productivity analysis: in the on-site food-service segment

Produc 'u-vity Analysis In the On-site

Food-service Segment

by Dennis Reynolds An accurate measure of productivity is an invaluable Iool for evaluating food-service

operations, but traditional measures are misleading.

A l m o s t any discussion of food-service operations will eventu- ally lead to the topic of productivity. More often than not, operators cite how they have modified their kitch- ens, implemented new technology, or restructured staffing to increase productivity. When asked how they measure productivity, however, operators too often provide vague answers or cite decreased labor costs as an indicator of increased productivity.

Productivity is similar in many ways to the concept of quality-- everyone strives to improve it, but most have difficulty defining it. It is used as an indicator of performance and as a criterion in decision making at numerous organizational levels. Productivity enhancement is frequently referenced, at least in broad terms, in managers' training manuals and is often included in managerial

performance-appraisal guidelines. Productivity maximization is also featured as a goal in many food- service organizations' strategic plans.

In its most general application, productivity is a performance measure and can be defined as the effective use of resources to achieve operational goals. Stated another way, productivity as an aggregate statistic can be expressed by this equation:

T o t a l goods+services productivity = labor+materials+energy+capital

That is simply an extension of the basic industrial model that defines productivity as output divided by input.

Dennis Reynolds is a Ph. D. candidate at CornelI University's School of Hotel Administration.

© 1998, Cornell University

22 [~]RN[L[ HOTEL AND RESTAURANT ADMINISTRATION QUARTERLY

Productivity can also be expressed as a partial-factor or a multiple partial-factor statistic by selecting at least one of the listed variables from both the numerator and denominator. Partial-factor productivity statistics, however, may not be good indicators of overall performance, since they serve only as measures of isolated aspects of the operation, i Problems arise when managers interpret partial-factor productivity measures as indicators of overall operational performance without considering the effects of related variables.

Nevertheless, partial-factor productivity is often used as a surrogate for profitability, since it seems logi- cal that the optimal use of labor, materials, energy, or capital would result in increased profits. Effective treatment of any one of those, however, does not ensure improved overall performance. For example, if we define productivity as the ratio of the number of guests served to the number of food servers and then apply that measure to an upscale restaurant, a targeted effort at maxi- mizing productivity would likely have an adverse effect on long-term profits.

Similarly, if a kitchen manager replaces labor-intensive food items with prepared products to decrease labor costs, she may be more productive in terms of total labor-dollar expenditures. The prepared items' cost, however, may exceed the reduced labor cost, and the change may negatively affect customers' food-quality perceptions. As a result, labor productivity is improved but the operation's financial viability becomes questionable. In this case, if productivity had been measured by dividing sales by the combined cost of labor and food, the foolishness of

1For a conceptual discussion of productivity, see:John Kendrick, Improving Company Productiv- ity (Baltimore:Johns Hopkins University Press, 1984).

the operational change would have been evident.

Thus some partial-factor productivity statistics can be meaningful indicators of which operational- performance areas require attention, most commonly labor management. Poorly formulated or misunderstood measures, however, can be damaging and, if relied on as the primary indicator of performance, can even be disastrous.

While productivity analysis is a requisite managerial function in all multiunit-restaurant segments, no- where is it more important--and complex--than in the on-site segment. 2 The on-site segment is gain- ing increasing representation in the multiunit-restaurant industry, 3 and on-site food-service sales are expected to exceed $80 billion in 1998. 4

Underscoring the need to measure and analyze on-site food-service productivity effectively is the fierce competitive environment, wherein only a small number of aggressive international companies are com- peting for the bulk of the business. Sodexho Alliance, ARAM^P,K, and Compass Group have established themselves as the "big three" managed-services companies, s They are defining the future of on- site food service and are creating a highly competitive marketplace.

2For a complete discussion of the segmentation of the multiunit-restaurant industry, see: Christo- pher Muller and Robert Woods, "An Expanded Restaurant Typology," Cornell Hotel and Restau- rant Administration Quarterly, Vol. 35, No. 3 (June 1994), pp. 27-37.

3Dennis Reynolds, "Managed-Services Compa- nies: The On-site Food-service Segment;' Cornell Hotel and Restaurant Administration Quar- terly, Vol. 37, No. 3 (June 1997), pp. 88-95.

4Daniel Puzo and Jacqueline Dulen, "The Numbers Game," Restaurants & Institutions, January 1, 1998, pp. 44-57.

SMarriott Managed Services, formerly another managed-services giant, merged with Sodexho North America in early 1998. The new company, Sodexho Marriott Services, is now the largest provider of managed services in North America. See also: Reynolds, pp. 88-95.

