Labor Cost Considerations

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Labor Cost Considerations

• HRT 276 Chapter 18
• Part IV Labor Control

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Thanks to

• The information in this presentation comes from
  Chapter 18
• Principles of Food, Beverage, and Labor Cost
  Controls
• By Paul R. Dittmer
• 7th Edition. 2003. New York John Wiley Sons

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Introduction

• Labor Concepts
• Remember, labor is the third component of an FB
  operations Prime Costs
• Think of a schedule as an invoice payment will
  be due!
• Compensation definitions
• Labor cost determinants

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Compensation

• Compensation refers to all forms of pay and other
  rewards going to employees as a result of their
  employment
• Direct and Indirect Compensation
• Current and Deferred Compensation

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Compensation

• Direct Compensation
• Salaries fixed dollar amount, regardless of
  hours
• Wages fixed rate, with hours as a factor
• Tips compensation in the eyes of the law
• Bonuses performance reward, usually a set
  dollar amount
• Commissions performance reward, usually as a
  percent of sales

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Compensation

• Indirect Compensation
• Health benefits
• Free meals
• Paid vacation
• Life insurance
• Free living accommodations
• Recreational facilities
• Discounts on FB, rooms, travel, etc.
• Also called benefits or fringe benefits

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Compensation in the Real World

• Benefits should be benefits of working for the
  company
• Benefits may have rules or restrictions
• Benefit use must be monitored
• Do not let Benefits become Entitlements!
• When not properly managed, employees begin to
  feel things are owed to them
• Companies are responsible for direct compensation
  and the associated the employers share of taxes

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Compensation

• Current Compensation
• Received on an ongoing basis
• Direct and Indirect Compensation are examples of
  current compensation
• Deferred Compensation
• Received after the conclusion of employment
• Pension benefits (individual) and Social Security
  (group)
• Employers matches what you pay into Social
  Security

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Determinant of Labor Costand Labor Cost
Percentage

• A determinant is something does, or can, affect
  labor cost

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Determinant of Labor Costand Labor Cost
Percentage

• Turnover Rate
• Ratio of departing employees to total employees
• Commonly cited at 100 for Hospitality
• Can be 300 or higher
• American industry, in general, is 10 - 20
• Costly if too high ?Turnover ? Labor Cost
• Recruiting, interviewing, references and
  background checks, selecting, hiring,
  orientation, training (specific), development
  (on-going)
• As high as 2,500 per employee
• Example 50 employees with 100 turnover
  125,000 per year!

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Determinant of Labor Costand Labor Cost
Percentage

• Training
• Proper training is the key to reducing
  undesirable turnover
• Is any turnover desirable?
• Training must be extensive and effective
• This can lead to increases job satisfaction
• Which leads to more positive performance
• A more pleasant working environment
• Happier customers
• Higher sales volume
• Lower employee turnover

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Determinant of Labor Costand Labor Cost
Percentage

• Labor Legislation
• Minimum wage laws
• Other mandated costs
• Social Security
• Medicare
• Workers Compensation
• Unemployment Insurance
• Labor Contracts
• Usually means union
• Usually higher wages and more indirect benefits

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Determinant of Labor Costand Labor Cost
Percentage

• Full-time vs. Part-time staff
• Assumes part-timers are willing to work for lower
  wages
• If the part-timer can do an adequate job, labor
  cost can be lowered
• The greater the role of part-time work, the
  greater the possibility of higher turnover

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Determinant of Labor Costand Labor Cost
Percentage

• Outsourcing
• Work performed in or for the organization by
  another person or organization, on a contract
  basis
• Done if the total cost (direct labor cost, hours
  required, insurance, etc.) will be lower
• In some cases, other costs (food, for example)
  may increase
• Examples
• Cleaning
• Payroll processing
• Food preparation
• Delivery

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Determinant of Labor Costand Labor Cost
Percentage

• Sales Volume
• Increases in sales volume usually lead to
  increased productivity per employee (beyond a
  certain point, it may be counter-productive)
• Usually measured in sales dollars per hour, per
  shift, per server, or per person
• Greater sales volume can lead to beneficial
  economies-of-scale, allowing
• Some variable cost percentages to drop
• All fixed cost percentages to drop

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Determinant of Labor Costand Labor Cost
Percentage

• Location
• Labor costs vary depending on where the operation
  is located
• In some markets - with lower a cost-of-living -
  lower labor costs may be offset by the need for
  lower menu prices
• The key is labor cost as a percentage of sales!

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Determinant of Labor Costand Labor Cost
Percentage

• Equipment
• State-of-the-art machines can lower labor cost
• The must be well-maintained
• Poorly-performing equipment might actually
  increase labor cost
• Layout
• Arranged to facilitate, rather than impede,
  performance and productivity
• Save steps save time - ?productivity

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Determinant of Labor Costand Labor Cost
Percentage

• Preparation HOH Labor
• Preparation rates move, theoretically, on a scale
  from 0 to 100
• The closer to 0, the lower the labor cost
• Realize, other costs will increase
• Service FOH Labor
• Likewise, service rates move, theoretically, on a
  scale from 0 to 100
• The lower the rate, the lower the labor cost

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Determinant of Labor Costand Labor Cost
Percentage

• Menu
• More items means more varied purchasing,
  receiving, storage, and issuing
• More items may mean more preparation skills are
  required
• More items may mean more stations need to be
  staffed
• More items usually leads to higher labor cost
• Balance the need for variety with the labor cost
  goals
• Balancing the cooking line
• Can increase productivity
• May lead to faster ticket times
• Faster table turnover
• Increased sales (more guests per hour and
  increased guest frequency)
• Increase in sales volume leads to a lower labor
  cost percent

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Determinant of Labor Costand Labor Cost
Percentage

• Hours of Operation
• Number of hours and day-parts open for business
• One goal is to cover overhead costs (fixed costs)
• If additional revenue gained by operating more
  shifts or longer hours is greater than the costs
  incurred, it makes sense financially
• It may negatively affect morale and wear n tear
• Cost/Benefit Analysis is required to decide

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Determinant of Labor Costand Labor Cost
Percentage

• Hours of Operation - Cost/Benefit Analysis
• Break-even for additional hours
• BE FC
• CR (CR is equal to 1-VR)
• See example on page 446
• The other part of the analysis is more
  subjective - what are the possible consequences?

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Determinant of Labor Costand Labor Cost
Percentage

• Weather
• Can affect sales volume, but the how varies
• Rain in San Francisco may decrease foot-traffic
  to restaurants, decreasing sales volume
• However, hotel dining may increase
• Staffing requirements should consider upcoming
  weather forecasts
• Importance is more critical in some markets
• However, general assumptions cannot be made
  covering all situations and all operations

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Determinant of Labor Costand Labor Cost
Percentage

• Competent Management
• Manage to the desired level of performance and
  productivity
• Knowing the goals of the operation
• Consideration of number and types of employees
  required every shift
• Knowing staff strengths finding balance between
  the rookies and the veterans
• Forecasting
• Historical information and general volume trends
• The day, the season, holidays, events, community
  activity
• Considering upcoming banquets and reservations

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Labor Cost Control

• The Control Process
• Establish standards and standard procedures
• Train and develop
• Monitor performance compare actual results to
  desired results
• Take appropriate action to correct deviations
  from standards