6 Ways Supply Chain Management Supports LTO Profitability

Despite their near-universal use, Limited Time Offers bring unique challenges to chain restaurant management.

In the highly competitive restaurant business, where most markets are saturated with brands vying for the same consumer dollars, boosting same store sales with new and repeat business is a never-ending challenge. For most, the tool of choice is the Limited Time Offer (LTO). But since almost all brands have come to rely on the repeated use of LTOs, keeping them effective has grown significantly more difficult than it once was. Expert supply chain management (SCM) helps the best performing chains on both accounts.

  1. Better LTO Planning and Execution
    “Every brand has a unique culture and its own strategy for building sales,” says Lynn Serrato, the Senior Director of Client Solutions at SpenDifference. She observes that this gives it unique insights into the many different ways LTOs are planned and executed. “A well-planned LTO always has specific goals that go beyond simply building sales,” she explains. “A brand may be focused on building foot traffic, promoting a higher margin product, taking advantage of a procurement opportunity, leveraging the seasonality of its menu, or other goals.”An LTO’s primary goal is often a marketing objective, “and marketing will be the team with its hands on the wheel,” says Serrato. “But supply chain insights can inform marketing plans in ways that keep cost, margin, inventory levels and other factors aligned so they don’t eat into the primary goal results.”
  2. Alignment of Forecast and Actual Demand
    Successful LTO planning should align sales and cost forecasts with actual results and costs, Serrato says. “I’ve never seen a chain where forecasting is always on target.” Because product demand and inventory needs are unpredictable, up-front supply chain contingency planning and on-going inventory management ensure consistent product availability at a forecast cost throughout a promotion. Tight monitoring of inventory levels over the promotion also helps minimize obsolescent inventory when it ends.
  3. Contingency Planning
    LTO performance across multiple regions entails some unpredictability, and contingency planning is key to remedying that. It begins with the right distribution network arrangements and identifying backup suppliers. It also includes ways to move additional inventory to regions where sales exceed expectations and advance identification of substitute products that can be available if supplies run short. “Strong SCM contingency planning means you are ready to always capture the sale when a guest walks in the door,” says Serrato. “The best LTOs never disappoint a customer, despite unexpected problems that might arise.”
  4. Sourcing and Market Test Analyses
    The most successful chains employ strong market-testing programs that include culinary and marketing ideation along with supply chain sourcing expertise.  It’s up to culinary and marketing teams to develop winning menu concepts and promotional plans. But working concurrently with supply chain management can help them negotiate advantageous pricing and timeline availability for key ingredients, or raise red flags if trends show more volatility in those areas than expected.  “There are always external forces that can complicate market tests,” Serrato adds, pointing to commodity cycles, weather, regional and unit-level challenges. “Lack of visibility into the actual sales and inventory at the store and distribution center (DC) levels during a promotion also have a big impact on how well you adapt to regional LTO performance. “That just underscores why you have to make sure benchmarking and historical supply chain data comparisons are evaluated during market tests and demand forecasts. To improve that process, we can sometimes pull non-proprietary data from distributors and suppliers about past promotions comparable to the one being planned.”
  5. Minimizing Financial Exposure
    Regardless of the amount of market testing done in advance, every LTO launches with assumptions that may not match up with actual results. As assumptions give way to actual results, changes may be needed in sourcing lead times, shipping and replenishment plans. “If demand takes off and regional needed LTO product runs short, last-minute solutions like emergency truck or courier deliveries to unit or DC locations can wreak havoc with predicted costs and margins,” Serrato says. And if forecast demand falls flat, excess inventory stuck in local DCs can mean significant financial exposure for a brand, especially if the product has a short shelf life. The risk of such exposure can be moderated with advance lead-time planning or the addition of some centralized redistributor inventory. While that will add a little front-end cost, “it is often a very good LTO ‘insurance’ investment,” she adds.
  6. Logistics and Distribution Management
    Offering consumer value while maintaining margin relies on identifying a procurement opportunity that culinary can leverage for the menu. But a good price on the ingredient buy is only half of the challenge. The cost advantage can be lost if the other supply chain issues aren’t managed. There are advance distribution arrangements necessary to stock the product, supplier logistics to get the right amounts into local DCs, and ongoing inventory management at both store and DC level at the time of launch and throughout the promotion. “Many great culinary R&D chefs understand the dynamics of the supply chain,” says Serrato.  “They recognize distribution and slotting challenges, the problem of trying to bring in 25 new skus for an LTO. In turn, good supply chain people need to respect culinary’s role and expertise. When you have mutual respect and there is culinary and supply chain alignment, together you can move things forward quickly and get the results marketing has planned for.”

The widespread use of LTOs to sustain the multi-unit restaurant model has an inherent contradiction: the very definition of a “Limited Time Offer” implies that its availability is constrained. But no operator ever wants a disappointed (or lost) customer. “That’s a key reason why supply chain planning is so important,” says Serrato. “It may be a limited time offer, but, in reality, you have to meet demand. Supply chain management helps you find the balance and not lose money in the process.”

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