The practices of those organizations rival the quick-service segment's efficiencies, the midscale segment's brand identification (through the use of national and proprietary brands), and the upscale segment's customization and market identification. Through increased capital investment, unprecedented economies of scale achieved through providing multiple services, and integrated technologies, these firms are also expanding the productivity capacity of their operations.

Surprisingly, however, the methods these companies use to measure and analyze their productivity are as varied as their corporate cultures. What is most disturbing is that the methods they commonly use do not encompass the operational complexities of on-site food service.

The purpose of this article is to define aggregate and multiple partial-factor productivity measures appropriate for each of the major subsegments of on-site food service. The subsegments are business and industry, education (elementary schools, primary schools, and colleges and universities), and health care (hospitals, nursing homes, extended-care centers, and retire- ment centers). Those subsegments represent about 85 percent of on- site revenue. 6

Business and Industry Food service in business and industry (B&I) largely evolved during the labor crises created by World War II. Plant managers sought to maximize workers' performance by offering a variety of benefits, and on-site food service soon became a notable perk. "White collar" food service devel- oped in the late 1960s and early 1970s, when business leaders realized they could increase workers' productivity and job satisfaction by making

6 Daniel Puzo,"Industry Forecast," Restaurants & Institutions, January 1, 1997, p. 29.

June 1998 • 23

Despite the problems with the

sales-per-labor-hour statistic,

many companies use it to

benchmark operations.

food available to employees within the office environment. As a result o f that evolution, almost every plant and office complex now has food outlets.

A n a l o g o u s to fast food . In terms of productivity analysis, B&I food service is analogous to quick- service restaurants. Such food and beverage operations, which empha- size value and convenience, pre- dominantly feature counter service. Customers are expected to clear their own tables, and food is packaged whether it is eaten on or off the premises.

Self-service items are incorpo- rated where possible (for example, salad bars and baked-potato bars). Queuing methods vary, but most B&I operations feature multiple serving stations (preferably arranged in a scatter, as opposed to a cluster, configuration) and a small number of cashier stands located near the exit o f the food-service area. Servingware is generally disposable, with the exception of more elaborate cafeterias (such as those found in upscale office complexes or on executive floors of large corporate headquarters).

O n the other hand. B&I operations diverge from their fast-food kin in five respects, all of which affect the analysis of productivity: menu design, kitchen layout and utility, subsidies, satellites, and leasehold investments. 7

While B&I operations frequently feature value meals and even "super- size" add-on items at a discounted price, they must also offer a wider

VSome operators include hours of operations as a differentiating factor between B&I food service and quick-service operations. While it is true that a requirement of the client-based organization may be that the unit maintain extended hours, a number of strategies can be employed to minimize any performance issues that may result. For example, shifting from cooked-to-order food to prepared-in-advance, microwaveable meals can minimize labor required during aD'pical mealtimes (such as the graveyard shift).

variety of menu items than most quick-service restaurants. B&I operators strive to capture the most customers from a limited captive market. Indeed, they hope to engage the maximum number of building tenants to patronize the eatery during every day part. In a new account in Morristown, New Jersey; for example, ARAMAIKK expects to capture an average of 650 of the 1,000 employees during lunch and hopes for similarly aggressive market penetra- tion during breakfast and between- meal snack periods, s Menu mix is therefore an art form. Its benefits should be reflected in any measure of productivity, preferably repre- sented as a contribution to revenue.

Product ion . Kitchen layout and equipment can vary according to space constraints, availability of gas and electricity, production capacity, and menu requirements. Some operations operate autonomously and therefore have elaborate food- preparation equipment. Others are equipped with nothing more than heated holding boxes and dish- washing equipment; food is prepared off-site and delivered shortly before service time. In still other operations, prepared foods are warmed by either staff or customers in microwave ovens. Productivity statistics incorporating only labor as a denominator variable nmst be viewed according to each operation's production features and constraints.

Subsidies and satellites. Subsi- dies, though not as prevalent today as in years past, affect pricing and therefore any measure that uses revenue as a variable. While a subsidy would not adversely affect any productivity statistic used by an operation to measure its own efficiency and improvement, it would present a problem should one com-

S"Lucent Targeting Fewer Food-Service For- mats," FoodServicc Director, January 15, 1998, p. 16.

24 EflRNELL HOTEL AND RESTAURANT ADMINISTRATION QUARTERLY

pare multiple operations, unless the subsidy is factored into revenue generated from counter sales.

