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Just in Time: Why Solidifying a System in Your Restaurant is Key to Recovery
Mark Kelnhofer is the President & CEO of Return On Ingredients, a food service consulting firm focused on cost control and stability. In this episode, he discusses why putting systems in place is important for restaurants. He shares some of the biggest operational mistakes he’s seen in the industry and the most important qualities of a successful manager.
1. For most successful restaurants, the $15 minimum wage will not be an issue. Successful business have already been paying well above that rate to attract and retain the best talent in the business.
2. MBE, or Manage by Excel, is not a sustainable process. What you need is a system that works with you in the long-term so you can have trustworthy data that can actually benefit your business operations.
3. The success of future restaurant leaders, especially managers and operators, will be contingent on their ability to be analytical.
Mark Kelnhofer: We're going to see a greater need for the preparation of managers or emerging managers.
Blakeslee Palmer: Inspirational stories, actionable business tips and real-world strategies. Join us as today's guest shares how you can make your business more resilient in an unpredictable world.
Matt Levin: Hi everyone. I'm Matt Levin and you're listening to The Resilient Restaurant podcast.
Today I'm joined by Mark Kelnhofer, CEO of Return On Ingredients, a food service consulting firm focused on cost control and profitability. We'll be discussing the benefits of assistance first approach and restaurant management, some of the biggest operational mistakes that operators make over and over again, and the most important qualities of a successful operator.
Mark, thank you so much for joining us today.
Mark Kelnhofer: I'm happy to be here and it's a great topic and I'm looking forward to participating.
About Mark Kelnhofer
Matt Levin: So just to start, can you give us a quick rundown of your background and how you got into consulting for the hospitality industry?
Mark Kelnhofer: I have a managerial accounting background, so I actually worked in several different manufacturing operations when I got out of college and I ended up getting a call one day to work for a restaurant company. And when I went over there to work, what I find out real quickly, it was that they really had not a clue what their cost was and, traditional managerial accounting tools that I would see in manufacturing, I didn't see it at all. So I actually got into the restaurant industry from an introduction from a previous CFO, and that's my first step was with Bravo Brio Restaurant Group. And again, I saw that there was so much opportunity there.
I ended up putting systems in place and I was able to reduce their costs line five consecutive years in a row. So what that kind of told me at the time was that there was something to this approach. Let's look at the managerial cost accounting approach and apply it to an industry where it's not in place. So I started Return On Ingredients in 2009 with that same managerial accounting approach. And I've been doing that since then. I've had in the past hotels, casinos, cruise ships, and restaurants, catering you name it.
The goal for all this is not only to provide them a solution, but it's actually to reduce that failure rate. And everybody knows the restaurant industry failure rate is quite high. In 2012, I created a restaurant institute. Which is an educational component. It really promotes what we're doing with Return On Ingredients. And so currently we have our own conference, we have a quarterly publication, we have several books published under that name as well, and we're looking to launch a hospitality leadership training component later this year. We have a lot going on between the educational side, as well as the consulting side, but all focused really on improving costs identification, improving cost controls. And obviously we want to drive cash and profitability.
Hospitality and Restaurant Industry Assessment
Matt Levin: So you certainly have an interesting vantage point on the industry. What's your assessment of the US hospitality and restaurant industry right now as of June 2020/2021? Where are we at in terms of recovery?
Mark Kelnhofer: I can make a comment towards that, which is, I think what operators are doing at the moment is that they're being very cautious as these volumes are increasing, they're being very cautious about how far they really want to open. I have a client here in town where they used to be seven days a week, lunch, dinner prior to the pandemic and are slowly but surely opening up the lunch a day part.
They have to be careful about staffing, being able to service the guests at a high level of high quality and flavor and consistency and all that. We are starting to come out of this, but there's a lot of things that operators are still a little worried about. One is the labor shortage, obviously. I really think it's two things: It's not just the extended unemployment, that certainly could be one reason. But the other reason is that during the pandemic a lot of people left the hospitality industry and went to other industries. And so they are not coming back to the industry. So I really think that that is also part of the problem why we can't get the proper staffing in place.
