BUS606: Operations and Supply Chain Management

It should be obvious by now that it is important to maintain an inventory of many types of products in a foodservice operation. There are, however, costs associated with procuring and maintaining that inventory, including holding costs, ordering costs and shortage costs.

Holding cost represents the cost of storing the material (electricity, insurance, security, data processing, handling), financial costs reflect the money that is tied up in inventory, and then there are costs related to deterioration and damage.

Ordering costs are any costs associated with ordering and receiving inventory. These costs consist of salaries of the purchasing and accounting departments, wages in the receiving area, and transportation. For example, if you purchase your weekly food and supplies from four different vendors, you have to place orders with four different salespeople, receive four different trucks, process four different purchase orders and pay four different invoices. If you purchase from only one weekly supplier, these functions are reduced accordingly. This area can also represent a cost-saving, since it may not take any longer to order and process payment for 200 cases than it does to do the same for two cases of a particular item.

Shortage costs are those that occur when the demand exceeds the supply. Shortages may occur when there is an unexpectedly high demand before new stock items are received. Although some shortages are inevitable, customers are not always understanding when they don't receive the meal they anticipated. While they may not voice their dissatisfaction to the foodservice department, they may tell their friends that the menu you print in your operation is not always the one that is served. This type of comment leads to a negative view of your foodservice operation. Shortages may also lead to paying a higher price for a needed item from another supplier.