Satellite outlets of a B&I operation also affect productivity statistics. Satellites, which range from small coffee kiosks to fully functional eateries, are generally considered financially viable, because they maximize distribution and food- production economies. They can, however, wreak havoc on partial- factor productivity statistics unless enough variables are included to aggregate the resulting indices. For example, say two operations (units) have average sales of $2,700 during a typical weekday morning, with hours of operation beginning at 6:00 AM and ending at 10:00 AM. Unit 1 consists of a single eatery with a full staff totaling 82 labor hours; it typically runs a 31-percent food cost for the morning day part. Unit 2 comprises a smaller eatery and a satellite kiosk. The labor for the eatery totals 60 hours and the kiosk requires just 4 hours of labor, because it features only coffee and individually wrapped baked goods. The total labor for Unit 2, then, is 64 hours. Unit 2's food cost is much higher (approximately 44 percent), however, because of the emphasis on packaged goods. On a sales-per- labor-hour basis, Unit 2 is a super- star, with a sales-per-hour productivity statistic of $42.2. Conversely, Unit 1 looks like a dog, with a statistic of $32.9. Obviously, by this measure Unit 2 is more "productive," but it may not be as efficient in terms of profitability.

Finally, leasehold investment costs associated with a B&I operation--a requirement for many B&I units operated by managed-services companies-cannot be ignored when analyzing productivity, since they can greatly affect profitability. More often than not, leasehold improvements are ignored at the unit level. (Those may include anything from

upgraded dining-room furniture to new kitchen equipment.) The resulting benefits, however, are cer- tainly not ignored. Such benefits may be increased sales due to a re- designed eatery or decreased labor requirements resulting from new production equipment. Hence true productivity measures must include the unit-level cost of such enhance- ments; ignoring the cost but tallying the benefits is not a reasonable practice.

Sales per labor hour . Most of the top managed-services companies operating in the B&I segment use the basic partial-factor productivity statistic of sales per labor hour. Sales are treated as net of sales tax. Labor hours are calculated using productive hours only; salaried positions are accounted for on the basis of eight hours per day per person. 9 Other costs, such as food costs, are not considered.

One of the largest problems in making unit comparisons is that some operators include catering sales in their productivity measure. Other operators keep catering sales separate but cannot always separate the labor used for catering activities. For example, when several of the entr&es will be used for a catered event and the remainder will be served in the cafeteria during lunch, how much of the cook's preparation time do you attribute to the catering activity? Similarly, how do you allocate managerial hours between catering and routine operations?

Moreover, catering activities typically require lower overall labor than do other operations of the eatery. As a result, overall productivity measured as sales per labor hour will be artificially inflated by high catering activities. Again, that is misleading only if different units treat catering

9Productive hours are hours worked and charged to the department, They include regular time, overtime, on-call hours (if worked), and hours spent in training and orientation.

in different ways. Furthermore, if catering activities are not priced properly, increased sales from catering may increase the sales-per- labor-hour statistic but will not benefit the financial performance of the unit.

Despite the problems with the sales-per-labor-hour statistic, many companies use it to benchmark operations. For example, a mid- Atlantic region of AP-.AMARK uses $30 per labor hour as a minimum for profit-and-loss-based accounts. In New England, Sodexho uses $35 per labor hour as a minimum. For both organizations failure to remain above the productivity threshold is reason for corporate intervention. Again, it is a good measure of labor productivity but not a good index of operational performance.

A bet ter m e a s u r e . A better measure of productivity in the B&I subsegment is

revi Productivity~ =

plci + cog~ + ali~ w h e r e

rev~ = revenue for period i pic~ = productive labor cost for period i cogj = cost of goods used for period i ali i = amort ized leasehold improvements

for period i

In that equation, revenue for the period is defined as sales from all operations (including catering), net of taxes, and includes subsidies, thereby minimizing differences between subsidized and nonsubsidized operations.

Productive labor cost includes wages paid for worked positions based on the hourly rates and salaried positions using annual salary appor- tioned for the period. If food is prepared off-site, the cost of preparation is factored into the cost of goods.

Cost of goods includes all variable costs, including food and paper products. These expenses must be

June 1998 • 25

calculated on the basis o f products used. Corporate overhead (in the case o f contracted operations) is not included, since it is not a function of performance and is outside the unit manager's control.

Amortized leasehold improvements, as the name implies, are the costs of leasehold improvements, amortized for the life of the contract. The dollar value used for the statistic is the amortized amount appropriate for the period under scrutiny.

This multiple partial-factor productivity statistic, which approaches an aggregate-productivity formula, is a better measure o f performance, since it includes the major revenue and cost variables. It also reflects profitability. It can be used as an internal corporate measure and can also be used to compare contracted and noncontracted B&I operations. Some have argued that it is not universally applicable, since consid- erable purchasing power o f major managed-services companies will decrease the cost of food. I would argue that only by including such factors does the measure serve any useful purpose in comparing diverse operations.

Differences in menu mix can affect the measure. It realistically rewards an operator who uses effective menu design and pricing to maximize sales. Catering and satellite outlets can also increase the statistic. On the other hand, i f any operational activity is executed without concern for the impact on profit, it will be evident in the productivity statistic.

