labor cost considerations

Labor Cost ConsiderationsLabor Cost Considerations

Tuesday, July 05, 2011 BAC-5132 Food and Beverage Management-II-Labor Cost Considerations Slide 1 / 39

Recap of the Previous sessionRecap of the Previous session

• Complete a menu engineering worksheet andComplete a menu engineering worksheet and analyze the resulting information.

• Define the terms star dog plow horse andDefine the terms star, dog, plow horse , and puzzle as they relate to menu analysis.Prepare a chart showing stars, dogs, plowPrepare a chart showing stars, dogs, plow horses, and puzzles.

• Describe appropriate action to take for starsDescribe appropriate action to take for stars, dogs, plow horses, and puzzles when changes are made to the menug


KCM of the Current sessionKCM of the Current session• Define employee compensation.p y p• Explain the difference between direct and

indirect compensation.E l i h i i i i d ll i• Explain why minimizing dollar wages is not the same as labor cost control.

• Define labor cost control• Define labor cost control .• Explain labor cost percentage: labor turnover

rate, training, labor legislation, labor , g, g ,contracts, use of part - time staff, outsourcing.


ScopeScope

• Components of Labor CostComponents of Labor Cost.• Direct Compensation.

I di t C ti• Indirect Compensation.• Deferred Compensation.• Factors affecting LC and %age.


Components of Labor CostComponents of Labor Cost

• Compensation:Compensation:1. Current Compensation.

Di t C tia. Direct Compensation.b. Indirect Compensation.2. Deferred Compensation


Direct CompensationDirect Compensation

• Salary: Usually the fixed monetary amountSalary: Usually the fixed monetary amount as compensation for services of employment largely on a monthly oremployment largely on a monthly or annual basis which follows a definite organizational structureorganizational structure.

• The hours of work may not affect the salary structuresalary structure.



• Wages: Take actual number of hours intoWages: Take actual number of hours into account.

• Usually referred to as the compensationUsually referred to as the compensation given to employees on a daily, weekly basis.

• The wages are also interpreted as hourly rate which is then multiplied by the hourly p y ywage rate and at the end of the week given as compensation to the employee.



• Tips: Often referred in the America’s asTips: Often referred in the America s as gratuities.

• These are under the federal law USA areThese are under the federal law USA are considered as a legal income as long as it is processed by the company.p y p y

• Bonus: Defined as a reward in monetary amounts over the employee’s regular p y gwages and salaries largely related to the employees general performance.



• Commissions: Monetary compensationCommissions: Monetary compensation given to employees as a percentage of the salessales.


Indirect CompensationIndirect Compensation

• Sometimes referred to as benefits fringeSometimes referred to as benefits fringe benefits, perquisites, perks.

• They may include Paid Vacation Health• They may include Paid Vacation, Health benefits, Life Insurance, Free meals, Free living accommodations use of recreationalliving accommodations use of recreational facilities.C t i t ti h t• Certain resort properties have separate accommodations for staff and free meals.


Deferred CompensationDeferred Compensation

• Deferred compensation is defined asDeferred compensation is defined as compensation received by an employee at the conclusion of his period ofthe conclusion of his period of employment.

• Pension benefits• Pension benefits.• Gratuity after 5 years of service in India.• Provident fund India.• Social security USAy


Factors affecting LC and %ageFactors affecting LC and %age1. Labor Turnover rate. 9. Equipment.2. Training.3. Labor legislation.

q p10. Layout.11. Preparation.g

4. Labor contracts.5. Use of part time

p12. Service.13. Menu.

staff( Casuals)6. Outsourcing.

S l V l

14. Hours of Operation.15. Weather.

7. Sales Volume.8. Location.

16. Competent management


Labor Turnover rateLabor Turnover rate

• Labor Turnover rate: A ratio relating theLabor Turnover rate: A ratio relating the number of departing employees to the total number of employeestotal number of employees.

• Usually expressed as a percentage.C l i th USA 10• Commonly measures in the USA as 10-20%.

• Usually managed by the human resource department.



• High turnover rates result in higher laborHigh turnover rates result in higher labor costs.

• Expenses incurred by the organization for• Expenses incurred by the organization for replacing and employee are for advertizing interviewing backgroundadvertizing, interviewing, background check, references and training.



