FSI

Data &  Analytics

Validating Invoices Against Contracts to Inspect What You Expect

    There’s significant pricing and product complexity in the industry. There can be hundreds of prices for any given item, and lots of product choice. Based on data from FSIC clients, we have found an 8-22% error rate on invoices to restaurants depending on the complexity of their business; the more distributors and brands/concepts, the higher the error rate. Because of this complexity, it is important to review invoices to ensure you receive the right product at the right price from the right vendor.

  There’s a lot of talk in the industry about validating or verifying your contracts or prices. What does this mean? It means different things to different companies, and companies do it differently (both restaurant groups as well as vendors; (some vendors just talk about price verification).

We recommend that you look at a few things to ensure you’re getting what you expected, and to look for additional opportunities to lower your costs and ensure a consistent guest experience:

Contract Price Validation/Price Verification/Price Compliance

  • Validate that each unit is charged the right contract price. Verify that each distributor invoiced each unit the correct contract price on all invoice transactions on all items across all distribution points. Along with contract price, incorporate distributor markup and freight if applicable in the price verification against invoice transactions. Read more on why this happens and how much it impacts restaurant groups (Contract Price Non-Compliance Is a Profitability Killer).

Product Compliance

  • Validate that units received the correct product (product compliance) according to product specs and contracts. Product non-compliance happens for a number of reasons: perhaps there isn’t a product spec, or units weren’t aware of the spec, or a product was substituted once and remained on the order guide. Regardless, lack of or noncompliance to product specs can disrupt your team, detract from your guest experience when they are getting different menu items at different locations for different times, and raise your COGS when units aren’t purchasing contracted products at contracted prices. Read more on what you can do to prevent and manage product non-compliance (Product Specifications Reduce COGS and Improve Guest Experience and Hidden Costs of Product Non-Compliance).

Vendor Compliance

  • While related to product compliance, vendor compliance is important enough to stand on its own, because it gets into rogue spending and challenges with trace-ability in the event of food safety issues. You should validate that your units purchased products from the correct manufacturer and the correct distributor – not just distributor purchases outside the preferred distributors, but among preferred distributors. We see rouge spending happening among preferred distributors to the tune of 5-15% or more on average each month. Read more on why this happens and the risks to your brand (Rouge Spending Costs Restaurant Groups 5-15% or More Each Month).

Non-Contract Price Validation

  • Conduct a sanity check of non-contract pricing across distributors and distribution points to identify inconsistent pricing across distribution centers. Where you don’t have contracts – whether because of type of product or volume purchased – it can be difficult to determine if you are charged competitive and consistent pricing. Read more on how to validate non-contract pricing (Hacking Non-Contract Pricing). This is where you will find freight creep which we will talk about in our Foodservice Insider next week.

Hidden Costs of Product

Non-Compliance

While contract price variances and sanity check of non-contract pricing are easily quantifiable, many believe that the impact of product compliance cannot be measured.

We beg to differ. We recently conducted a review with a multi-unit operator client that has more than 600 units and multiple brands. In reviewing product spec compliance of 30% of their purchases, we identified a 2% COGS impact of units not getting the right product.

Product non-compliance happens because units are buying different items, whether because there isn’t a product specification they should buy, the distributor substitutes an item, the unit wants to save money, or the unit buys the product from the “wrong” distributor.

Along with the COGS impact of units not getting the right product, there is an impact on guest experience and ultimately your brand equity. Your guests expect a consistent experience across each of your brands.

57 Different Cups

When we analyzed the data for one of our newer clients, we found that their 600+ units bought 14 different French fries, 12 sliced American cheeses, 19 BBQ sauces, 57 different cups. The list goes on. Ordering or receiving the wrong product can be a triple-whammy to your company’s bottom line. It can disrupt your team, detract from your guest experience and raise your COGS. As a multi-unit restaurant operator, your guests expect a consistent experience across all of your units.

14 Sizes of Ribeye

Another client has just over 40 units. For 7 core protein items, they had received 75 items from 50 different units in the last quarter, including 14 different sizes of ribeye. What is the impact when your guests are served a different size or quality of steak at each visit?

 

Too Many Turkeys

Another restaurant group, a deli, was purchasing a variety of turkey products, ranging from organic non-GMO to “formed” turkey. While neither choice is wrong, how will your guests feel when they have such a different sandwich?

It takes twice as much work to earn a new customer as it does to please an existing one, so don’t let a bad experience end a customer relationship. Online reviews are the number one factor consumers use when choosing a place to dine, according to recent findings by socialmediaweek.org.

According to a Harvard Business Review Research Report by Michael Luca, a one-star increase in Yelp rating leads to a 5-9% increase in revenue for restaurants. And, at least 49% of consumers need to see at least a four-star rating before they choose to use a business, according to BrightLocal.

How is your guest experience affected when your guests receive different experiences at your units, or even at the same unit at different time?

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Rouge Spending Costs Restaurant Groups 5-15% or More Each Month

Rouge spending happens more than you may think. Many think that this rarely happens because they define it as distributor purchases outside the preferred distributor list, which they monitor. But, we see rouge spending happening among preferred distributors to the tune of 5-15% or more on average each month. Preferred vendor means that the vendor is approved (such as a produce or non-foods distributor) but the unit should be buying the item from a different approved distributor. Or, this may happen when the unit is sent the wrong item in the complex world of supply chain.

There are three key risks of rogue spending:

  • Traceability/food safety issues: if you are not getting the product from the vendor you should, what happens when there’s a food safety issue? Can you track down the product from the vendor? How do you know it was purchased from them vs. another?

  • Profitability/paying more than you should: many times, if you are getting the product from another vendor, you are not getting the contract price, meaning you are paying more than you should. Additionally, volume purchased from other vendors doesn’t typically count toward commitments written into the contract.

  • Getting the wrong product: many times people think they are receiving the same product or like item and in fact it is very different and changes recipes that affect the guest and brand experience.

An in depth review of a FSIC, Inc. client found where 10-15% of items like cheese, eggs, dry goods, French fries, etc.  were being purchased from the produce company and non-foods distributor instead of the broadliner. The client spent 6-8% more by rogue purchasing on these items and didn’t see the impact it played on costs. Many times, they purchase these items to meet a bracket and then it becomes a habit. This significantly affects the cost of goods.

Some units have a better relationship with one distributor over another and give them the business. These issues can be the difference between hitting COGS budgets or not.

Regardless of the cause, rogue spending can have a significant impact on a restaurant’s profitability and brand equity. Why take chances?

With visibility, you have the ability to adjust to threats and take advantage of opportunities.

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