By including the cost of leasehold improvements, the productivity statistic can also be used to analyze an investment. For example, if a $50,000 investment is needed to renovate a B&I operation, or if a $50,000 investment is required of the managed-services company before receiving a new contract, the contract must be long enough to

warrant the investment. I f that is not apparent from the salesperson's pro- jections, it will become obvious during the early months o f operations using the recommended formula. The need to include leasehold improvements is underscored by the impact such investments can have on revenue maximization and labor use.

Referr ing back to our example of breakfast sales at two hypothetical units, we saw that Unit 2 (the one with the kiosk) was far more productive in terms of sales per labor hour. We still don't know, however, which operation is more efficient. Now, using the new measure, we can find that answer. As illustrated in the table below, the expenses for the units are very different and produce distinct productivity statistics. The labor used in Unit 1 is higher both in the number of hours and the average hourly rate than for Unit 2. The cost o f goods is dramatically lower, however, than that of Unit 2. Furthermore, we see that Unit 2 has a greater amortized leasehold improvement cost, which is largely the result o f the cost of the kiosk. So whereas at first glance Unit 1 might have been criticized for being less productive, we see that it is, in actu- ality, slightly more efficient than Unit 2.

Unit 1 Unit 2 Revenue $2,700 $2,700 Productive labor cost $1,193 $832 Cost of goods $1,107 $1,458 Amortized leasehold

improvements $26 $54

Productivity index 1.16 1.15

To summarize this section, the proposed measure is more indicative o f performance than the traditional statistic o f sales per labor hour, since the multiple partial-factor measure integrates all the major revenue and cost variables that lead directly to a measure of profit. Using sales per labor hour, productivity could conceivably be increased while profit is

greatly diminished. The measurement that I propose is also useful for comparing dissimilar operations. From a corporate perspective, that is highly desirable, since operational nuances are not always accurately communicated in financial reports.

Education Food service in schools began in the mid-nineteenth century as an in- centive to attend class. It has evolved into a competitive business, with managed-services companies com- peting for school districts in every part of the country. In colleges and universities meal service began as a formal event during which the students assembled each night for sup- per. Today food service in higher education is a complex endeavor, and students expect diverse menu items, high quality, and good value.

Food-service productivity is a focal point for operators in the education submarkets. Self-operated facilities, which represent 85 to 90 percent o f the schools and 45 to 50 percent of the colleges and universities, are under close scrutiny from superintendents and administrators, who demand high quality at a low price and are under increasing pres- sure to consider outsourcing food services or changing providers? ° Also, managed-services companies are w i n g for every available share of the market, putting productivity analysis in the spotlight.

Meals o r sales p e r l a b o r h o u r . Traditionally, operators have used partial-factor productivity measures only, typically focusing on meals per productive labor hour in schools and sales per productive labor hour in colleges and universities.

In the case of schools, which are largely government subsidized, that measure is fraught with problems. First, a school meal is typically considered the equivalent of an entrte,

1°Reynolds, p. 89.

20 I~ORNELL HOTEL AND RESTAURANTADMINISTRATION QUARTERLY

two side dishes, and a beverage; a la carte items are frequently not taken into consideration (though they arguably constitute a small percentage o f total sales).

Second, subjective meal equivalents are used in tallying sales from business outside the central school. Owing to the focus on costs, operators are increasingly seeking add-on business from child day-care centers, adult day-care centers, preschools, and private schools. They sell entr6es and side dishes, delivered in bulk to those sites, to be served during the lunch period. Meals are frequently priced lower than in the school cafeterias (since they constitute added sales and are considered a function of variable costs only), yet are counted equivalently in the productivity calculation.

Finally, subsidies and differences in menu pricing strategies are not included in the calculation.

One partial-factor statistic that solves some, though not all, of those problems is the ratio o f servings produced per labor hour. While that measure is rarely found in practice, research indicates that it is a better partial-factor statistic for school food service than the standard meals per labor hour. u R.egrettably, accounting for the number of servings can be tedious, and errors caused by estimating the number can compro- mise the statistic's validity.

Problems with the partial-factor productivity measure o f sales per productive labor hour used in colleges and universities are similar to those described in the discussion of B&I food service. Sales may include subsidies, and variable costs associated with different menus or outlets are not considered. Moreover, financial losses or gains associated with food production and internal con-

11Cynthia Mayo, Michael Olsen, and Kobert Frary,"Variables That Affect Productivity in School Foodservices," Journal of the American Dietetic Association, Vol. 84 (1984), p. 187.

tmls are not integrated; only labor expressed as hours is used. Another omitted factor is the variable cost o f labor, which can frequently be reduced through the integration o f student workers or student interns. Such internships provide individuals the opportunity to learn food- service skills but in some cases do not include financial remuneration.

