our opinion, the benefits outweigh the costs for all but perhaps the smallest hos-

pitality operations. The purpose of this book, however, is to present what we perceive

Evaluation of the Purchasing Function



to be the relevant aspects of selection and procurement. We leave it to you to decide,

gradually, the value of the purchasing function and the relative justification for its cost.

Key Words and Concepts


Accredited Purchasing Practitioner

(APP)

As-purchased price (AP price)

Backdoor selling

Back orders

Certified Foodservice Professional

(CFSP) program

Certified Foodservice Purchasing

Manager (CFPM)Certified Purchasing Manager (CPM)

Convenience foods

Edible-portion cost (EP cost)

Foodservice Purchasing Managers

(FPM)

Forecasting

Institute of Supply Management

(ISM)

Make-or-buy analysis

Minimal inventory investment

National Restaurant Association

(NRA)

North American Association of Food

Equipment Manufacturers

(NAFEM)

One-stop shopping

Optimal inventory level

Plant visits

Problems of the buyer

Product substitutions

Purchasing activitiesRecycling

Restaurant Association Network

Returns and allowances

Sourcing

Stockout

Supplier diplomacy

Supplier selection

Trade relations

Trade show visits

Value analysis

Value-added foods

What-if analysis

Questions and Problems

1. Assume that two suppliers sell the same quality of meat for the same price.

What type of supplier services would you seek from them? Why? Which sup-

plier service would you value enough so that if one supplier provided it and theother did not, you would purchase your meat from the former? Why?

2. Assume that steak represents 30 percent of your overall food cost. If the pur-

chase price of steak increases 10 percent, by what percentage will the overall

food cost increase?



3. Name some potential benefits of trade relations. Name potential difficulties.

Would you engage in trade relations? Why or why not?

4. Do you think it is a good idea to allow competitors to “borrow a cup of sugar”

once in a while? Why?

5. Explain what is meant by the purchasing function’s goal of “maintaining the

company’s competitive position.”

6. Assume that you have decided to serve roast beef on your menu. The AP price

of roast beef is $3.98 per pound. The edible yield per pound is approximately

9 ounces. You plan to serve a 41 ⁄ 2-ounce portion size.

(a) Approximately how much raw roast beef must you purchase in order to

serve 125 portions?

(b) KWG Enterprises, a statewide food-merchant wholesaler, offers a pre-

cooked, presliced roast beef product for $6 per pound. The edible yield

is 100 percent.

(1) Under what conditions would you purchase this convenience item?

(2) Under what conditions would it be advisable to purchase the raw

roast beef product instead of this convenience item?

(3) Approximately how much of this convenience roast beef must you

purchase in order to serve 125 portions?

7. Name the five major objectives of the purchasing function.

8. Name three types of research activities that a buyer might perform.

9. Is it a good idea to allow a salesperson to assist owner-managers in carrying out

the necessary purchasing activities? Why or why not? If possible, ask a broker

and a merchant-wholesaler to comment on your answer. Also, if possible, ask a

hotel or restaurant buyer to comment on your answer and the answers of the

broker and the merchant-wholesaler.

10. Define or explain:

(a) Value analysis (e) CFPM

(b) Sourcing (f ) Stockouts(c) CPM (g) Backdoor selling

(d) Plant visits (h) Back orders

11. What problems will a foodservice operation incur if it experiences several back

orders?

Questions and Problems

Questions and Problems (continued)



Questions and Problems (continued)

12. What is a major disadvantage associated with having excess inventory on hand?

13. When should the buyer visit a supplier’s facilities?

14. List three advantages and three disadvantages of using convenience foods.

15. A purveyor has offered to sell you fudge cakes for $6 each. You try to determine

whether you can make the cakes more cheaply. Assuming that you will need to pay

an additional employee $9.25 per hour, plus about $1.50-per-hour fringe benefits,

and further assuming that this employee can make 24 cakes per hour, what alter-

native should you select? Should you “make” or should you “buy”? Why?

