How Supplier Relationship Management Creates Value for Restaurant Brands

Once the low-hanging fruit has been harvested, restaurant chains’ efforts to protect their margins and drive customer value can become increasingly difficult. SRM strategies offer an alternative way to enhance the bottom line.

Chain restaurants have traditionally relied on marketing and promotional strategies to grow sales while depending heavily on volume-based procurement leverage to cut costs.

But as the competitive landscape has intensified, brands that rely only on price-based supplier relationships find that this approach quickly reaches a point of diminishing returns. Alternatively, embracing SRM strategies can result in sustainable value.

Moving beyond Price
SRM—Supplier Relationship Management—strategies are a recognized way to move beyond price centric supply chain relationships. With SRM, the emphasis becomes one of reducing a chain’s Total Cost of Ownership.

  • Reduction of operational and transactional inefficiencies
  • Leveraging supplier Chefs for menu innovation and optimization
  • Partnering to shorten lead times for LTO’s and menu changeovers
  • Development of custom tools and dashboards to manage short and long-term exposure

A Change in Focus

With SRM, the emphasis is on creating mutual value for both a brand and its suppliers. Companies that embrace SRM become ever nimble at developing and rolling out new offerings, continuously improving operations, negotiating stronger procurement contracts and obtaining favorable distribution and logistical terms.

The benefits of this change of focus are well established. White papers from leading professional services companies like Price Waterhouse Coopers, Deloitte and others go into great detail about how SRM can give companies a better “big picture” understanding of where competitive advantages can be had and costs can be reduced across an organization.

In practice, SRM requires that a restaurant brand adopt a different approach to the way it interacts with key suppliers. Rather than emphasizing transactions, the focus is on creating trust, open communication, information sharing and collaboration with a strategically limited number of trading partners.

SRM Best Practices
Successfully adopting the SRM model requires both operational and cultural changes in an organization. On the cultural side, it requires inter-company collaboration and information sharing, and on the operational side, core tenets include:

Adoption of a centralized data platform.
SRM requires detailed tracking of all vendor and supply chain data—item specifics, purchase orders and volume, delivery and pricing data—in a centralized location.  Avoiding organizational silos improves coordination and reduces costs.

Strategic consolidation of suppliers.
With information centrally housed and accessible, a brand can analyze the full costs of product acquisition to reduce the inefficiencies of dealing with multiple suppliers for similar items.

Frequent and Effective Communications.
Companies committed to SRM put processes in place that ensure regular meetings are scheduled to review line item performance, culinary and food price forecasts.

Process Ownership.
Effective implementation of SRM also requires that brands clearly identify individuals within their organization who will be tasked with “owning” each strategic relationship.

Embracing the idea that Supplier Success is Your Success.
Partners in an SRM relationship recognize that the business success of each benefit both. In contrast, companies where this is lacking, frequent churning of suppliers increases the total cost of ownership.

The value of a shared supply chain service provider
A partnership with a shared service provider such as SpenDifference can help you capitalize on all the benefits of SRM to help you compete more effectively in an ever-challenging business environment.  To learn more, talk with one of our Supply Chain experts.

 

 

Why a Redistribution Strategy Can Pay Off for Restaurant Brands

Redistribution options are becoming a key strategy for ensuring continuous availability of brand-critical restaurant chain ingredients.

When Taco Bell ran short of tortillas in many regions of the country in July 2019 – disrupting sales and generating national attention ­– it underscored how critical a usually invisible supply chain is to successful restaurant operation. Similar problems are all too common among restaurant chains, even though they seldom get that kind of attention.

“In some ways, ensuring that the right amount of product, at the forecast price, is always available when and where a restaurant chain needs it, is tougher now than it has ever been,” says Curt Small, Senior Distribution Manager for SpenDifference.

That’s partly due to the changing dynamics of today’s foodservice landscape, he says. With every member of the supply chain – from supplier to distributor to operator – looking to reduce the amount of inventory it keeps on hand, so-called “safety stock” is becoming a thing of the past. Add to that the short-term inventory needs caused by most chains’ near-continuous use of limited time offers (LTOs). And then consider distributors’ growing capacity constraints as they are asked to stock an ever-larger variety of ingredients to satisfy consumer tastes.