The measures currently used are good for analyzing labor utilization from a narrow perspective. They are not, however, consistently applied, and they fail to capture much of the operational variation that directly affects performance. Worst of all, they are too often used to measure a manager's effectiveness in running the operation.

A p re fe r r ed measure . A pre- ferred measure of productivity as an indicator o f performance is a multiple partial-factor statistic similar to that suggested for B&I operations, expressed as

rev/ Productivity z =

plc i + cogj

w h e r e

revj = revenue for period i plcj = productive labor cost for period i cogz = cost of goods used for period i

Here, revenue is all sales from operations (including off-premises sales and satellite operations) and subsidies. Again, productive labor cost includes productive hourly wages and salaried positions using gross salary divided by the appropriate number of periods. If food is prepared off- site, the cost of preparation is factored into the cost of goods. Cost of goods includes all variable costs. As mentioned earlier, corporate overhead (in the case o f contracted operations) is not included.

The proposed productivity measure is a good indicator o f performance but does not carry an im- plicit message of high profits as is the case with a contribution- percentage calculation.

The amortized cost of leasehold improvements can also be included in the statistic. That may or may not be appropriate in the near future. At present, however, leasehold improvements are not as prevalent in the education segment as they are in B&I. Moreover, when a sizable investment is included in an education-segment agreement, the terms of the contract are typically much longer than the standard education agreements and therefore have less impact on performance in those cases.

Health Care O f all the on-site food-service segments, none is as complex as health care. Not only are costs scrutinized, but also customers' expectations of quality and value have increased during the recent years o f health- care reform. Health-care food service is viewed on the one hand as a necessary evil and on the other as an added-value resource of the health-care facility that contributes to a patient's recovery and comfort, or at least provides respite from the tedium of chronic or debilitating illness.

Hospitals, skilled-nursing centers, and elder-care centers are increasingly looking to outsource their support services, particularly their food services. According to a survey conducted by AgAMAP, K last year, outsourcing of.nonclinical support services in domestic hospitals alone is expected to grow by at least $300 million in 1998.12 Such revenue potential makes the health-care segment attractive to managed- services companies. With regard to outsourced food services, today's health-care administrators are seeking contractors who will guarantee both costs and quality of food and

lZPaul King, "Survey Reveals Outsourcing of Nonclinical Services Will Grow," Nation's Restau- rant News, January 12, 1998, p. 18.

June 1998 • 27

service. Not surprisingly, productivity analysis is critical to success in this segment of on-site food service.

Coun t ing meals. Historically, productivity in health-care food service has been examined on the basis of meals per productive hour. That single-factor measure, though seemingly straightforward, is anything but simple, owing to the segment's operational complexity.

For example, consider patient meals. One would expect that an operator could take the number of patients in the hospital during a given day and multiply that number by a standardized factor (equating to the average number of meals consumed by a patient) to calculate the number of patient meals for the day. t3

Several problems arise, however. Some patients receive tube feedings instead of trays. Tube feedings require varying amounts of time to prepare and deliver and represent an expense that hits the food-service manager's operating budget. Late trays--meals delivered after the traditional mealtimes--must also be counted. Additionally, how should the operator account for meals delivered to rooms from which the patient has been moved or dis- charged? Customers and clients also frequently expect guest meals. They are the equivalent of patient meals in terms of raw cost but are difficult to account for and may be requested at any time of the day or night.

Another problem is outpatient meals. With the emphasis of health- care providers on minimizing the length of stay and relying more heavily on outpatient procedures, food-service managers may be expected to deliver meals, snacks, and refreshments to a growing number of customers (sometimes referred to as observation patients) who are not

13Such factors used in acute-care settings typically range from 2.80 to 2.92.

counted as patients at all. Such out- patients stay in the facility less than 23 hours but typically consume two or more meals.

Other problems associated with accounting for patient meals include those created by the diverse patient mix. For example, pediatric patients typically eat smaller meals than their adult counterparts. At the other end of the continuum are psychiatric patients, some of whom are in recovery from addiction or related illnesses and may require double portions at every meal. Should a tray for pediatrics with a three-ounce hamburger, two ounces of potatoes, three ounces of vegetables, and juice be considered equivalent to a tray sent to the psychiatric wing with two servings of lasagna, garlic toast, two salads, two large milks, and two desserts?

Three other important compo- nents of patient meals must also be factored into the meal-count equation. Floor stocks, such as juices, coffee, and crackers, which are maintained at par levels on various floors, augment a patient's intake of calories and must be routinely replenished by the food-service department.

