Lesson 4: Controlling “Cost of Goods” – Part 1

Last month we talked about how to calculate an actual cost of goods (COG) and an ideal cost, so you can evaluate both as a percentage of sales to determine if you have a cost control problem. In this and the next article we’ll discuss why your cost might be high (1½% higher or more than your ideal cost), and how to fix it.

There are only 7 reasons why your actual cost might be significantly higher than your ideal cost, they are:

1. Product has become damaged so that it is unusable

2. Menu items are being over-portioned

3. Losing product to spoilage

4. Excessive waste is occurring during production

5. Losing product due to theft

6. Losing money due to theft, which is inflating your cost

7. You are making clerical errors

1. Unusable damaged product 

This is when product has become damaged to the extent that it can’t be used, for example: a bag of coffee beans that has burst open and spilled on the floor, a cheese cake that gets smashed because a heavy box was placed on top of it in the refrigerator, or cups that get flattened because the case was accidentally dropped and was partially crushed.

If you determine that the product came damaged from your purveyor, then of course you should return it and request an exchange or full credit. However, if you can’t determine how or where the product got damaged, then you should at least have your employees inform you when they come across damaged product. This will allow you to assess the value of the product lost, so that when you do your month end COG calculations, you’ll be able to understand how that lost product impacted your numbers. It will also give you an opportunity to remind your employees about proper handling and storage procedures.

2. Over-portioning menu items

Your ideal COG calculations are based upon the portions specified in your recipes. If your employees aren’t following your recipes, and they are using portions greater than what you have specified, then your COG will become inflated.

If your employees have accurate recipe sheets, and the tools necessary to measure your specified portions, then there is absolutely no excuse for over-portioning. After all, your bank wouldn’t tolerate a teller that gave away and extra $10 each day, and likewise, you shouldn’t tolerate an employee who gives away extra product!

The only way to know if your employees are over-portioning is to watch them and check their portions. On a regular basis, you should watch your baristas work to make sure they are using the proper portions. You should also check your food prep cook by weighing the meat and cheese they use in sandwiches, and the lettuce they use in salads. Of course, if you catch them over-portioning you’ll need to give them a stern warning! Little portioning overages can add up to hundreds of dollars each month.

3. Product lost to spoilage

Spoilage can occur from a number of reasons. Over-ordering or over-production, buying or preparing more product than can be used before it spoils, is one reason. Improper product rotation (using new product before old) can also contribute to loss.

Cold or hot items that are not held at the proper temperature, or that are left out at room temperature for an extended period of time, will grow bacteria rapidly and spoil. A malfunctioning refrigerator that can’t hold a temperature of 40°F or less can also be a source of this problem.

Finally, cross-contamination, bacteria transferred to food from unsanitary hands, a cutting board, knife, food storage container, or some other work surface, can also result in premature spoilage.

To find out if spoilage might be occurring in your operation, you should mandate that your employees inform you whenever they come across spoiled product. You should also inspect all of the perishable products in your store each morning. Look at flavored syrups to make sure they aren’t growing mold or have turned cloudy. Taste a spoonful of whipped cream from each dispenser to verify that it hasn’t soured. Go through your food prep refrigerators to smell and taste meats, cheeses, sauces, and other condiments. Be sure to address any issues that might be contributing to loss when you come across spoiled items.

Next month will touch upon the remaining causes that can negatively affect your cost of goods.

Ed Arvidson is a 25-year veteran consultant to the Specialty Coffee industry, and President of E&C Consulting. Elements of this article are from his new book, “How to Get Profitable in the Coffee Business.” www.coffeebizhelp.com