• The total cost per employee in 1993 spentThe total cost per employee in 1993 spent over recruitment was estimated to be $ 2500 so if a restaurant has 50 employees2500 so if a restaurant has 50 employees and the turnover rate is 100%.

• The cost of recruitment could go up as• The cost of recruitment could go up as high as $ 125000.00 per year.


TrainingTraining

• Training is required at every phase ofTraining is required at every phase of recruitment.

• For a dishwasher it would be a one on oneFor a dishwasher it would be a one on one and observation of performance.

• For a experienced cook training mayFor a experienced cook training may involve meeting familiarization with the menu equipment and client expectations.q p p

• Training extends from Induction to on the job in all cases.j


TrainingTraining

• Training helps in reducing labor turnoverTraining helps in reducing labor turnover rate and shapes employee minds reduces attritionattrition.

• Training may be done in-house or by an external agencyexternal agency.

• Results of training are done by evaluating f f l f thperformance of employees from the

Knowledge, Competencies and Mindset.


Labor LegislationLabor Legislation

• Labor legislation in the USA varies fromLabor legislation in the USA varies from state to state unlike India where there is minimal difference.

• The minimum wage is what mainly is contributory in minimum wage.y g

• The minimum wage in the USA is hourly while in India it is monthly.y

• http://www.legalserviceindia.com/income%20Tax/Tax5.htm


Labor ContractsLabor Contracts

• This is a modern day methods to reduceThis is a modern day methods to reduce the effect of labor on the operational needsneeds.

• The system exists in both types of Organizations unionized and nonOrganizations unionized and non-unionized.H f th b fit h t b• How ever some of the benefits have to be extended to the contractual staff.


Use of Part-time staffUse of Part time staff• Has significant impact on the labor cost:Has significant impact on the labor cost:• Example of Luvin’s Camp Slosh Bar and

Restaurant• Luvin has 7 cooks and pays them $ 15 per

hour.• Wages: • 7 cooks x 35 hours x $15 per hour = $3,675

Benefits: 3,675 x 20% = $ 735Total labor cost = $4,410


Use of Part-time staffUse of Part time staff• Full - time cooks

Wages: • 4 cooks x 35 hours x $15 per hour = $2,100

B fit $2 100 20% $420Benefits: $2,100 x 20%= $420Part - time cooks

• Wages: • 15 shifts x 7 hours x $10 per hour = $1,050

$ $Benefits: $1,050 x 10% = $ 105New total labor cost = $3,675


Outsourcing of labor and FoodOutsourcing of labor and Food

• One of the main methods used these daysOne of the main methods used these days by the IT industry and contractual hospitality.p y

• Reduces labor costs and organizational responsibility.p y

• Skills come as a package.• Purchasing becomes easy like desserts.Purchasing becomes easy like desserts.• Cleaning services, Ice carving, desserts

and baked goods are examples.and baked goods are examples.Tuesday, July 05, 2011 BAC-5132 Food and Beverage Management-II-Labor Cost Considerations Slide 22 / 39

Sales VolumeSales Volume

• Peak hours and Weak HoursPeak hours and Weak Hours.• Scheduling staff using business hours as

standardstandard.• In short it is know as the complete utility of

manpower during the weak hours of themanpower during the weak hours of the operation.

• Scheduling becomes easier when the• Scheduling becomes easier when the operation is large because its easier to hire cooks and dishwashers on hourly basiscooks and dishwashers on hourly basis.


LocationLocation

• Labor Costs vary in place to place ruralLabor Costs vary in place to place rural areas and economically backward area have lower labor rateshave lower labor rates.

• Labor costs hold a relationship with areas where the cost of living is highwhere the cost of living is high.

• They also relate to the sales figures as l i f ti l itsales price of a particular item.


EquipmentEquipment

• Labor costs can be reduced by automationLabor costs can be reduced by automation in the kitchen by using automatic peelers, slicing machines Pulverize machinesslicing machines, Pulverize machines, accelerated dough fermenting machines and dough kneadersand dough kneaders.

• Old and poor quality equipment actually increases cost of labor in man hoursincreases cost of labor in man hours.


LayoutLayout• The amount of space used has a direct effect p

on the labor cost.• Such facilitating arrangement should me

made at the planning phasesmade at the planning phases.• The biggest difficult arises in a badly

designed kitchen.designed kitchen.• Also the distance between the kitchen and

the dining area.• The proximity between the stores, Kitchen

and Garbage disposal area is also of vital importanceimportance.