Dietary supplements, used in a variety of health-care settings to dramatically boost caloric intake of patients, must be integrated into the meal count. Interestingly, supplements can range from a few cents to several dollars per serving.

Finally, between-meal snacks, commonly referred to as "nourishments" (or as "10 /2 /8s" to reflect the times they are usually served), are a part of many patients' meal service.

The number of patients who receive items from the floor stock, supplements, or nourishments can change dramatically from one day to the next. Hence allocating the costs is not as simple as spreading them evenly across the patient population.

Similarly, accounting for those expenses as meals is questionable at best.

Other food outlets housed in the health-care facility further exacer- bate the difficulty of tallying meals. In the cafeteria, for example, a meal count cannot be based on the number of customers or transactions, since an individual may purchase anything from a cup of coffee to any number of entr6es.

Meal equivalents. Operators have traditionally addressed that problem by using an equivalent- meal-value (EMV) factor equal to the cost of the raw food used for a typical midday meal. (Most operators consider a "typical" meal to include an entr6e, two side dishes, a beverage, and a dessert.) Total cafeteria sales are first multiplied by the estimated food-cost percentage and then divided by the EMV to produce a meal count. For example, in the United States, Sodexho uses an EMV of $1.44 (for fiscal 1998). If sales for a given day totaled $4,000 and the food-cost percentage was 36 percent, an EMV of $1.44 would produce a meal count of 1,000. TM

The obvious problem of using an EMV is that no consideration is given to variation in menu mix, pricing, or sales strategies (such as combo meals). Also, without a perpetual-inventory system in place, food-cost calculations may not be accurate. That and other problems with an EMV can be corrected, at least in part, by using a floating equivalent-meal-price factor (EMP). An EMP is the price of a complete meal. Dividing sales, net of taxes, for a given meal period by an EMP produces a meal count.

To be effective, however, the EMP needs to be adjusted after

14For a good introduction to meal-cost calculations, see: Lynne Richards, Measure It, Manage It (Chicago: American Dietetic Association, 1997).

28 I~IIRNELL HOTELAND RESTAURANT ADMINISTRATION QUARTERLY

F O C U S O N F O O D S E R V I C E

each meal period. In other words, at the close o f breakfast, the adjusted average price must be determined using the menu mix detailed on the sales record. Net sales can then be easily divided by this EMR That is quickly executed by most point-of- sale systems. Wi thout a good elec- tronic cash register or point-of-sale system, however, such calculations can be tedious, to say the least.

Catering activities pose the last hurdle in counting meals. Operators typically use the same EMV used to calculate cafeteria meals. The accounting systems of most managed- services companies, in fact, use the same EMV for both cafeteria and catering sales throughout the fiscal year and across accounts. However, is a lobster dinner prepared and served to the board o f directors equal in terms of raw cost to a grab-and-go lunch consisting of deli sandwich, chips, cookie, apple, and can of soda? Is the labor required for each of those the same? O f greatest importance, is the profit the same?

Meals per labor hour. As dem- onstrated, meal counts can be labo- rious and can produce questionable results. Therefore productivity statistics that include meal counts, such as the common meals per productive labor hour, are similarly impre- cise, and managers who want to paint a rosy picture of their operations can easily manipulate such data.

Moreover, even if meal counts could be measured consistently across operations, factors that influ- ence the statistic have more o f an impact than are accounted for in the measure. One study conducted in the United Kingdom determined that productivity, as measured by meals per labor hour, was influ- enced more by rates of pay and ratio of supervisors to employees; operations with higher wages and more supervisors were more "pro-

ductive" though not necessarily more profitable, is

The meals-per-productive-labor- hour statistic has been used for many years. Many managers have relied on it to benchmark their labor and to compare their operations against others. Regrettably, it is not an accurate measure unless systems are in place to remedy the many problems associated with accurately counting meals. Even with such systems in place, differences among operations make an apples-to-apples comparison impossible.

The only useful application of this single-factor statistic is intertemporal analysis; that is, analysis o f a single operation over time. Used for that purpose, the statistic could be a meaningful indicator o f labor u s e . i6 A s a measure of performance or operational parsimony, however, the statistic has limited meaning.

A m o re mean ingfu l measure. For most purposes, a better, more meaningful measure is an aggregate, total-factor productivity statistic expressed as

rev i Productivi tyj =

fc i + Ic i + doe r + (mi or mf)i + ali i

where

revj = revenue for period i fcj = food cost for per iod i Ic~ = labor cost for per iod i doe i= direct operating expenses for period i (mi or mf)~ = apport ioned minimum invest-

ment or management fee for period i alii = amortized leasehold improvements

for period i

Revenue is sales from all activities, including catering, cafeteria, vend-

lSWansoo Hong and David Kirk,"The Assess- ment of Labour Productivity and Its Influencing Variables in 12 Conventional Hospital Food Service Systems in the U.K.," International Journal of Hospitality Management, March 1995, pp. 53-66.