The labor piece of it is still going to be a problem. I think the cost for that labor is going to go up. I've always said, I don't think the $15 minimum wage is really an issue because everybody that I've worked with on the client's side, they're already paying more than that to try to attract the quality person.
In addition to that, we always know that commodity costs are constantly an issue. It's very difficult to manage that because costs are changing every week. And I don't think, when we talk about recovery, most will tell you that they really don't think their recovery’s going to happen completely until maybe six months, nine months down, down the road yet.
Industry Labor Shortages
Matt Levin: So it's not necessarily wages, then what's holding back the hiring?
Mark Kelnhofer: Well I think it's the first piece of it. I think it’s really finding a quality person. There are a lot of people that did leave the industry, but when we're trying to find somebody to replace those people, it's difficult to find somebody that's quality. I think it's going to take a while to fill that gap. I think there are so many jobs out there right now just because the volumes have gone up significantly so quickly, I think it's going to be some time before we see the pool of candidates actually increase.
You know, again, it might be another six months down the road before we actually see those slots after extended unemployment is done, and when we get more people into the industry through the university programs that we can eventually fill slots the way we traditionally were used to.
Biggest Operational Mistakes
Matt Levin: Let's pull up a little bit at the macro level. When you look across all different types of operators, what’s consistently the biggest operational mistake that you see them making over and over again?
Mark Kelnhofer: A lot of times what I see is an intentional overproduction in amount. Part of that is because the chef doesn't want to run out of food, obviously. The last thing he wants to tell a guest is “no”. So they overproduce and sometimes in great quantities, but the problem with that is that as soon as you produce something, the safety time clock starts going right. And the shelf lives are limited. So that product they produce might last three days, might last two days, it might last only a shift. So if overproduce, in many cases, it just opens up the inefficiency where they're wasting product.
Just by doing a simple walk through the cooler, you can get a story. Yesterday l walked through a cooler and I was amazed. There was hardly any inventory in that cooler. And he said, “No, this is perfect because tomorrow we're getting our shipment. This is where we are at all the time.” That's really what it should be. It’s almost like a “Just in Time” scenario where the cooler has a minimal amount of inventory there when the next order comes in. Outside of that, there are certainly other areas where we can save costs too, but I would think that's probably the biggest area.
Matt Levin: So this challenge of overproduction and not managing inventory levels appropriately, do you find this to be a consistent problem across operations of all sizes and all types? Or is it something that pops up only in certain businesses more than others?
Mark Kelnhofer: Chains typically have systems in place, but they may or may not have the tools for the production side or the ordering side, so that it's still sometimes done very manually with manual pars. But if you get into smaller emerging chains, couple of locations, mom and pops, they typically, and I use this acronym all the time: MBE, Manage By Excel, which means it's a very manual process, too. It's not really a supply chain management system, but it certainly is a tool they can attempt to use.
It's just that there's a lot of opportunity with accuracy and potential garbage in, garbage out on formulas, things like that. So I do see it. I have seen it with all different size companies. I've even seen a chain with 50 units, not have cost control systems in place. And I know that the potential could be there that even a large company really still doesn't have a whole lot of controls in place, which means they're probably leaving some money on the table, even though they've survived all this time, they probably, with cost controls, could be more profitable and actually increase more cash, so the opportunities are across the board, too.
The Importance of Systems
Matt Levin: What's the closest thing to a silver bullet for getting this under control? Is it an equal mix of software and process and people, are there some tax or shortcuts, or is it really a holistic and systemic kind of approach that needs to be implemented?
Mark Kelnhofer: I'm a big advocate for systems. I really believe that MBE is kind of the cheap way out and it's not really going to give you all the data you're gonna need to really reduce percentage points the way you want them to reduce.