Preparation and ServicePreparation and Service• The comparative is made betweenThe comparative is made between

restaurants making ready to eat foods and regular restaurants that have a standard ki h b i dkitchen brigade.

• The ready to eat foods restaurant does not i t i ti t drequire extensive preparation storage and

preparation time.• Another aspect can be useful where a mix of• Another aspect can be useful where a mix of

ready to eat and preparation items can be made.


ServiceService

1. Vending machines.1. Vending machines.2. QSR drive thru.3 QSR take away3. QSR take away.4. QSR.5 E t i5. Eateries.6. Public Cafeteria.7. Buffet restaurants.8. American casual dining.


ServiceService

• 9 Grill rooms9. Grill rooms. • 10. Steak houses.

11 S i lt t t• 11. Specialty restaurants.• 12. Fine dining restaurants.• 13. International destination restaurants.• 14 Guerdon service restaurants14. Guerdon service restaurants.


MenuMenu

• In restaurants like buffet types its easier toIn restaurants like buffet types its easier to prepare items in bulk rather than À la carte restaurants.

• The large list of main courses will require larger manpower to execute.larger manpower to execute.

• The most effective in this is ODC business.• Fast food restaurants are another example of• Fast food restaurants are another example of

restaurants with reduced LC owing to the menumenu.


Hours of OperationHours of Operation

• Restaurants open all 24 hours will have aRestaurants open all 24 hours will have a higher LC as compared to the others.

• Coffee shops in 5 * hotels face the similarCoffee shops in 5 hotels face the similar problem.

• Fixed labor are independent of businessFixed labor are independent of business volume.

• The following example will shed extra light:The following example will shed extra light:• Chandni wants to extend the restaurant

operation hours from 21h00 hrs to 22h00.operation hours from 21h00 hrs to 22h00.Tuesday, July 05, 2011 BAC-5132 Food and Beverage Management-II-Labor Cost Considerations Slide 31 / 39

Hours of OperationHours of Operation• Additional wages from extension of one hours g

amount to $ 148.00• Heat and Electricity: $ 11.00 • Variable costs estimated at $ 0.38 per dollar sale.• FC

Break even =Break-even = —————————CR (equal to 1 — VR)

• BE for 1 extra hour = $ 159 0.62

BE= $ 256.45


WeatherWeather

• One of the determinants of labor cost whichOne of the determinants of labor cost which completely beyond the managers control.

• However the manager can read the forecastHowever the manager can read the forecast of weather and schedule staff accordingly.

• Consistency in weather may also boost the• Consistency in weather may also boost the sales.

• Weather reports may not be accurate the• Weather reports may not be accurate, the managers projection is the best at such timestimes.


Competent ManagementCompetent Management• The Labor cost is affected by the y

management ability to plan, organize, control, and lead the organization.

• The following have a direct effect:• The following have a direct effect:1. Measurement of suitable performance.2 Scheduling employees for optimal2. Scheduling employees for optimal

performance.3. Training facilities.g4. Equipment and material.5. Resources, motivation, direct and lead.


Restaurant ComparativeRestaurant Comparative


Questions on ComparativeQuestions on Comparative

• Which restaurant has a higher SVC?Which restaurant has a higher SVC?• Which restaurants has a higher DVC?

Wh t ki d f t t d thi k A• What kind of restaurant do you think A and B are?

• What corrective action should be taken by restaurant A?

• What corrective action should be taken in which area for restaurant B?


Labor Cost control definedLabor Cost control defined

• A process used by managers to directA process used by managers to direct, regulate and restrain employee actions .

• Sometimes mistaken to suggest mere• Sometimes mistaken to suggest mere reduction of payroll costs to their irreducible minimumirreducible minimum.

• Short term policies in minimizing i di t t h d i blimmediate costs may have undesirable long term effects.


The Sequence of the Labor C l PControl Process

1 Establish standards and standard1. Establish standards and standard procedures for the operation.

2 Train all individuals to follow established2. Train all individuals to follow established standards and standard procedures.

3 M it f d t l3. Monitor performance and compare actual performance with established standards.

4. Take appropriate action to correct deviations.


Q tiQuestions

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