THE RECIPE FOR ONE CAKE IS:

12 ounces shortening

1 pound, 12 ounces cake flour2 pounds sugar

1/4 ounce salt

1/2 ounce vanilla

1 ounce baking soda

6 eggs

11 ⁄ 2 pints buttermilk

5 ounces cocoa

THE AP PRICES FOR THESE INGREDIENTS ARE:

Shortening: $0.32 per pound

Cake flour: $11.09 per 50 pounds

Sugar: $18.22 per 50 pounds

Salt: $0.11 per pound

Vanilla: $6.85 per pint

Baking soda: $0.24 per pound

Eggs: $1.29 per dozen

Buttermilk: $2.45 per gallon

Cocoa: $2.12 per pound

Experiential Exercises

1. Give the purchasing activity list below to a purchasing manager. Ask the man-

ager if he or she performs all of these tasks. Ask if the manager would add or




remove any of these tasks from the list. Provide a report detailing your conver-

sation.

a. Determine when to order.b. Control inventory levels.

c. Establish quality standards.

d. Determine specifications.

e. Obtain competitive bids.

f. Investigate vendors.

g. Arrange financial terms.

h. Oversee delivery.

i. Negotiate refunds.

j. Handle adjustments.k. Arrange for storage.

2. Determine the requirements for an individual to receive the following certifi-

cations:

Certified Purchasing Manager (CPM)

Accredited Purchasing Practitioner (APP)

Certified Foodservice Professional (CFSP)

Certified Professional Purchasing Manager (CPPM)

Certified Professional in Supply Management (CPSM)

References

1. National Restaurant Association 2006 Restaurant Industry Fact Sheet. National

Restaurant Association (NRA), retrieved June 2006, http://www.restaurant.org/

research/.

2. Gregory T. Bohan, “Purchasing for Hotels: A Changing Scene, Survey Reveals,”

Lodging , April 1986, p. 17. See also John Lawn, “Common Mistakes that

Purchasing Managers Make,” Food Management , February 2003, 38(2), p. 6; John Lawn, “Seven More Mistakes Purchasing Managers Make,” Food

Management , March 2003, 38(3), p. 8. See also C. Lee Evans, “The Hotel

Purchasing Function” in Hotel Management and Operations , Denney G.

Rutherford, Editor, 4th edition, New Jersey, Wiley, 2006.

References

Experiential Exercises (continued)



3. R. Dan Reid and Carl D. Riegel, Purchasing Practices of Large Foodservice Firms

(Tempe, AZ: Center for Advanced Purchasing Studies [CAPS], 1989), p. 19.

4. Patt Patterson, “Good Buyers Track Orders from Field to Kitchen,” Nation’s

Restaurant News , October 5, 1992, p. 42.

5. “McDonald’s Recruits Duo to Make Its McCroutons,” USA Today , January 27,

1989, p. 7B. See also “Purchasing Power” by Dave Ostrander, Pizza Today , June

2006, Vol. 24, Issue 6, p. 50–52.

6. Udayan Gupta, “Getting Together,” The Wall Street Journal , February 19, 1993,

p. R12. See also Udayan Gupta, “Where the Money Is,” The Wall Street Journal ,

May 22, 1995, p. R6; Amy Zuber, “Minority Franchisees Prosper with Help

from McD Support Groups,” Nation’s Restaurant News , February 14, 2000,34(7), pp. 26–30.

7. Supply Chain Advisor, “E-Sourcing Interview: Part 1” retrieved July 2006:

http://supplychainadvisor.com/doc/07815.

8. Howard Elitzak, “Desire for Convenience Drives Marketing Costs,” Food Review ,

September–December 1999, 22(3), pp. 23–25. See also Sarah Hart Winchester,

“Cutting Costs Without Cutting Quality,” Restaurants USA , March 1995, p. 12.

9. Tom Wood, “Total Quality Management,” Restaurants USA , February 1993,

p. 19. See also Mary Clare Brady, “National Restaurant Association Executive

Study Groups,” Restaurants USA , January 1993, p. 15.

10. “Casinos Back Variation on Set-Aside Program,” The Wall Street Journal , March

30, 1993, p. B1.


References (continued)

Documents

Purchasing Function