Labor cost considerations

Labor Cost Considerations

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

Recap of the Previous session
• Complete a menu engineering worksheet and
analyze the resulting information.
• Define the terms star dog plow horse , and
star, dog,
puzzle as they relate to menu analysis.
Prepare a chart showing stars, dogs, plow
horses, and puzzles.
• Describe appropriate action to take for stars
stars,
dogs, plow horses, and puzzles when
changes are made to the menu
g

KCM of the Current session
• Define employee compensation.
p y p
• Explain the difference between direct and
indirect compensation.
• E l i why minimizing d ll wages i not
Explain h i i i i dollar is
the same as 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.


Scope
• Components of Labor Cost.
Cost
• Direct Compensation.
• Indirect C
I di t Compensation.
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• Deferred Compensation.
• Factors affecting LC and %age.


Components of Labor Cost
• Compensation:
1. Current Compensation.
a. Di t C
Direct Compensation.
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b. Indirect Compensation.
2. Deferred Compensation


Direct Compensation
• Salary: Usually the fixed monetary amount
as compensation for services of
employment largely on a monthly or
annual basis which follows a definite
organizational structure.
structure
• The hours of work may not affect the
salary structure
structure.


Direct Compensation
• Wages: Take actual number of hours into
account.
• Usually 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 y
wage rate and at the end of the week
given as compensation to the employee.


Direct Compensation
• Tips: Often referred in the America s as
America’s
gratuities.
• These 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 g
wages and salaries largely related to the
employees general performance.


Direct Compensation
• Commissions: Monetary compensation
given to employees as a percentage of the
sales.
sales


Indirect Compensation
• Sometimes referred to as benefits fringe
benefits, perquisites, perks.
• They may include Paid Vacation Health
Vacation,
benefits, Life Insurance, Free meals, Free
living accommodations use of recreational
facilities.
• C t i resort properties h
Certain t ti have separatet
accommodations for staff and free meals.


Deferred Compensation
• Deferred compensation is defined as
compensation received by an employee at
the conclusion of his period of
employment.
• Pension benefits
benefits.
• Gratuity after 5 years of service in India.
• Provident fund India.
• Social security USA
y

Factors affecting LC and %age
1. Labor Turnover rate. 9. Equipment.
q p
2. Training. 10. Layout.
3. g
Labor legislation. p
11. Preparation.
4. Labor contracts. 12. Service.
5. Use of part time 13. Menu.
staff( Casuals) 14. Hours of Operation.
6. Outsourcing. 15. Weather.
7. S l V l
Sales Volume. 16. Competent
8. Location. management


Labor Turnover rate
• Labor Turnover rate: A ratio relating the
number of departing employees to the
total number of employees
employees.
• Usually expressed as a percentage.
• C
Commonly measures i th USA as 10
l in the 10-
20%.
• Usually managed by the human resource
department.

Labor Turnover rate
• High turnover rates result in higher labor
costs.
• Expenses incurred by the organization for
replacing and employee are for
advertizing, interviewing,
advertizing interviewing background
check, references and training.


Labor Turnover rate
• The total cost per employee in 1993 spent
over recruitment was estimated to be $
2500 so if a restaurant has 50 employees
and the turnover rate is 100%.
• The cost of recruitment could go up as
high as $ 125000.00 per year.


Training
• Training is required at every phase of
recruitment.
• For a dishwasher it would be a one on one
and observation of performance.
• For 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
j
job in all cases.

Training
• Training helps in reducing labor turnover
rate and shapes employee minds reduces
attrition.
attrition
• Training may be done in-house or by an
external agency
agency.
• Results of training are done by evaluating
performance of employees from the
f f l f th
Knowledge, Competencies and Mindset.


Labor Legislation
• Labor 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
y
while in India it is monthly.
• http://www.legalserviceindia.com/income%
20Tax/Tax5.htm

Labor Contracts
• This is a modern day methods to reduce
the effect of labor on the operational
needs.
needs
• The system exists in both types of
Organizations unionized and non non-
unionized.
• H
How ever some of th b
f the benefits h
fit have t b
to be
extended to the contractual staff.


