What is a Return Factor and how does it help me?

Well, this story starts back in 1974 in New York City. I was working for a McDonalds franchise and had recently been promoted to General Manager. At the same time, I was taking courses at Pace University, also in NYC. One course was Business Analytics.

At the time, McDonalds and the entire restaurant industry was just beginning to make the transition from manual cash registers to computerized POS systems. These early systems only did a basic job of calculating sales and did nothing in terms of inventory management.

So, as someone that liked to "crunch the numbers" I wanted to look for a better way. And what I came up with I called a Return Factor.

A Return Factor is a ratio of two numbers. A Return Factor is the TOTAL RESTAURANT SALES divided by the QUANTITY OF A PRODUCT. I will illustrate with 3 examples below.

First, in McDonald's, one of the hardest items to order was the different types of hamburger buns. There were Regular Hamburger Buns, Big Mac Buns, and Quarter Pounder buns. And they had a very short shelf life - a couple of days and then you had moldy buns. Not fun.

We are going to calculate the Return Factor for Regular Hamburger Buns. We will need 2 pieces of information. #1. What were the total restaurant sales for a month. #2. how many Regular Hamburger Buns were used for that month.

So, let's crunch some numbers.

Last month's sales: $315,675

Regular Hamburger Buns used last month:10,890 dozen buns (buns were ordered by the dozen)

So, the Return Factor for Regular Hamburger Buns was $315,675 divided by 10,890 dozen buns WHICH EQUALS $28.99 sales/dozen

ALL RETURN FACTORS ARE IN THIS FORMAT: SALES/ITEM

Sales are in dollars. The item package will vary. For Buns it is dozen. For French Fries it is the case. For Coke it is the 5gal container.

The return factor is always how the item is ordered. Dozen, Case, 5gal container.

What this number means is that for every $29 in total restaurant sales you would need one dozen Regular Hamburger Buns. How does this help me?

Let's say you need to place an order for a 3 day holiday weekend. Over the 3 days you expect to do $50,000 in total restaurant sales.

So, 50,000/29 = 1,724 dozen buns. That's your order!

The second example comes from my time working for Nathans Famous - the Hot Dog company started in 1916 in Coney Island, NY. (Nathan's conducts the 4th of July Hotdog Eating Contest.) The most critical item to order was the Hot Dog. And Hot Dogs were ordered by the case.

Again, we will calculate the Return Factor for a case of Hot Dogs.

We take our Monthly Sales and divide that by the # of cases used.

So, if we crunch the numbers

Previous Month's Sales $617,320

Cases of Hot Dogs used 3,585

The Return Factor for Hotdogs is $172/case

So going back to the 4th of July, we need to order enough Hotdogs so #1 we don't run out and #2 we don't have more than a day's supply at the end of the holiday weekend.

Expected sales July 4th weekend (4days) $425,000

Return Factor $172/case

We need to order $425,000/172 = 2,471 cases

I used the return factor differently in the Arby's Roast Beef restaurants in NYC. The return factor for the 10lb roast beef was $205/roast. In these restaurants, lunch was the main revenue generator. And you needed enough roast beef to last until 2pm. So, if projected sales were $5,000 from opening until 2pm, how many roasts did I need.

Well, $5,000/205 is 24 roasts you needed to cook. And since they took 4 hours to cook, you needed to get started at 6AM. We actually created a ROAST BEEF COOKING SCHEDULE that used the Return Factor to determine when and how many to cook throughout the day.