The Redistribution Option

These trends all contribute to unexpected product shortages and drive more chains to include redistribution options in their supply chain agreements. In the right situation, redistribution can be a flexible tool that helps chains better manage critical product inventory levels while minimizing freight costs. It can also be beneficial in other areas, like:

  • Managing promotions and new product introductions
  • Expanding into new markets
  • Achieving lower overall delivered freight costs
  • Gaining access to lower-velocity specialty products
  • Dealing with unexpected supply interruptions

Essentially, redistribution involves arranging to have key inventory stocked by a 3rd-party “master” distributor that already has relationships with a chain’s primary distribution centers (DCs). The redistributor maintains additional stock for selected items that may need to be replenished outside of a DC’s normal delivery schedules from suppliers.

Most DCs receive deliveries weekly or more from a redistributor already. That’s because the sheer number of items a DC is required to stock almost always means it will regularly run low on some products that need to be replenished while it waits for its next scheduled full truckload shipment from a given supplier.

The redistributor serves as an inventory “buffer.” When a redistributor assembles a local DC’s order, it consolidates a wide variety of items to make up a full truckload. On short notice, it can move smaller quantities of product to regional DCs at close to the “full truckload” pricing and landed costs that are specified in a chain’s national distribution agreement.

This offers very significant freight cost savings compared to the alternative – direct ordering less-than-full-truckload (LTL) quantities of needed products from a manufacturer at much higher freight and handling rates. Such replenishment options are especially critical for products and specialty items that don’t come from manufacturers from which the DC receives frequent deliveries.

Making Sense of Redistribution

“The challenge is that forecasting demand is not an exact science,” says Small. “Redistribution is not a miracle solution—it is only a tool. But in the right situations, it adds a lot of value by streamlining product velocities and dramatically reducing the costs of LTL deliveries.”

Another plus? “A redistributor can analyze and report the chain’s true inbound and outbound costs, and what the total landed costs should be by SKU (individual item), says Small. “This added transparency helps reveal costs previously hidden in the supply chain so they can be minimized.”

And while arranging for redistribution of key products does add some costs, he says these can often be offset by the avoided costs that would otherwise be entailed, or by the lost sales a chain would experience from running out of key items.

That’s important when specialty items are needed for LTO offerings or new product introductions when regional demand varies and may be higher than forecast. It can also happen because of manufacturer supply disruptions or in newly opened territories, where demand for key products isn’t high enough to justify large inventories at regional DCs.

Consider the Advantages

Beyond improving the efficiency of the supply chain, redistribution offers other advantages that aren’t immediately obvious.

For example, “LTO management is often greatly improved by redistribution,” Small says. That’s because it allows for “nimble movement” of a chain’s LTO inventory to where it is needed, without building up excess inventory at the DCs.

When LTOs wind down, redistribution facilitates drawdown and disposal of any excess inventory that remains. And if supply interruptions occur for whatever reason, the use of a centralized redistributor can help a chain control the movement of limited available product supplies and recover from the interruption more quickly.

Culinary R&D also benefits. Because new menu development can require brands to source low-volume specialty products that are hard to place in regional DCs, “redistribution lets a chain obtain distribution of these products when they might not be able to otherwise,” Small says.

“The same dynamic helps to stabilize the cost and supply of brand-critical products in new markets, where low unit count demand would otherwise make that difficult.”

Reduced Operating Expenses

Finally, in an era when improving product velocity and reducing costs are priorities at every level in the supply chain, redistribution can improve the working relationships a chain has with the suppliers and distributors it relies upon.

“When redistribution is an appropriate strategy, it offers trading partners a reduction in stock levels, purchase orders, dock appointments and the paperwork associated with accounts receivables and payables,” says Small. “These represent real operating expenses born by the supply chain partners, and ultimately, by the restaurant brands themselves.”