So a system, some type of system, needs to be in place, but at the same time systems are data and you do need the personnel to understand how to interpret the data. So we’re talking about variances and things like that. There is still an educational component there where we have to train our managers how to interpret the data that we get out of systems.
I think you need to have systems, but I think you also need to have the right people in place to actually react to the system. If you're not using the data to react and make improvements, because at the end of the day that's what it's all about.
It's not just about cranking out numbers. It's about learning what those numbers mean, being able to react and come up with a plan to actually perform better. The last thing you want is the system generating data and data just sitting there.
Cost Management and Supply Chain Management Lessons
Matt Levin: Do you think there's been any lessons broadly learned by the industry during the pandemic in regards to cost management or supply chain management? Were operators forced to put new systems in place in a sort of trial by fire kind of way?
Mark Kelnhofer: During the downturn for restaurants, I don't think any of them really were thinking about systems during that time. They were thinking “how are we going to survive?” Now that the volumes are starting to increase, what I'm seeing on the consultant side is they're finally coming around where “We've got to have systems in place now. We survived the pandemic, our volumes are increasing. We’ve got to control things a lot more tighter now.” It was a wake up call so to speak.
Systems are a key component to operating the business properly. I think that now that they're getting out of this pandemic, it's gotta become a focus.
Qualities of a Good Leader
Matt Levin: One thing you've mentioned a couple of times is the people component to all of this. Is there some sort of profile that you've developed over the years from operators that you seem to be successful with failure? When you meet somebody and you kind of know right away and say, “yeah, this person is definitely going to figure it out and be successful” versus someone that says, “Ooh, you know, this person's really gonna fail or likely to fail”?
Mark Kelnhofer: It's interesting you said that because I've been to clients before where I will talk about the importance of cost controls and costing and profitability and all that. And then generally speaking, I can tell pretty quickly whether or not they understand. If I get a lot of head-shaking up and down and they actually participate in the conversation, it tells me that they know exactly what I'm talking about. There are times where I'll be in front of somebody and you know what, they really have not been exposed to things like this.
One of the reasons why Restaurant Institute’s developing this hospitality leadership program is that what I see in quite a few cases is: as restaurants want to promote from within, which is ideally they want to retain their good employees, but a lot of times they don't have the mechanisms to prepare them for management.
And whether it's soft skills, communication, HR, there's all kinds of other components to the operation that they need to be exposed to, but certainly understanding the importance of being able to analyze a P and L statement, being able to understand the data from different systems. We need to make sure that we prepare our personnel that we want to promote from within to become really good managers. I think maybe as we get out of this pandemic, I think what you're going to see is not only is Restaurant Institute going to provide that type of training, but I believe that you're going to see others as well potentially getting into that arena too, because there's going to be a great need.
I've met several restaurant companies, believe it or not, with quite a few locations that during the pandemic, they completely furloughed their training department and they're not coming back. They actually said, “we're not going to have this training department again, we're going to externally find a vendor to provide that information.
So I think we're going to see a greater need for the preparation of managers or emerging managers. And a lot of it's going to be contingent on their ability to be a little more analytical. They don't have to be an accountant, but what they do need to know is how to really read and interpret some basic data, whether it's on the income statement, balance sheet or through a system, there are some key components of data that they're going to need to know.
So they can't have a fear of numbers and they’ve got to understand how to communicate and talk about numbers as they become managers. And I think that's really one of the biggest traits that they should have. It doesn't mean that they always have it when I go into a client. Sometimes it takes some time for me to educate them so that they understand what the goal of the system is.
Matt Levin: One of the other parts of this kind of holistic systems approach and talking about getting away from MBE is thinking about the technology component. Are there any tech trends that you're excited about right now?
Mark Kelnhofer: In terms of what I see out there, I see a couple of things. I see -- kiosks obviously are becoming big where people just come up and they put their own order in, they settle their own check, and submit the order. I see that in quite a few applications. But, believe it or not, I'm also starting to see quite a bit -- if you ever do a search on YouTube, just look up “robotics for the restaurant industry” -- and what you're going to see is that it's a growing segment where there is a lot of technology and robotics coming into play.