161ntertemporal analysis using meals per productive labor hour does not need to be adjusted for inflation, assuming the EMV used during each period reflects inflation-adjusted dollar values, lntertemporal analysis using dollar-based statistics (such as those pertaining to labor costs) must be adjusted to reflect constant-dollar values, however.

ing, dietetic counseling, and patient meals, snacks, nourishments, and supplements (which may be an internal transfer if self-operated), net o f sales tax, and includes subsidies. Revenue associated with patient meals must be based on actual tray counts and production records, which is facilitated by meticulously documenting what is prepared and what leaves the kitchen. Types of meals served must also be noted (such as those with double portions and children's meals).

Food cost is just that, the exact cost of the prepared food. It is im- perative for the operator in calculat- ins food use to account for all items delivered, including supplements, nourishments, and floor stocks. 17 In a self-operated environment, patient-related items should be reflected in revenue as a direct function o f costs. I f the department is operated on a profit-and-loss basis, those items should be tallied according to the contracted prices and charged to the respective client- based cost centers.

Labor cost includes salaried and hourly productive labor, nonproductive labor, and labor-related expenses, including those associated with management salaries. The inclusion of nonproductive labor and labor-related expenses is a major departure from traditional measures of productivity. The need to aggres- sively deal with the operational complexities in health-care food service, however, demands the inclusion of those costs, since the benefits of certain labor expenses can enhance operations. For example, training from seminars and development programs can help supervisors manage better and motivate employees and the cost of continuing

17See, for example, Wilco Chan and Norman Au,"Profit Measurement of Menu Items in Hong Kong's Chinese Restaurants," Cornell Hotel and Restaurant Administration Quarterly, Vol. 39, No. 2 (April 1998), pp. 70-75.

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education for dietitians can have a direct, positive effect on patient care. As such, the cost o f such programs is typically included as a labor-related expense.

Similarly, encouraging ownership through employee stock-purchase plans can have positive effects on the operation. In such programs employees can buy stock in the parent company, usually at a discounted price. Again, that cost is usually included in the labor overhead. Offer- ing paid vacations (a nonproductive labor item) that are longer than industry averages can often improve morale and retention. Finally, managers who minimize on- the- job injuries not only decrease costs associated with workers' compensation claims but also decrease sick-pay expenses. Conversely, managers who do not control injuries incur nonproductive labor expenses in the form of sick leave. An aggregate productivity measure that accurately analyzes performance will reflect all those costs, necessitated by the complexity of this segment.

Such costs as nonproductive labor and discounted stock options generally are not included in B&I productivity analysis because B&I operations are typically small and therefore have small staffs, and typically have only a single management position. The resulting nonproductive costs, then, do not vary dramatically across units. For education, I anticipate that inclusion of nonproductive and labor-related expenses in productivity analysis will become a necessity as more companies real- ize the benefit o f increased training and development o f both line and supervisory personnel.

Direct operating expenses include such items as paper goods, cleaning supplies, cooking utensils, data and office supplies, merchandising materials, menu or printing expenses, rent or lease (if applicable), mainte- nance and repairs, equipment agreements, and depreciation.

Minimum investment refers to a minimum profit that self-operated units may need to set aside for capital projects. Management fee is the expense charged by managed-services companies i fa contract is structured on a fixed-fee basis. Finally, amortized leasehold improvements are the same as those covered in the discussion of B&I operations.

What is not included is administrative overhead (both for contracted and self-operated units). That expense is not included because of its ambiguity and variety, both o f which are be- yond the operator's control. Furthermore, some administrators may allocate soft costs in the form o f an overhead expense to the food-service department; similarly, managed-services companies could conceivably allocate administrative expenses to a particular unit. While either is a reasonable accounting practice, it is not sensible to include corporate- controlled allocations when assessing operational performance.

A true indicator . In practice, the aggregate, total-factor statistic is a true indicator o f performance. A number greater than one indicates that outputs (sales) exceed inputs (costs); more to the point, it indicates positive performance. While thresholds vary from organization to organization, a reasonable annualized mini- mu m value using this measurement device is 1.08.