To further explore supply chain management, read Supply Chain Optimization: What It Is and Why It’s Important. Or to speak directly with a supply chain expert, please contact us.

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.”

To optimize your supply chain for profitable LTOs, please contact us here.

How Timing Dictates Profitable Food Purchasing

A surprising number of supply chain factors can affect when, how and at what price contracted food purchase decisions are made.

In the restaurant business, as in one’s personal life, timing is everything. That goes for refreshing a menu, scheduling a promotion or kicking off an ad campaign. And it’s especially true in supply chain procurement planning when management is making decisions that may affect the price and availability of key ingredients—and a brand’s menu profitability—for months or even years into the future.

To everything there is a season
Supply chain managers use specialized tools and insights to identify where key commodity prices may be heading, then employ customized strategies for how and when to capitalize on that knowledge. And while most operators are aware of the broad commodity forecasts that are released each year, fewer are familiar with the annual and seasonal cycles that often drive those forecasts, or which indicate the best time to take advantage of them. Some of these cycles affect the supply side and are weather and agriculture-related; others involve various kinds of demand in retail, foodservice and import/export markets.

“You have to time your buys,” letting out contracts well in advance of predictable demand patterns, says Bryce Anderson, Senior Director of Category Management for SpenDifference.

As an example, he explains that retail grocery demand for ground beef and steaks typically peaks in the summer, driving prices up and making that the worst period for putting out restaurant contracts for these items. “Many specific cuts of beef, pork and other protein have their own seasonal cycles at different times of the year,” he adds.

Procurement specialists closely observe other factors as well, such as average cattle herd sizes and feed price trends, which can have longer-term effects on center-of-the-plate protein costs. “If you need to buy on the spot market, cattle weight variances can also be a factor,” Anderson says. “Typically they are heavier in the winter, but in a cooler, wetter summer, weights will not drop as much as usual and will increase supply.”

An exercise in constant refinement
Grain and dairy markets follow their own cycles. Demand for dry nonfat milk from China can mean lower butter prices in the U.S., for example. The release of spring planting reports in June and July are watched carefully as trend indicators, notes Amy Smith, another senior category management director who specializes in these areas at SpenDifference.

“We follow data like planted acres of corn and soy, whether crops went in early or late, how weather is affecting field growth along with other factors that affect expected yield,” she says. Such information is combined with data like beginning grain stocks, estimates of import and export demand, ethanol market demand.

Sometimes “we see a lot of market noise when the big USDA reports are released,” Smith notes, indicating that single reports are only one part of a complex picture. Updates and price forecasts are constantly being refined until harvest, even as speculators jump in and out of the market, complicating demand and price forecasts.

Winter wheat follows different cycles, with fall planting and spring harvests. Grain production in South America, at the opposite time of the year of that in the U.S., is another factor. And in the course of a year, the spot and forecast prices of some commodities can vary significantly as the specifics in international supply and demand become known. Such factors are very hard to predict as “countries like China and Russia are quite savvy about keeping their own internal production numbers close to the vest,” says Smith.

Cycle disruptions and risk factors
Category managers also carefully evaluate how large meat and other processors are reacting to the same trends: for example, the percentage of their feed grain purchases that are contracted for in advance vs. the percentage to be bought on the spot market as a potential price hedge.

There are also external factors like the current international “tariff wars” or the spread of swine fever in Asia that can disrupt traditional cycles, as is happening right now with pork demand patterns from China and Mexico, Anderson says. That often means trying to evaluate the direction in which prices and supplies are going before a trend is completely clear.

While it may seem that pricing trends are firmly established for the coming year when broad category supply and price forecasts are released, the truth is that these are constantly moving targets with significant variations that occur all year round.

When the timing and price are right
So, how does one know when to make purchasing commitments? Expert supply chain trend forecasts can help answer this question, but they are most useful in the context of strategic relationships developed with key suppliers, Anderson says. “In most cases, they are looking for large volume commitments that can help them with their own planning.”