And obviously it's cost savings. That's ultimately what they're doing when they do robotics. And I've seen some pretty amazing demonstrations of robotics to the point where some of the robots that I've seen use are very ambidextrous and you're very human-like in their operations. So I think that potentially what we're going to see is we could have more and more automation, more and more robotics out there to help actually produce the product at an efficient amount.
I have seen some 3D food printing. I don't think we're there yet. I mean, the demonstrations I've seen so far on that, which is print on demand, have been for like small desserts or things like that. So will I get refined and become better? Yeah maybe. I really think that the industry is going to see some of these evolving technologies come through and I think it's probably going to be a growing segment.
Matt Levin: So it seems to me also there would be kind of an unequal distribution of that kind of technology. Physical hardware of course, is a big investment, typically more so than software, especially when it comes to robotics. Do you think you're going to see bigger chains having an even bigger advantage over those that can't make that type of investment?
Mark Kelnhofer: Certainly if they have the robotics in place and they're able to reduce costs and increase efficiency, the larger chains that have the bigger pockets and then the ability to invest in that technology, they certainly have an advantage, but I do see that smaller companies can still have a very profitable concept, but they still need to have cost controls in place, because at the end of the day I think that if your goal is to make this a successful concept in business that the cost controls really should be there for you to optimize what that profitability and cash is going to be.
If your goal is to have this as a hobby, you're in the wrong business, right? It's one of the most expensive hobbies you can get into and typically people who are in it for that reason, they typically fail, right? They don't have the cost controls in place or the systems in place, or they don't know about the full operation.
I think it's all about also the quality of the product and service you provide. If you really want to become a large chain, if that's your goal, I think that you're going to have to make sure that you're consistent with the quality of the products that top-notch and the services there, and combined cost controls, I think that that's really the key to becoming a chain.
Advice for Operators
Matt Levin: If you had to pick just one thing that operators should do that would have the highest leverage impact on their business, what would that be?
Mark Kelnhofer: Being able to operate and manage every aspect of the businesses is incredibly difficult. And in order for you to really truly succeed, you do need to have systems and processes in place for you to be able to really optimize what that profitability is going to be. Entrepreneurs in many cases, just because they are an entrepreneur, don't know when to ask for help. We cannot be professionals at everything. And I tell restaurant operators this all the time.
I mean, when you're looking at technology and accounting and staffing and HR and all these things, is that the good entrepreneurs know when to ask for help and they're going to have to figure out over time when to ask for help. And I think that's probably the biggest thing I see is that those who are successful over time, they knew the proper time when to ask for help in what areas so that they could actually move forward with the growth plan that they have.
Matt Levin: Last words of wisdom or advice? Maybe your number two piece of advice for folks?
Mark Kelnhofer: Again, I'm a big proponent of systems. If I could give any advice, it'd be definitely make sure you look into the variety of different systems that are out there and vet them. That's the biggest thing. Sometimes what I see is that operators will make an investment in the system and it just sat on the shelf. And so, they really need to make sure that when they're looking at a system, they need to vet it properly and how compatible it is with their other systems that they have in place.
But it is not a small dollar decision here. Typically when we're looking at an investment in systems, there's some significant dollars tied to it and we want to be careful about those decisions to make sure that the systems are going to give us the tools that we need. Again, I'm very big on technology and systems to help operate the business and the entrepreneur is going to have to know how to use those systems and react to them.
But the vetting process is one that they must do. They shouldn't just jump into a system because they need to do some homework about the system and find out its true capabilities, what it can do, and in some cases what it can't do.
Matt Levin: Awesome. Well Mark, thank you so much for joining us today. This is a ton of great insight into the managerial mind of a successful restaurant operator. Thanks again.
Mark Kelnhofer: I appreciate it. It's been a great 30 minutes here, so ask me back again anytime.
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This podcast was produced and edited by MarketMan. Music by Joseph McDade.