Control Analysis, Corrective Action And Evaluation

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  • Note: Every property is unique by itself and also operates in a unique Socio – Economic / Competitive Environment. Hence, when we use “Industry Wide Averages” for the purpose of Benchmarking or establishing Standard F&B Costs against which we will be comparing the Actual F&B Costs of the property, it does not give us a true picture of the Performance of the F&B Operation.
  • Note: In this case, Mario has recorded a Higher Actual Food Cost % due to the fact that Mario is an Italian Restaurant situated in the Commercial District of Mumbai. The Restaurant has only two meal periods a day. It serves ethnic Italian Fare with a concentration on Seafood. Mario’s high Food Cost could be explained because of it’s adherence to Original ingredients which includes very expensive Herbs and ingredients like Truffles, Virgin Olive Oil etc. Also, with Prime ingredients like Lobster / King Prawns / Crabs, the Cost of Food is high as stiff competition in the area does not allow Mario to increase Contribution Margins by hiking up the Selling Price. Hence, Mario works on Narrow Margins in order to meet his Non – Food Costs and Profit Requirements. Hence, Mario must rely on his Restaurant Turnover for leveraging his N.F.C. and Profit Requirements.
  • Note: In the Past, there were no Control Procedures in Place. Mario’s has no Standardization in terms of Ingredients, Recipe, Portion Control. Cost of Food & Beverage were higher as per the Past Financial Statements. Mario’s has now implemented Control Procedures in all areas of his operations. However, Mario has decided to “Benchmark” Costs of F&B from previous Financial Statements against which Current Actuals would be compared. Mario’s finds that Current Actuals are at par with Standards. Mario’s mistakes this for Operational Efficiency , when in reality, the Current Actuals should be far lower due to established Control Tools. In other words it means that Staff at Mario’s Diner does not follow the Set Control Procedures and requires Training. Such problems cannot be identified by comparisons with Past Financial Statements.
  • Note: The Actuals and the Budgeted become truly comparable when the Profit % is incorporated in the Budgeted Figures. Profit Requirements must be factored into the Budget at the time of development. It is generally a Bottom – Up Budgeting Procedure that is followed wherein the Profit Requirements are determined first and then all other expenses are determined scientifically. This enhances our Control of the Operation. Simply comparing the Budgeted to the Actual Figures will not reveal Management inefficiencies or lapses in the Control procedure. When specific Profit % are decided upon and “Benchmarked” then control of Operations enhances. Explanation: Considering the above example: Let us say that we have “Benchmarked” a 20% Profit Requirement. Thus, having all other Control Systems in place and assuming that they are complied with, Base Selling Prices will decide Food Cost % and Beverage Cost %. If then, Actuals exceed the Budgeted, the problem area surfaces by mere comparison of figures.
  • Involvement of the Management would show the commitment from the TOP to resolve a particular problem. In this manner, the Management of a particular Department would Re – Prioritize the Goals and Objectives of the Department and Streamline Operations to achieve the New Set of Goals. Management influence can help pass the message down to the lowest rung of Staff, so that everyone involved works in the same direction towards achieving the same Objective. They help mould and re-orient “Staff Level” thinking to the new Priorities of the Management in order to achieve Organizational Goals.