Then, depending on whether a market is forecast to go up, down or remain flat, buyers will negotiate the best terms given a chain’s specific needs and market strategy. That can mean block buys by quarter, by year, month-to-month using trailing price averages, or other terms. Operators need to know that at any given time during that year, spot prices may be higher or lower than the contracted level. There is risk in over commitment and in under commitment, Anderson adds.

Ultimately, “It’s critical to work with supply chain management well in advance and on a regular basis, so potential risk levels can be understood and managed as well as possible,” says Liz Longstreet-Darr, Vice President of Client Solutions for SpenDifference. “Brand management needs to understand where prices are headed and what the possible variations are.” Regular reviews allow brand management and supply chain management to optimize the timing and strategy for major buys.

“That helps chain management know where they can take pricing and where they can’t,” she adds. “Such understandings can have major implications for menu items that are critical to the brand, as well as those that may be key to promotions offered throughout the year.”

To see firsthand how a supply chain partner like SpenDifference can get the timing right for planning out new menu items, read How a Commodity Sourcing Forecast Sets the Stage for a Top-Grossing LTO. Or to speak directly with an expert at SpenDifference, please contact us.

What Restaurant Brands Can Learn from Supply Chain Giants

The chain restaurant business model is considerably more complex than many people imagine. Restaurants operate both as regional or national retail service providers and as small, local manufacturing operations. This dual role puts unique demands on a brand’s supply chain processes.

A chain must source both raw commodities as well as processed and proprietary food components; and these must be reliably stocked and delivered to many dispersed locations by multiple third-party distribution centers. Ingredients are very price- and specification-sensitive, since variances have an immediate impact on food consistency, costs, margins and promotional plans. Additionally, menus often change seasonally and promotionally, and local inventory needs are constantly shifting.

Coping with such fluctuations makes effective supply chain management critical to a brand’s profitability. To effectively manage them, multi-unit executives can learn valuable lessons from supply chain giants like Apple, Amazon and Walmart. While no single supply chain model will fit the unique needs of a given brand, management does well to study which aspects of these best-practice supply chain operations can be applied to their own businesses. Here are some key points to consider:

  1. Managing Inventory
    If there’s one over-riding characteristic companies like Apple, Amazon and Walmart have in common, it is a sophisticated approach to inventory management. Carrying excess inventory increases costs, but running out of inventory can hurt sales, brand reputation and create its own additional costs. Walmart was a pioneer of strategies to avoid both problems, largely with a system in which it collaborates closely with suppliers in demand planning and forecasting, while also managing an inventory replenishment system that employs constant, real-time data sharing from one end of its supply chain pipeline to the other.
  1. Building Secondary Supplier Contracts
    Strategic supplier contracts are important, and so is having secondary suppliers to help mitigate the risk of dependency on a single source. Apple designs products that share component parts and sources, giving it greater volume with which to negotiate the best pricing from key manufacturers. Its supplier partnerships involve close collaboration on new product development so that the interests of both parties are served. This also gives Apple more input into the manufacturing process for proprietary components and specifications. On the commodity side, Apple develops long-term raw materials contracts to obtain better pricing stability and supply security.At the same time, Apple ensures that it has relationships with alternate suppliers for key components and manufacturing facilities. This strategy was underscored recently when Apple announced it already had plans in place that would allow it to relocate all its Chinese mainland production to other areas if necessary. Such diversification reduces the risk of supply chain disruptions and allows for increases in production capacity if customer demand exceeds forecast. On the sourcing side, it provides negotiating strength, since multiple suppliers will sometimes compete for more of its business.
  1. Using Logistics as Leverage
    The biggest retail players take advantage of all the negotiating leverage their volume represents. But they also know that F.O.B. pricing is only part of the picture. To maintain the cost advantage they’ve negotiated, companies like Walmart and Amazon have invested heavily in systems to evaluate and optimize logistics, tightly managing the costs associated with moving product from their suppliers to their distribution centers and retail stores. Oversight of inbound freight costs, re-distribution options and opportunities to consolidate orders help them build and maintain margins before product is distributed or stocked.
  1. Outsourcing Selectively
    Outsourcing can provide needed expertise and resources at a lower cost than trying to do it all in-house. One of the keys to Apple’s 1998 business recovery was Tim Cook’s decision to outsource much of its in-house manufacturing so that Apple could focus on its core strengths—design and marketing. Amazon has adopted a similar strategy that relies on its third-party vendors to fulfill orders placed through its online marketplace. Strategic outsourcing reduced both company’s inventory carrying costs and achieved greater efficiencies. For restaurant brands, supply chain management itself can often be profitably and effectively outsourced to shared service providers.
  1. Managing Distribution
    Tight management of distribution costs – by working closely with distributors to manage the cost of stocking and warehousing products – is critical to profitability. In the course of its 1998 business turnaround, Apple famously reduced the number of products it offered consumers and the number of unique components it required to build those products. Design work emphasized components that could be used in multiple products. That helped Apple simplify warehouse inventory requirements, improve throughput and optimize its supply chain.
  1. Tracking and Analyzing Data
    You can’t manage what you don’t measure. This timeless advice from Peter Drucker is nowhere truer than in supply chain management. Walmart was one of the first major retailers to show how sophisticated demand forecasting and inventory tracking could improve service levels and augment logistics to reduce costs. Having the right metrics in the right reporting format provides visibility in real time across its procurement, warehousing, distribution and retail network. It also provides real time data to keep key suppliers and distributors in the supply and demand management loop, so production schedules can be adjusted as necessary to match changing product needs.
  1. Implementing Technology
    Finally, all of today’s best-practice supply chains employ high levels of technology in order to achieve the level of reporting outlined in the previous step. Technology makes it possible to track and monitor sourcing and distribution contracts, inventory levels, logistics costs, distribution service levels and all of the other factors critical to managing the supply chain. Investment in the right technology to monitor supply chain activity and generate reports customized for the oversight needs of chain management is essential to strengthening and growing any restaurant brand.

For more supply chain best practices, read our 10 Keys to Effective Supply Chain Management. Or to better understand how a supply chain partner can streamline supply chain processes and increasing profitability, please contact SpenDifference.

Supply Chain Optimization: What It Is and Why It’s Important

A restaurant’s supply chain is never static.
Optimization strategies keep it forward-looking and efficient.

Supply chain optimization is a matter of human oversight and intervention, always focused on achieving best case results. It is the constant adjustment for always-changing supply and demand, product costs, distribution and operating factors. Unfortunately, there is no automatic solution to this complicated system. Supply chain managers use specialized tools, customized contracts, strategic cost forecasts and procurement hedges to balance the various tradeoffs needed to compensate for those changing factors in a restaurant chain’s business model. Optimization requires supply chain managers to be forward-looking and prepared to make adjustments for likely future conditions, not just reacting to what is happening in the here and now.

Every restaurant brand has its own distinct priorities and issues that require specific supply chain optimizations. For some, rapid product development times and speed to market are key strategic goals. For others, competitive pressures make product cost management the top priority. And for still others, custom sourcing and logistics support for ongoing marketing initiatives top the list. Other factors like proprietary ingredient needs and regional unit density variations require their own, custom supply chain arrangements.

That’s why supply chain optimization inevitably means balancing tradeoffs rather than implementing fixed or cookie-cutter solutions. “You can’t do this with an all-purpose market basket analysis,” says Liz Longstreet Darr, our Vice President of Client Solutions. “A brand needs to look at its purchases on a line-item basis, understanding both the category trends and the specific item variables.” For instance, food price forecasting always entails some uncertainties, and efforts to optimize a supply chain require that those uncertainties be hedged to the best degree possible.

She adds that “tradeoff decisions can’t be made in a vacuum”. Ultimately, they must be made by brand management that is informed with the real-time data and forecasts needed to evaluate tradeoff implications. “Our customers must manage the present, plan for the future and protect their margins in an environment where food and logistics costs and other risks are in constant flux,” she adds.