Exhibit 1 Comparison of productivity indices-- The hypothetical example of Suburban Medical Center

Summary statement of operations, year-end December 31

Revenue Patient meals $863,596 Catering sales 391,500 Cafeteria sales 675,328

Total revenue $1,930,424

Expenses Food Cost Patient meals $293,600 Patient-related food 34,949 Catering 145,000 Cafeteria 243,118

Total food cost 716, 667

Labor Hourly $666,510 Salaried 140,500 Payroll related 235,798

Total labor cost 1,042, 808

Direct operating expenses 150,636

Minimum investment 50,000

Amortized leasehold improvement 25,000

Total expenses

Operating profit

1,985,111

($54,687)

Statistics Patient meals 220,752 Catering meals (EMV=$1.46) 99,315 Cafeteria meals (EMV=$1.46) 156,519

Total meals 486, 586

Productive Labor Hours Salaried 8,320 Hourly 70,512

Total 78,832

Meals per productive labor hour 6.17 Total-factor productivity index 0.97

This statistic reflects the complexity ofhealth-care's on-site food service. It can be modified according to any organization's revenue and expense categories, so long as all rev- enues, cost o f goods, labor, and other operating expenses are included.

30 NNELL HOTELAND RESTAURANTADMINISTRATION QUARTERLY

F O C U S O N F O O D S E R V I C E

Exhibit 1 shows a hypothetical summary statement o f operations for Suburban Medical Center (SMC), a 250-bed, acute-care facility with modest outpatient activity. Inter- temporal analysis shows that the food-service department at SMC has held or improved their meals-per- labor-hour statistic during the last few years, and for the most recent fiscal year that number is 6.17. This is admirable given the industry average o f 3.91.18

Using this statistic as a measure of the food-service director's ability to manage his operation would portray him as a good performer. The more- accurate analysis using the aggregate- productivity statistic shows a serious problem, however. The operation's true productivity, as measured by the total-factor statistic, is 0.97, which is dramatically less than the target o f 1.08. This also reflects negative operating profit. Operational analysis would likely uncover one or more issues associated with an unbudgeted increase in labor cost, inappropriate assignment of positions (for example, having a high-paid employee doing an entry-level task), unacceptably high food cost, or factors associated with sales, such as price structure or sales mix. Any of those factors could affect efficiency, and therefore, profitability.

More than anything else, this statistic is universally applicable and is meaningful as an indicator o f performance across units and organizations. It reflects operational efficiencies, such as maximized employee retention, effective training, accurate market identification, and accurate asset management (achieved through sound internal controls), gained through any combination of economies and operational acumen. It also serves as a flag in the event a food- service manager fails to employ judi- cious business practices.

ls1997 MECON-PEERx benchmarking data.

Finally, it should be noted that this aggregate productivity statistic can be used for any of the on-site segments with positive results. The relative simplicity o f B&I and, to a lessor extent, the education segment, may allow operators to use a multiple-factor statistic that is less encompassing but still valid. In health care, any measure that does not include all the categories described above simply does not do justice to today's complexity of health-care food service.

A Better Way Productivity is a major criterion in the assessment of organizational performance. It integrates revenue maximization with operational parsimony. We must, however, effectively measure it if we want to improve i t - -a formidable task.

Partial-factor measures can be useful for analyzing specific aspects o f an operation but are meaningless as measures o f overall performance. That distinction is too often ignored. Aggregate and multiple- factor measures are more robust, meaningful measures for analyzing actual operational productivity. Moreover, they can be supple- mented with partial-factor measures as needed for a thorough un- derstanding of every on-site food-service operation.

While almost any productivity statistic can be used for a single operation on an intertemporal basis, true productivity measurement allows managers to compare diverse operations. The ability to compare unlike operations within a given subsegment is invaluable for both self-operated and contracted units. In fact, using multiple-factor or aggregate productivity measures allows managers to compare self- operated units with contracted operations, thereby providing a basis for such decisions as whether to outsource.

What gets measured gets done. That wonderful adage describes an inter- esting organizational phenomenon. When applied to productivity, it means that i f you compute a productivity statistic and evaluate people based on that formula, the organization will improve in terms of what is measured.

That underscores the need to accurately assess productivity. Re- ferring back to the example o f an upscale restaurant seeking to decrease its front-of-the-house labor cost without regard for service level, one can readily see that striv- ing to increase a poorly defined productivity measure can be damaging. On the other hand, an accurate productivity measurement and analysis can provide a significant competitive advantage, one that is useful in a variety of applications ranging from operational optimiza- tion to employee-performance management.

Productivity measurement has become more common in on-site food service, yet remains in many aspects elusive. Careless application o f productivity incentives can lead to grave operational outcomes.

Appropriate measurement and analysis, however, can serve managers in various ways. Properly con- ceived and applied measures enable managers to evaluate the relation- ships between productivity and management policies. They serve as a barometer for monitoring the effectiveness o f operational changes such as new production methods, integration of work teams, and implementation of new technology.

Finally, effective productivity modeling such as I've outlined here overcomes the limitations o f traditional productivity measures. O f greatest importance, true productivity analysis provides managers with a method to comprehensively evaluate any on-site food-service operation. CQ

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productivity analysis: in the on-site food-service segment

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