Article

Creating franchise-friendly supply chains

A well-managed supply chain accomplishes three vital goals that are critical to a franchisee’s operations and bottom line:

June 11, 2015

By Maryanne Rose, SpenDifference

When entrepreneurs become franchisees of a national or regional restaurant chain they’re doing more than investing in a business opportunity. They’re buying access to a well-respected brand and everything it promises to deliver to consumers – while assuming a certain amount of risk for themselves in the process – and depending heavily on the brand’s reputation for quality products to generate a profit for their own restaurants.

With that in mind, franchisees are entitled to expect that a franchisor will operate a supply chain that manages costs, mitigates future risks and delivers a consistent supply of quality products. A well-managed supply chain accomplishes three vital goals that are critical to a franchisee’s operations and bottom line:

• It delivers the right product meeting all brand and quality standards.
• The product is delivered at the right time in the correct quantity.
• The product is delivered at the right price.

Succeeding in only one or two of these goals is not an option. Price doesn’t matter if the franchisees can’t get the burger meat they ordered; timely delivery is irrelevant if the products fall below quality standards; on-time delivery of high-quality products erodes the franchisee’s profits if costs fails to come in at the contracted price or are not contracted at all.

Franchisees often feel isolated from supply chain prices. They don’t know whether the prices they’re paying are good or bad, and sometimes they have doubts that the supply chain department is working on their behalf.

Building trust

It’s a common problem, and one that franchisors must address. How do chains bridge the lack of understanding and make the supply chain program friendlier to franchisees? The first thing is to build trust with them.

Unfortunately, supply chain departments often fall far short in communicating with franchisees and keeping them informed about price changes and the volatility of commodities that significantly affect their costs. Supply chain departments should make sure that bad news travels as fast as good news and must keep franchisees informed of market changes.

On the other hand, franchisees need to better understand the function of their supply chain departments. Franchisees often monitor prices and believe they can get better deals on their own. They don’t understand that supply chain management is designed to smooth out the peaks and valleys of costs over the long term, and that the price of goods day-over-day cannot be fairly compared to a short-term deal, or to a product that doesn’t meet the same specifications. It’s also important for franchisees to know they should be looking for consistent, competitive costs and supply on a yearly basis, and that the supply chain department has strategies in place to combat excessive swings in cost.

Regular communications with franchisees about the latest developments in the global commodity market, both in supply and costs, will help everyone understand the bigger picture. When franchisees pull out of programs it hurts the entire organization’s credibility with the suppliers who built their business around the contracted volume.

As supply chain departments create strategies for the following year they must bring franchisees aboard and explain the reasons behind their decisions. But that’s merely the starting point. Throughout the year, supply executives need to update franchisees on what’s happening in the global commodity market to ease any concerns about costs and availability of products, to reassure franchisees that sudden increases in costs or shortages of products can be dealt with to their advantage. For example, we purchase cheese in the first half of the year because prices spike in the fall.

Feedback and suggestions from franchisees lead to well-rounded strategies and more buy-in. Franchisees should see themselves as part of the team. They have issues that can go unnoticed because supply chain departments don’t always know the particular needs and problems franchisees face in their daily operations. Franchisees might see something supply chain executives don’t, and it’s worth tapping into their experience. Working with franchise advisory councils is an opportunity to develop programs that achieve maximum success — especially if franchisees help to develop them.

Be flexible

Flexibility is another way to create franchisee-friendly supply chain programs. In any national or regional chain there are high-volume and low-volume performers. The high-volume franchisees often subsidize the operations of those whose sales are not as high, so it’s a smart move to reward the top performers with discounts if they exceed systemwide averages.

That said, supply chain executives should remember that they can’t please every franchisee. There will always be some who believe that their costs are too high and their products not up to quality standards, despite the best efforts of the supply chain department.

However, franchisees should insist on accountability through performance reports, essentially asking supply chain departments: "Did I actually receive the cost savings you said I would? Am I benefitting from your decisions in the long term?"

Sometimes, programs don’t work out as planned. Global commodity markets can be volatile, and there’s no crystal ball to look into and predict when that volatility will occur. Contracting is a strategy about margin management and a committed supply, rather than an attempt to get the lowest possible price. Sometimes it works out, and the wins are big. Sometimes it doesn’t. If prices rise unexpectedly, franchisees need to be informed about market changes as soon as they occur so that they know the franchisor is on top of the situation. They don’t want to read media reports about sudden cost increases, they want the news before anyone else gets it.

Franchisees and supply chain departments working together have more purchasing power than either one working alone. Franchisees grapple with numerous operational problems throughout the year that need to be solved. For supply chain departments, the goal is to become part of the solution to their purchasing needs, not part of the problem.  

Maryanne Rose is President and CEO of SpenDifference, a supply chain management firm that partners with restaurant companies of varying sizes, providing a wide array of services that manage costs and support growth.