BUS606: Operations and Supply Chain Management

Some restaurants and hotels, particularly those belonging to chains, will have contracts in place for the purchasing of all products or for certain items. This may mean that the property can only purchase from a specific supplier, but in return, it will have negotiated set pricing for the duration of the contract. This has advantages and disadvantages. On the positive side, the contract price remains stable and the job of managing food costs becomes more consistent since there are no price fluctuations. On the negative side, contract buying takes away the opportunity to compare prices between suppliers and take advantage of specials that may be offered.

Centralized purchasing is also used by management companies that operate a chain of nursing homes and small hospitals or a number of school districts or a combination of all the aforementioned organizations. In this case, the unit managers may be responsible for ordering only dairy and bread directly from suppliers and ordering the remaining products through the management company's central purchasing system. In a large segment of the industry, however, foodservice managers/directors decide on the purchasing methods that best suit their needs.

Purchasing methods can be divided into informal – often called open-market buying and formal bid buying.

Informal purchasing is basically working with suppliers to identify the appropriate products, ordering the correct quantities, and then receiving and storing the product. Getting the best price for the quality of the product desired is just as it's called – informal.

Some types of operations, such as K-12 operations receiving federal funds, are required to use a more formal purchasing method, which includes requesting bids or requests for proposals (RFPs) for all products over a certain cost threshold. This assures that the procurement process is transparent and that there is a free and open competition. Any supplier who wants to be involved in the process is able to do so and the requirements for participating are clearly outlined. Bid buying and RFPs for procuring food, supplies, and equipment require careful, accurate forecasting as the lead time for receiving products can be several months. Operations may use line item bidding or a market basket approach to awarding the bid.

Line item awards simply choose and purchase from the supplier with the lowest price. This is why it's important to develop tight specifications for products and inspect the product carefully when receiving. You have to make sure you are getting exactly the product you want and checking that is what is delivered. Line item bidding works in very large operations purchasing large quantities of products, but it may be difficult for smaller operations to make sure their delivery is large enough to be the "valued customer/buyer" desired.

A "market basket" approach groups similar items, or items that would logically be purchased from a single supplier, such as produce. The amount of each product is forecasted and is multiplied by the bid price from each bidding supplier to get an extended price for that product. This extended price is calculated for all items in the market basket and the bid (business) is awarded to the supplier with the overall lowest price for the whole group of products. See the following example where the entire bid/order would be awarded to Supplier C.

Table 10.11 Food Product's Forecasted Amount and Purchasing Information for Three Different Suppliers