Running Head: FARMERS RESTAURANT CASE ANALYSIS 1

Farmers Restaurant Case Analysis

Norbert Von Lotten, Charles Griffith, Jacob Goeser, Sara Blake

Instructor: William Knight

Course Number: MGT-713

April 3rd, 2016

FARMERS RESTAURANT CASE ANALYSIS 2

Farmers Restaurant Case Analysis

Introduction:

Inventory management is probably one of the most critical practices in any type of business

that directly impacts overall profitability. Inventory management in regards to restaurant operations is

significantly crucial to the longevity and success of the restaurant. Poor inventory management will

almost certainly cause a reduction in food quality, availability of fresh ingredients needed for food

dish preparation, frustrated customers ultimately leading to customer decline which leads to loss of

profit. Restaurants are difficult enough to manage mainly because of the low margins they provide.

Proper inventory management that uses todays technology and is organized tends to be more

streamlined and runs smoothly. In this particular case, Kristen Davis who is the manager of Farmers

Restaurant modestly does not fully understand how to utilize the moving average forecasting

technique available to her. Because of this, Kristen has been using her own intuition to manage

inventory that has not only increased the typical cost average of previous orders but has also caused

additional foods to perish sooner that ultimately needed to be thrown away. Furthermore, there are

additional difficulties because many of the items are packed in multiple quantities therefore she will

always have more in stock than she actually needs. After discussing with her boss she decides to ask

for additional help in determining alternative methods for product ordering.

Analysis:

Farmer Restaurant offers breakfast, lunch and dinner in Grand Rapids, Michigan. This is a

highly competitive market so quality and freshness of the food is very important. Major competitors

are Applebees, I Hop, and Big Boy. They each have specialty options to attract and keep customers.

Applebees offers a family style restaurant and a full bar. They advertise the 2 for $20 meal deal and

also offer car side to go ordering. IHop specializes in breakfast and has seasonal items with heavy
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advertising as well. Big Boy is a family based old fashion hamburger shop that also offers a full salad

bar. The quality of food is important to maintain, in order to compete with the many options

available. Farmer Restaurant offers daily specials in order to keep loyal customers and attract new

customers wanting more options. However, having these special items in stock may cause

instabilities in the amounts and ingredients needed on a weekly basis. Furthermore the items are

packaged in multiple quantities so they must be ordered in the quantities available, not in exact

amount needed .Keeping this in mind the competitors are major chain restaurants and have brand

awareness and national advertising programs giving them an advantage. Farmers Restaurant relies

heavily on referrals and its loyal customer base to continue to compete for market share.

Farmers Restaurant is starting to see a decline in customer counts and the owners are

concerned about the above average in food costs. Kristin, the general manager, is struggling with the

inventory process. On hand inventories are taken on a weekly basis by hand and then entered into the

computer system that maintains records and tracks costs. Food costs make up about 30% of the total

cost so the owners monitor them closely. Ordering is done weekly. The week starts on Thursday for

the week ending on Wednesday. The company generally uses a computer software system that

provides a moving average and the manager would than the company has a guideline of 29%-36% of

on hand inventory standard. The inventory is perishable so if too much is ordered it will quickly

become waste. Kristin has been using her own ordering method and is not meeting the company

standards. She doesnt have a great understanding of the computer ordering system and is not meeting

the company standards with her own ordering method. After analyzing how much product we need to

for the week, we must look at the chance of running out of product before the next order and the lead-

time until it arrives.

LT= 2 days
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OI= 7 days

D= 5 servings/day

A= 12 servings

Q= 42 servings

Std dev = 0.5

Initial Lead-time

12= 5*2 + z(1.414)(0.5)

12= 10+ .707z

2= .707z

Z= 2.83

Percentile= 99.5 %

End of second lead-time

42= 5(7+2)+ z(.5)(3)-12

42= 33+1.5z

9=1.5z

z=6

Percentile= 100%

Given the numbers above, there is a very small chance that theyll have limited stock out before the

next order arrives. With each percentile at 99.5 and 100%, they will likely not have a stock shortage.

There are many reasons that Kristin may want to consider switching to a local supplier. Specifically

to hopefully improve delivery time switching to a local supplier will improve delivery lead times. In
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using one that is several states away, it takes much longer between ordering and delivery time. When

using a local supplier, they can hold less of an inventory due to the fact that the turn-around time will

likely be much shorter. If it is in the same city, Kristin may even be able visit the retailer and pick up

products in person. It takes a lot more preparation and more exact forecasts when using a retailer that

is many states away. One other potential benefit of using a local retailer is the ability to say that you

buy local. This appeals Marketing locally sourced product appeals to many people that they are

helping their local community one more ways than one. Buying local also could mean much fresher

foods. This will allow for foods to stay on the shelves longer without them going past their expiration

date. Buying fresher foods is one way that restaurants can give them more flexibility in ordering,

without have to order more food and throwing it away because it expired. It may still be cheaper

given product and time to use the supplier in Ohio. Sometimes buying from a local retailer can be

quite expensive. One other factor that may play into Kristin choosing to buy from the retailer in Ohio

is due to the ability to get a product. Local retailers may have a smaller variety of products. This

would keep a restaurant from being able to prepare certain meals. Commented [GC1]: Is this Jacobs portion?