  • Resistance to Change: Case I Mystery Guest at the Hyatt Hyatt has a Mystery Guest who comes in at least 2 times a year and Audits the Facilities and Services of the Property he is visiting in accordance with the Brand Standards of the Hotel Chain. At the Grand Hyatt, Muscat the F&B Mystery Audit Report was very poor, showing that Service Brand Standards were not followed by the Room Service Stewards. It was upon the In – Room Dining Manager to show a Positive Improvement in the Audit scores during the next Survey. Brand Standards were already in place, but in order to get the staff involved and ensuring they adhere to it during each order delivery, they had to taught by means of using a Principle of Adult Learning which is “WIIFM” – What’s in it for me? The In Room Dining Manager told the staff that a better score in the next Survey would earn the Outlet as a whole the appreciation of the Management and a personal letter from the General Manager. Along with that, if Brand Standards were to be incorporated into the Day to Day Operations and followed in every Order Delivery, it would reduce Guest Complains, earn them better Guest Recommendations leading to rewards and finally a better Tip Pool due to improved Service Quality and Standards. Case II Beverage Cost Control in In Room Dining The Room Service Operation of the Grand Hyatt, Muscat had a small bar to itself from where Alcohol Service was effected. It was a 24 – Hour Operation. The Department was manned by 3 Supervisors (One for every shift). In – Room Dining Beverage Sales (Ideal) never matched up to the Actual Sale computed at Month End (Actual Monthly Beverage Cost) by the Cost Controller. There was always a “SHORT” i.e. Physical Inventory revealed that the Actual Consumption always fell short of the Ideal Consumption. This was a loss of Revenue $$$ to the Operation which was eventually recovered from the Room Service Credit Tips. It fell upon the new In Room Dining Manager to reduce Beverage Costs and to exercise a better control over the Bar Operation. After studying the situation, the Manager suggested a number of steps for Better Controlling the Bar and reducing the Inventory Discrepancy at the month end. The Manager introduced proper Portion Control Tools like Jiggers and Pourers in order to ensure that Over – Pouring is avoided. Also, he planned to take up a number of Training Sessions for ensuring reduction in Spillages while making and serving the drinks. Most important of all, he introduced an Shift Wise Inventory System for which the Shift Supervisor would be responsible. At the Beginning of each Shift, the Supervisor, say “X” would take a Physical Inventory of Alcoholic Beverages. This would be tallied with the Ideal Closing Stock of the Previous Shift. If there were any discrepancies, the out going Shift Supervisor would have to give an explanation for the same. At the end of X’s Shift he would close the Inventory based upon the Sale during his shift which would be the Ideal Closing Balance and a New Supervisor responsible for the next shift would take the Physical Opening Inventory. In this manner, every Supervisor was held responsible for Beverage Consumption during his shift. The result was that Beverage Consumption was now more closely regulated by the Supervisor on Shift which included monitoring of Spillages, Misuse, Internal Consumption, Over Pour etc. Beverage Costs were reduced in the Outlet and the Discrepancies if any were properly documented and given to the Cost Controller at the time of the month end inventory. Satisfactory explanations convinced the F&B Manager that there was no Misuse / Theft of Alcohol and this did not warrant the need of Recovery for discrepancies from the Credit Tips. When the In – Room Dining Manager introduced the Shift Wise Inventory System, there was a lot of resistance from the Supervisors. The Manager took them into confidence and explained to them that this would be beneficial for them in the sense that they would get more Tips at the end of the month. This ensured their support for the new System. This is a Real Life example of “What’s In It For ME?” Principle.
  • Control Analysis, Corrective Action And Evaluation

    1. 1. Control Analysis, Corrective Action and Evaluation Food & Beverage Management III Year Bhavin Parekh
    2. 2. Contents <ul><li>Procedures for Comparison and Analysis </li></ul><ul><li>The Comparison Process </li></ul><ul><li>Questions to Consider during the Comparison Process </li></ul><ul><li>Variance from Standards </li></ul><ul><li>Analyzing Variances </li></ul><ul><li>Potential Savings </li></ul><ul><li>Identifying the Problem </li></ul><ul><li>Taking Corrective Action </li></ul><ul><li>Assigning Responsibility </li></ul><ul><li>Evaluating Corrective Action </li></ul>