Use of Part-time staff
Part time
• 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% = $ 735
Total labor cost = $4,410


Use of Part-time staff
Part time
• Full - time cooks
Wages:
• 4 cooks x 35 hours x $15 per hour = $2,100
Benefits:
B fit $2,100 20%=
$2 100 x 20% $420
Part - time cooks

• Wages:
• 15 shifts x 7 hours x $10 per hour = $1,050
Benefits: $1,050 x 10% = $ 105
$
New total labor cost = $3,675


Outsourcing of labor and Food
• One of the main methods used these days
by the IT industry and contractual
p y
hospitality.
• Reduces labor costs and organizational
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responsibility.
• Skills come as a package.
• Purchasing becomes easy like desserts.
• Cleaning services, Ice carving, desserts
and baked goods are examples.

Sales Volume
• Peak hours and Weak HoursHours.
• Scheduling staff using business hours as
standard.
standard
• In short it is know as the complete utility of
manpower during the weak hours of the
operation.
• Scheduling becomes easier when the
operation is large because its easier to hire
cooks and dishwashers on hourly basis
basis.

Location
• Labor Costs vary in place to place rural
areas and economically backward area
have lower labor rates
rates.
• Labor costs hold a relationship with areas
where the cost of living is high
high.
• They also relate to the sales figures as
sales price of a particular it
l i f ti l item.


Equipment
• Labor costs can be reduced by automation
in the kitchen by using automatic peelers,
slicing machines Pulverize machines
machines, machines,
accelerated dough fermenting machines
and dough kneaders
kneaders.
• Old and poor quality equipment actually
increases cost of labor in man hours
hours.


Layout
• The amount of space used has a direct effect
p
on the labor cost.
• Such facilitating arrangement should me
made at the planning phases
phases.
• The biggest difficult arises in a badly
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
importance.
importance

Preparation and Service
• The comparative is made between
restaurants making ready to eat foods and
regular restaurants that have a standard
kitchen brigade.
ki h b i d
• The ready to eat foods restaurant does not
require extensive preparation storage and
i t i ti t d
preparation time.
• Another aspect can be useful where a mix of
ready to eat and preparation items can be
made.

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

Service
• 9.
9 Grill rooms
rooms.
• 10. Steak houses.
• 11. Specialty restaurants.
11 S i lt t t
• 12. Fine dining restaurants.
• 13. International destination restaurants.
• 14.
14 Guerdon service restaurants
restaurants.


Menu
• In 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.
• The most effective in this is ODC business.
• Fast food restaurants are another example of
restaurants with reduced LC owing to the
menu.
menu

Hours of Operation
• Restaurants open all 24 hours will have a
higher LC as compared to the others.
• Coffee shops in 5 * hotels face the similar
problem.
• Fixed labor are independent of business
volume.
• The following example will shed extra light:
• Chandni wants to extend the restaurant
operation hours from 21h00 hrs to 22h00.

Hours 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


Weather
• One of the determinants of labor cost which
completely beyond the managers control.
• However the manager can read the forecast
of weather and schedule staff accordingly.
• Consistency in weather may also boost the
sales.
• Weather reports may not be accurate the
accurate,
managers projection is the best at such
times.
times

Competent Management
• The Labor cost is affected by the
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management ability to plan, organize, control,
and lead the organization.
• The following have a direct effect:
1. Measurement of suitable performance.
2.
2 Scheduling employees for optimal
performance.
3. Training facilities.
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4. Equipment and material.
5. Resources, motivation, direct and lead.


Restaurant Comparative


Questions on Comparative
• Which restaurant has a higher SVC?
• Which restaurants has a higher DVC?
• Wh t kind of restaurant do you think A
What ki d f t t d thi k
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 defined
• A process used by managers to direct
direct,
regulate and restrain employee actions .
• Sometimes mistaken to suggest mere
reduction of payroll costs to their
irreducible minimum
minimum.
• Short term policies in minimizing
immediate costs may h
i di t t have undesirable
d i bl
long term effects.


The Sequence of the Labor
Control P
C l Process
1.
1 Establish standards and standard
procedures for the operation.
2.
2 Train all individuals to follow established
standards and standard procedures.
3. Monitor
3 M it performance and compare actual
f d t l
performance with established standards.
4. Take appropriate action to correct
deviations.

Questions
Q ti

Comments
C t

Labor cost considerations

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