Resolution:

Managing inventory in any restaurant can be a daunting task. With Farmers Restaurant, like

many food service businesses, the need to effectively control on hand food items is crucial to

maintaining a fluid basis of operations. With 30% of the stores costs structure allocated to inventory,

effectively managing inventory levels is a critical aspect of Kristens role. Maintaining proper levels

of adequate inventory amounts allows Farmers Restaurant to deliver a consistent experience to the

customer and build a stable and positive reputation within the local market. With major competitors

nearby all instances of negative customer experience have the potential to significantly decrease the

Farmerss customer base. There have more than likely been instances where Kristin has had to resort
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to secondary methods of meeting inventory needs as well. For instance if Farmers ran out of a key

ingredient for a special or very popular menu item Kristin or another staff member may have been

required to go to the closest grocery store to find it. When this is the case it disrupts the flow of

operations within the restaurant and can lead to operational issues or the inability to handle a major

problem if the person who left is the manager. Running too high of certain inventory on the other

hand leads to waste as mentioned in the case. Produce and fresh foods have relatively low shelf lives

and effectively controlling usable levels at Farmers not only ensures fluid operations, but also reduces

the amount of waste, which can easily be translated into lost capital.

Farmers Restaurant operates in a cyclical manner. Demand can be tracked and averaged based

upon not just the previous weeks performance, but trends observed from prior years. Demand

forecasting using a weighted moving average should be utilized to help Kristin understand the

demand trends and anticipated levels of high value items. Utilizing this data the best model for order

for Farmers would be the single-period model. The single-period model places a monetary value on

shortages and excesses of inventory within the given period (Stevenson, 2015). Given the

perishability of most of Farmers inventory requirements there is a direct need to control inventory

levels closely to maximize the return on purchase. Using the demand levels determined through

forecasted analysis and combined with the knowledge that Kristin and the owners have regarding

local shifts or trends purchasing trends that may affect demand, calculating the perfect balance point

of order quantity can be handled more effectively than it was under Kristins intuition baes model.

The knowledge that managers have in the trends of operation should not be undermined here, yet it

should be coupled with hard data and a solid computational theory to effectively create a positive

ordering model. The single-period model should be utilized within these order estimations, but

ultimately Farmers operates within a fixed-order-interval model. Orders are placed on a weekly basis
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after inventory is calculated and shipments are received the same day every week. While the single-

period model is excellent at factoring based on excess and shortage costs, Kristin must be able to

effectively determine the order quantities needed to maintain operations from one order to the next.

Take for instance this theoretical situation provided by Stevenson in Operations Management (2015)

regarding ordering gravy packets: Kristin would like a service level of 95%, and you have found that

there is a standard deviation of 3.5 units per week, and a moving average weekly demand of 35

servings. The gravy comes in packs of two servings. There are currently three packs in inventory.

With the order cycle in place Kristin must be able to effectively calculate the amounts needed

between order cycles. The fixed-order method can further more be broken down into the fixed-

interval method, which is based upon a fixed order interval and allows for variations in demand, and

is the most representative to the order processing calculations needed by Kristen (Stevenson, 2015).

So given the information provided regarding the gravy orders several important values can be pulled

and utilized for fixed-interval calculations. There is a demand for 35 servings per week, or 5 servings

per day. The desired service level is 95%. The standard deviation is 3.5 servings per week or 0.5

servings per day. The amount on hand at recording is 6 servings. The fixed-interval method of

calculation is as follows:

Amount to order = Expected demand during interval + Safety stock Amount on hand at reorder

Q = d(OI + LT) + z*sigma d *(OI+LT) A Formatted: Font: Bold

Q = amount to order

d = demand = 5 servings per day

OI = Order interval = 7 days

LT = lead time =2 days

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z =1.645 for 95% service level

A = amount on hand = 6 servings

Q = 5(7+2) + 1.645*0.5* (7+2) 6

Q = 45+2.4675-6 = 41.4675 servings

Based upon the known information and the fixed-interval model Kristin can calculate that the order

quantity needed to meet Farmers inventory requirements would be 42 servings. This means that

Kristin would need to order 21 packs of gravy on the current order to meet anticipated demand for the

coming week.
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References:

http://www.livelenz.com/resources/blog/categories/inventory-and-food-costs/inventory-best-

practices/

http://smallbusiness.chron.com/keep-track-inventory-restaurant-23415.html

Stevenson, W. J. (2015). Operations Management (12th ed.). New York: McGraw-Hill.