    3. 3. Objectives <ul><li>Identify the types of Standards used to evaluate the results of Operations. </li></ul><ul><li>To know which Variances from Cost Standards should be thoroughly analyzed. </li></ul><ul><li>Identify factors to be considered when Analyzing Variances between Cost Standards and Actual Costs </li></ul><ul><li>Identify factors to be taken into consideration when taking Corrective Action to Control Operations. </li></ul>
    4. 4. Introduction <ul><li>The Sequence of the Control Process begins with setting Standards – Goals or Expected Results. </li></ul><ul><li>The next step is measuring Actual operating Results. </li></ul><ul><li>After the above, we Compare the Standards with the Actual Results. </li></ul><ul><li>The Comparison may reveal the need for Corrective Action due to Variances. </li></ul><ul><li>Once Corrective Action is taken, it’s effectiveness must be Evaluated. </li></ul>
    5. 5. The Control Process Establish Standard Operating Results Compute Actual Operating Results Compare Actual Operating Results with Standards If Equal Operation Running Perfectly (Ideal Case) ≠ Identify & Analyze the Variances Take Appropriate Corrective Action Evaluation
    6. 6. Procedures for Comparison & Analysis <ul><li>To compare expected results with Actual Results, Standards must be established and Actual Costs assessed. </li></ul><ul><li>After which a comparison can be made between the Standards and Actuals and we can determine how successful the Operation has been in meeting it’s Goals. </li></ul>
    7. 7. What Standards & Actuals are we going to Consider? <ul><li>There are a wide number of Parameters to be considered when we look at the Hotel Operation as a whole and several Standards of Performance can be established to compare with Actual Performance . </li></ul><ul><li>However, for the Purpose of Food & Beverage, we shall only benchmark Food & Beverage Cost and compare them with Actual F&B Costs. </li></ul>
    8. 8. Procedures for Comparison & Analysis <ul><li>Sources of Standard Food & Beverage Costs and Information provided by each Source. </li></ul>Source Information Provided Averages Industry Averages. These are Statistics which serves a benchmark against which to compare Actual F&B Costs of an operation. They could be similar Costs incurred in your Competitive Set or figures established by the National / State Restaurant Associations. Past Financial Statements Previous Financial Statements of the Operation wherein the F&B Costs are expressed as a % of the Revenue. Past or Current Operating Budgets F&B Costs expressed as a % of Revenue in Previous Operating Budgets or Current Projections of Costs and Revenues expressed in the Budget for the Operation.
    9. 9. Procedures for Comparison & Analysis <ul><li>Sources of Standard Food & Beverage Costs and Information provided by each Source. </li></ul>Source Information Provided In – House developed Standard Costs F&B Costs developed specifically for the Operation after a careful study of the results when all Control Tools are set in place.
    10. 10. Procedures for Comparison & Analysis <ul><li>Source of Information for Actual Costs </li></ul>Source Information Provided Current Income Statement Cost of Food & Beverage as a % of Revenue Internal Records Daily Food Cost Issues + Directs – Adjustments Food Revenue Daily Beverage Cost Issues to all Bars Total Beverage Revenue
    11. 11. The Comparison Process <ul><li>Industry Averages </li></ul><ul><li>It is the least reliable basis for developing Cost Standards for a Food & Beverage operation. </li></ul><ul><li>This is because using the industry averages against which to compare an operation’s Actual F&B Costs does little to address the specific concerns of a property whose needs likely differ from the average property. </li></ul>
    12. 12. The Comparison Process <ul><li>Industry Averages </li></ul><ul><li>While the success of the individual property cannot be measured by comparing the Actual Costs to the Industry Averages, yet many properties use this method of “Benchmarking”. </li></ul><ul><li>This is beneficial in case a Property has Multi – Unit Operations in similar Market Conditions. Example: McDonalds’ / Pizza Hut etc. </li></ul>
    13. 13. The Comparison Process <ul><li>Industry Averages – Example </li></ul><ul><li>Consider that Papa Mario’s Diner compares it’s Actual Food Cost. There is a Variance of +5% over the Industry Average. Mario’s would then evaluate his Daily Food Cost Records to see where Costs can be cut. However, in this case Mario is assuming that the Industry Average applies to them, which might not be true; 43% to the Industry Average of 38%. </li></ul>
