October 6, 2014 |

Power Purchasing

By Dave Ostrander

Purchasing is the second leg of the profit triangle

What is the first question you ask your sales rep every week? I’ll bet it isn’t weather or family related. I’d bet it goes like this: “How much is cheese this week?” I stopped asking the big question in 1989, after I was educated on a term that changed the entire way I bought all of my food from that day forward.Your sales rep has very little control over the prices that show up on your invoice. DSR’s (Direct Sales Reps) have to sell their food and supplies under high scrutiny. They answer to their district managers, then to the sales manager, then all the way up the to the corner office. Food distribution companies must cover four areas of expense before the final lowest cost price is set and reflects on your invoices.

They are:

• Product costs: What it costs the supplier to buy the products from their manufacturers. The higher their volume, the lower their costs are.

• Delivery and handling costs: This is much the same as how we charge for home delivery. What is the cost per drop to your restaurant? This cost has skyrocketed for your distributor in the last year because of diesel fuel, insurance, wages and depreciation of tractor-trailers.

• Selling costs: The cost of servicing your account and processing orders. The more you order determines how far these fixed costs can be spread over your total sales dollars. Special orders, delivery frequency and credit terms are factored in here.

• Profit on account: This is the percentage of mark-up or gross profit (sometimes referred to as margin) that needs to be made to consider your account profitable, after considering the above factors and potential volume of your account.

Did you ever wonder why publicly held chain restaurants are two to three time more profitable than independents? One of the big reasons is they don’t buy their food like we do. Every single one of them uses one primary supplier to buy 80 to 100 percent of all of their food and supplies. I’m convinced that this issue alone accounts for a huge reduction in their annual food cost percentages.I was taught to be an adversarial buyer. I was very good at it. I used guilt trips, lies, and threats to get the lowest cost possible from my DSR. I spread my orders over three to four distributors (not including the produce guy and soft drink distributor) to keep them honest. I made them sweat for my order. I must have said, “How much is it for XYZ?” a million times.” They shot me a price and I started the adversarial dance of, “Sorry, you’re 10 cents too high.” Little did I know I wasn’t getting their lowest prices. It was a very time consuming power trip. They still had to factor in the four equations described above. My monthly food purchases were about $25,000. I was spreading my orders between 3 distributors. Each one of them was getting around $100,000 a year. They were paying around $80,000 for the food they sold to me. Their gross margin was close to 20 percent. That wasn’t profit. They still had to subtract selling and administration costs, delivery, handling costs and profit.Then I met Ty Troy, DSR extraordinaire. After cold calling me for six months I gave him his first mercy order, just to get him out of my hair. He showed up every week, sometimes twice. He was like cancer and just wouldn’t go away. He kept on telling me all of the ways his company was the only choice and how he would blow me away with service and price. He was so genuine and his references checked out, so I decided to give him a try. After a rough start (I was disorganized and accidentally bounced a few checks to him) we settled in and got down to business. After the honeymoon period we started to trust each other. I told him what my worries were and he shared his. Then we did something very extraordinary. We made a solemn vow to never lie to one another. He told me what he was looking for in a customer.

He was a four million dollar man (eventually grew his route of 100 miles of lonely Lake Huron shoreline to 6 million) and didn’t have time for customers who weren’t:

  • Going to pay their bills on time
  • Totally honest
  • High dollar accounts
  • Loyal, even with low ball offers from competition
  • Going to refrain from guilt trips and adversarial buying games
  • Organized and have the order ready. (time is money)
  • Going to regard the relationship as win-win
  • Reasonable in their expectations I shared my thoughts too.

I was looking for a supplier who:

  • Stocks the right ingredients in their product mix
  • Can deliver food on time, at agreed pricing amounts
  • Will work out agreeable credit terms
  • Is totally honest
  • Knows their product line inside and out
  • Suggests money saving ideas without compromising the food quality
  • Will suggest, track, and monitor manufacturer rebates and special pricing
  • Is comfortable on a cost plus arrangement
  • Will cover me if I screw up and forget to order a product.

He suggested that we might want to try a non-binding Prime Vendor Agreement for six months. He knew my potential volume was appealing to him and his company. I would buy all of my food from him and he would set me up on a cost-plus program. He would much rather cut his margin almost in half to get all of my business. After all, 12 percent of $300,000 is better than 20 percent of $100,000. From that day on I never asked him the price of cheese or anything else for that matter. My cheese price was directly tied to the Chicago Mercantile Exchange (CME) Block Cheddar price, and all of my other categories were indexed off of cost-plus percent over their invoices. He organized my purchasing and created customized order forms, par levels and was always informing me when my food ingredients were on sale or when they expected costs to go up.This type of arrangement is based on trust and goes both ways. Other suppliers tempted me with better prices on specific items, but in the long run it’s not wise to cherry pick. I was finally able to spend the three to four hours a week of newly found extra time on more productive areas (like training, guest service, finances, and marketing), and eventually delegated the entire ordering process to one of my high school employees.Bottom Line: my annual food costs went down 8 percent. I gained over 200 hours a year for more productive management. My invoice paper clutter was slashed. My DSR was my advocate and was always watching my back.Does this make sense for your pizzeria? Give it a shot.