BUS606: Operations and Supply Chain Management

Another type of buying is called cost-plus buying. This is a purchasing procedure commonly used by large food chains. An arrangement is made with a supplier to purchase all of a certain kind of food at a specific percentage mark-up over the supplier's cost. The advantage of this method is that the mark-up is smaller than it would otherwise be. In addition to the cost savings realized for a lower mark-up, the purchasing agent saves time contacting other suppliers to get price quotations. The disadvantage of this system is that it is usually impossible for a purchasing agent to verify the supplier's cost unless the supplier agrees to unannounced inspections of the firm's books.

Another variation of cost-plus buying is the use of a prime vendor. The advantages and disadvantages of prime vendor purchasing are the same as cost-plus; however, some organizations need to be cautious in their use of these methods because of the purchasing regulations they are required to follow. This is particularly true of school systems since they are public institutions supported by taxpayers and must use competitive bidding.

It is important for foodservice managers, especially those in smaller operations, to understand the benefits of a group or cooperative purchasing. Cooperative buying involves similar operations joining together to purchase products. It is commonly referred to as group purchasing. The organization of these units may be based on a number of considerations: membership in a regional hospital or educational association or council, the proximity of other institutions wishing to participate, a common religious affiliation or some other allegiance, or membership in a national purchasing program.

The obvious benefit of group purchasing is that it enables a relatively small facility to reap the same cost benefits it would enjoy if it were receiving mass purchasing discounts. In order to realize volume discounts, however, the group must agree to minimize the number of different items ordered. This tends to limit flexibility in menu planning. Often facilities that belong to a group purchasing program also go to a local secondary supplier.

Institutions can increase their food cost savings and tighten their control over group purchasing procedures by designating a representative–preferably someone with purchasing experience–to keep an eye on the group's policies and standards. Collectively, members of the group can develop purchasing specifications to be used, in turn, by their purchasing agent in obtaining bids or quotations from food vendors. The formulation of these specifications would, in fact, be an obvious fringe benefit to the small operation with no specifications of its own to define the quality of food it requires. The membership representative might also participate in taste panels, yield tests, and examination of can contents – activities that encourage more objective and thorough purchasing decisions but are inconvenient and impractical for a single facility to conduct on its own.