    14. 14. The Comparison Process <ul><li>Past Financial Statements </li></ul><ul><li>Financial Statements that have been prepared for the property in the past provide Cost Information that may be used to define Standards for the Property’s Current Operations. </li></ul><ul><li>A major disadvantage of this is that Management lapses and Inefficiencies in the past may go unnoticed if Management strives to do only as well as it did in the past Financial Period. </li></ul>
    15. 15. The Comparison Process <ul><li>Past Financial Statements Example </li></ul><ul><li>Considering that Papa Mario’s Diner has “Benchmarked” Food Costs from Past Financial Statements against which Current Actual Food Cost are to be compared. </li></ul><ul><li>If the Food Costs in the Past were higher then a Lower Current Actual Food Cost may be perceived as an indication of an efficient operation in compliance with all established Control Tools. However, if Current Costs are higher then a problem is perceived to exist. </li></ul>
    16. 16. The Comparison Process <ul><li>Operating Budgets </li></ul><ul><li>Operating Budgets must be developed such that the Desired Profit Requirement is factored in. All other Figures in the budget must be uniformly expressed: such as % of Total Revenue to enable ideal comparisons. </li></ul><ul><li>If Budgeted Figures are not in accordance with the Specific Profit Requirements of the Operation, then comparison of Actuals holds no meaning. </li></ul><ul><li>(Refer example of Budgeted to Actual Comparison in the next slide) </li></ul>
    17. 17. The Comparison Process <ul><li>Actual Budget </li></ul><ul><li>Total Revenue $ 20000 $ 15000 </li></ul><ul><li>Food Cost $ 8000 $ 6000 </li></ul><ul><li>Beverage Cost $ 5200 $ 4000 </li></ul><ul><li>G.P. $ 4000 $ 3000 </li></ul>40% 26% 20% 40% 26% 20% Does not reveal Management Inefficiency
    18. 18. The Comparison Process <ul><li>Actual Budget </li></ul><ul><li>Total Revenue $ 20000 $ 15000 </li></ul><ul><li>Food Cost $ 8000 $ 6000 </li></ul><ul><li>Beverage Cost $ 5200 $ 4000 </li></ul><ul><li>G.P. $ 4000 $ 3000 </li></ul>20% 20% C.M. = N.F.C. + Profit Required C.M. = S.P. – Cost Profit = B.S.P. – Standard Cost – N.F.C. 
    19. 19. The Comparison Process <ul><li>Specific Property Requirements </li></ul><ul><li>The best and most accurate information about what costs should be is based on In – House Cost Standards developed specifically for an Operation. The Ideal Costs developed incorporate the fact that all Control Procedures are followed. These Standard Cost are then compared to the Actual Costs. </li></ul>
    20. 20. Variance from Standards <ul><li>Comparisons often reveal the Actual Costs to be than Standard Costs. </li></ul><ul><li>Standards, especially those developed Specific to the Property’s requirements indicate the Ideal Cost if nothing goes wrong. </li></ul><ul><li>But even with the Best Management Systems: </li></ul>Greater Something will always go WRONG. After all we are Human
    21. 21. Variance from Standards <ul><li>Should the Manager take corrective action for every variance? </li></ul><ul><li>No. The Manager allows for a certain % of Variance due to the Human Element involved. This degree of Variance is considered permissible. </li></ul>
    22. 22. Variance from Standards <ul><li>Establishing the Degree of Variance Permissible: </li></ul><ul><li>It is the decision of the Management. They would ideally consider the following in determining the permissible Variance: </li></ul><ul><li>Profit Requirements from the Operation. </li></ul><ul><li>Amount of freedom it has to reduce expense levels in other areas like Employee Benefits. </li></ul><ul><li>Management Priorities and Cost Justification. </li></ul>
    23. 23. Variance from Standards <ul><li>Example: </li></ul><ul><li>Consider that the Standard Beverage Cost of Papa Mario’s = $ 27,000 </li></ul><ul><li>When Actual Cost were compared a Variance of +1% were recorded. In $$$ this means: </li></ul><ul><li>0.01 x $ 27000 = $ 270 </li></ul><ul><li>Variances are generally expressed in $$$ and Management’s Priority Decisions are based on where the $ are higher. </li></ul>
    24. 24. Variance from Standards <ul><li>Example: Management Priorities </li></ul><ul><li>Variance in Std. and Actual Food Cost = 2% </li></ul><ul><li>Variance in Std. and Actual Beverage Cost = 5% </li></ul><ul><li>Where do you think is Management’s Priority to take Corrective Action??? </li></ul><ul><li>Food Operation: $ 500000 x 0.02 = $ 10000 </li></ul><ul><li>Beverage Operation: $ 100000 x 0.05 = $ 5000 </li></ul><ul><li>Corrective Action will be implemented for Food Operations. </li></ul>
    25. 25. Variance from Standards <ul><li>Example: Cost Justification for Corrective Action </li></ul><ul><li>The Cost incurred to take Corrective Measures must be justified by projecting Potential Savings. </li></ul><ul><li>If it costs $ 500 monthly to save $ 250 in Beverage Costs Annually, then the Corrective Action is not justified. </li></ul>
    26. 26. Analyzing Variances <ul><li>A difference between Standard and Actual Costs does not immediately warrant Corrective Action to be taken. </li></ul><ul><li>The difference may be explainable – Change in the Menu Sales Mix: </li></ul><ul><li>Food Costs tend to be generally lower in Summers because Guests would generally order for Soup / Salads / Sandwiches etc. (Items with a Lower Food Cost and Higher C.M.) than in Winters wherein heavier Entrées are ordered with Higher F.C. </li></ul><ul><li>Studying the Sales History records help clarify this situation. </li></ul>
    27. 27. Analyzing Variances <ul><li>Significant increases F&B Purchase Prices: </li></ul><ul><li>This calls for better Pre – Costing and revision of Menu Selling prices. </li></ul>
    28. 28. Analyzing Variances <ul><li>If Variances cannot be explained even after the study, then a Potential Problem exists which calls for a review of F&B Operations. </li></ul><ul><li>The Main Reasons could be: </li></ul><ul><li>Failure to follow Cost Control Procedures </li></ul><ul><li>Theft or failure to collect all Revenue. Both of these raise the Cost %. </li></ul>
    29. 29. Potential Savings <ul><li>Difference between Actual Costs and Standard Cost represent Potential Savings for the F&B Operation. </li></ul><ul><li>Every $ saved is a $ Earned </li></ul><ul><li>If the Variance is $ 250, then this would represent a Potential Saving for the Operation. The Management could have upped the Profit Margin by $ 250. </li></ul><ul><li>( Refer a Potential Savings Worksheet in the next slide ) </li></ul>
    30. 30. November                         December                         Food & Beverage Potential Savings Worksheet Month Food Cost Beverage Cost Actual Standard % Variance Potential Savings Actual Standard % Variance Potential Savings Cost Revenue % Cost Revenue % January 118545 330209 36 33 3 9576 13875 51772 27 21 6 3003 February                         March                         April                         May                         June                         July                         August                         September                         October                        
    31. 31. Identifying the Problem <ul><li>In order to ease understanding we first define Cost of Sales: </li></ul><ul><li>F&B Cost % = </li></ul><ul><li> Cost of Food / Beverage Sold </li></ul><ul><li> Total F/B Revenue Generated </li></ul>
    32. 32. Identifying the Problem <ul><li>Variance can be defined as: </li></ul><ul><li>Variance = </li></ul><ul><li>- </li></ul><ul><li>Actual Costs will increase over Standard Cost to give you a Variance. The reasons for this is: </li></ul><ul><li>Increase of </li></ul><ul><li>Decrease of </li></ul>Actual Cost Standard Cost Cost of F or B Revenue Generated
    33. 33. Identifying the Problem <ul><li>Increase of Cost of F&B: </li></ul><ul><li>Are Gross Revenues decreasing? </li></ul><ul><li>Is the Seat Turnover decreasing? </li></ul><ul><li>Is there an increase in the Purchase Cost? </li></ul><ul><li>Is there evidence of Employee theft? </li></ul><ul><li>Are proper procedures in place during each stage of the Control Point Cycle and are they being strictly adhered to? </li></ul>
    34. 34. Identifying the Problem <ul><li>If Revenues are decreasing while the Cost of Food remains the same , then the Variance from the standards will increase , resulting in lost Revenue $$$ . </li></ul><ul><li>When Variances between Standards and Actuals are found, then it is time to review all Checklists and S.O.P. </li></ul><ul><li>(Refer Attached Checklists for Profitable Food & Beverage Operations) </li></ul>
    35. 35. Taking Corrective Action <ul><li>Once the problems have been identified, Management must determine the need for Corrective Action: </li></ul><ul><li>The probability of Success – reduction of Variance – must be weighed for all possible alternatives. </li></ul><ul><li>All Costs of implementing the Corrective Action must be known. There can be no surprises. </li></ul><ul><li>Knowing what has or has not worked in the past can be excellent clues to resolving current problems. </li></ul><ul><li>The Plan to be implemented must be S.M.A.R.T. </li></ul>
    36. 36. Taking Corrective Action <ul><li>In some instances, alternatives can be tried on a limited basis rather than implemented throughout the operation. </li></ul><ul><li>For example: If issuing practices are judged to be at fault, a new control procedure for issuing selected high cost items – Meats / Liquor might be tried before applying to all items in the inventory. </li></ul>
    37. 37. Assigning Responsibility <ul><li>Another concern when considering strategies for corrective action is assigning responsibility for the Action . </li></ul><ul><li>As the Variance between the Standards and the Actual Costs increases, more $$$ become involved. As the problem increases in Monetary Value, so too does the need for Higher Levels of Management to be involved in resolving it. </li></ul>
    38. 38. Assigning Responsibility <ul><li>How specialized is the problem? </li></ul><ul><li>If there is an issue with assessing the Value of Directs in the DRR, then it is always advisable to involve the Receiving Clerk & his immediate Supervisor. </li></ul><ul><li>In any case, the Management of the concerned area would be involved in resolving the problem. </li></ul>
    39. 39. Assigning Responsibility <ul><li>Staff Involvement? </li></ul><ul><li>Staff must be involved as per some HR Specialists if Participative Management Style is to be encouraged in the Organization. </li></ul><ul><li>Line Staff in the Operations may sometimes have a good idea about resolving a Problem. By involving Staff in Problem resolution, we gain their commitment and this also helps reduce resistance to new Policies and Practices which might have to be implemented as a part of the Solution. </li></ul>
    40. 40. Levels of Assigning Responsibility <ul><li>Top Management: Accountable to the Owners, Corporate Level Offices. </li></ul><ul><li>Middle Level Managers: Those who have been delegated the authority and responsibility for Operating Specific Segments of the Property. </li></ul><ul><li>Employees: Those who most frequently perform or come in contact with Control Procedures. </li></ul><ul><li>External Consultants: They have special knowledge and experience in specific areas of Operation. </li></ul>
    41. 41. Before Assigning Responsibility <ul><li>Training: It is very essential before any new procedure is implemented and an individual assigned to carry it out. </li></ul><ul><li>It helps the Individual to understand ??? he is doing an additional task and it’s importance to the Operation. </li></ul><ul><li>The Message must be clearly communicated to the assignee in terms of what is expected of him / her and What the end result should be in terms of Management Expectations. This may also include Consequences if results are not achieved. </li></ul>
    42. 42. Before Assigning Responsibility <ul><li>Basic Infrastructure: All tools must be made available before any new procedure is implemented. It leads to more frustration when Control Procedures are all on paper, but cannot be followed in practicality due to lack of the Tools / Equipment required. </li></ul>
    43. 43. Evaluating Corrective Action <ul><li>Evaluating the effectiveness of Corrective Action is another important step in the Control System. </li></ul><ul><li>The main concern here is to evaluate if the Difference between the Standard and the Actual has been reduced or not. </li></ul><ul><li>If yes, then Corrective action has been helpful </li></ul><ul><li>If no, then Corrective Action has been unsuccessful and must be checked for Implementation or completely Overhauled. </li></ul>
    44. 44. Implementation Find the Best possible Solution Identification of a Problem Assign Task Of Implementation Ensure Training & Tools Evaluation By Comparing with Standards Ask Why? Identify the Reasons Set as P&P
    45. 45. Evaluating Corrective Action <ul><li>Evaluation must not be done too early. Sufficient time must be given for the new procedure to be implemented and all teething problems must be resolved. </li></ul><ul><li>Note: During this period, Variances will continue to remain high. </li></ul><ul><li>Other problems might surface during Evaluation since all systems in the Hotel are closely related and changing one might negatively affect the other. </li></ul><ul><li>(Refined Schematic Representation of Previous Diagram) </li></ul>
    46. 46. Sufficient Time Must be given Other Problems might Surface If Results are not as Expected? Implementation Find the Best possible Solution Identification of a Problem Assign Task Of Implementation Ensure Training & Tools Evaluation By Comparing with Standards Ask Why? Identify the Reasons Set as P&P
    47. 47. Reference <ul><li>Food & Beverage Controls – </li></ul><ul><li>By Jack Ninemeier </li></ul><ul><li>(American Hotel & Lodging Association) </li></ul>
    48. 48. Link to Next Lesson <ul><li>Revenue Control </li></ul>

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