An optimized supply chain supports marketing initiatives and top-line revenue by ensuring that new products required for promotions are tested, in stock throughout market regions, and ready for timely promotion roll outs. “Optimization provides critical input for strategic business planning.” “It helps brand management focus on the big picture to achieve results.”

A forward-looking supply chain can help a restaurant brand evaluate and develop contingency plans, secondary sources and business plans able to cope with potential risks, like the African swine fever outbreaks that are now spreading through Asia and affecting global pork supplies.

It also helps restaurant organizations cope with the changing nature of distribution networks. As distribution centers look to manage their own financials by reducing inventory levels, supply chain management monitors their performance and keeps them apprised of ongoing changes in regional demand so that out of stocks, especially of critical items, are minimized or eliminated.

But optimization is not only about mitigating risk—it’s also about finding opportunities. When restaurant management can more accurately evaluate the factors affecting the product mix specific to a brand, Darr says,“then they can actively work to mitigate headwind issues and take advantage of the tailwinds” with marketing, menu and promotional strategies. That may mean working with suppliers to take advantage of under-utilized capacity or to augment specific product demand of other companies to lower production costs.

While supply chain optimization is not an automatic process, entrusting it to a strategic partner can keep restaurant chain decision-makers apprised of all of the necessary input without having to spend valuable time mining for this information themselves. “Managing the supply chain for our clients means customizing an approach based on the strategic priorities each brand sets for its business… Our role is to keep the brand team informed with the intelligence it can use to evaluate where it may need to make changes in future menu pricing and where it won’t,” Darr says. “It requires the kind of forecasting that can help protect menu margins in future promotions”.

Could new opportunities help improve the results of your restaurant brand? Contact us to learn how SpenDifference can assist in optimizing your supply chain systems.

7 Ways Supply Chain Management Can Help Your Career

Supply Chain Management (SCM) is a discipline that is not always top of mind for some people in the restaurant industry. They know it’s important, but just don’t see it as particularly relevant to their own career or area of expertise.

That’s partly because foodservice management traditionally emphasizes customer satisfaction and the consumer experience, relying on them to drive the top line and repeat visits. But while these are critical, it is often SCM behind the scenes that drives a brand’s operational efficiency and bottom line.

That’s especially true in our current landscape where food commodities are sourced globally and where purchasing, transportation and logistics costs can make or break a brand’s profitability. SCM touches and has implications for every part of a restaurant business. And it doesn’t matter if your company manages its supply chain with dedicated internal specialists or, as is increasingly common, partners with an SCM service provider.

Whether you’re in Culinary, Marketing, Operations or have some other role, making an effort to better understand how SCM works in your company can help you do your job better, build more successful teams and position you for advancement. Here are seven important ways your business skills (and career potential) improve when you apply SCM insights to them:

  1. You Improve Your Understanding of Market Dynamics
    Supply Chain Management generates actionable data that lets you see more clearly what is happening concurrently at all levels of a business. Better data means better decision-making. It allows better management of supply and demand and lets one tackle problems or take advantage of opportunities in real time.
  2. Your Project Management Skills are Enhanced
    Career opportunities are always enhanced for those able to demonstrate strong project management skills. Because SCM analyzes how actions in one part of the business affect another, understanding its principles makes it easier to coordinate resources and people across an organization and to keep them focused on project objectives.
  3. You Become Better at Assessing Risk Management
    Risk exists in every part of the restaurant business, whether it comes from price and promotional competition in the marketplace, an unexpected food recall, or the vagaries of food costs due to bad weather or harvest shortfalls. When marketing works more closely with supply chain managers, they can jointly develop contingency plans in case consumer demand slows or food cost increases affect LTO profit forecasts.
  4. You Strengthen Your Negotiating Skills
    You’ll gain a better understanding of how purchasing decisions and practices affect the businesses of your suppliers. Internally, SCM helps identify how culinary and menu development decisions affect total costs. Insights like these enable more constructive give-and-take in deal making and help you identify the factors that matter most to the other parties.
  5. SCM Helps You Drive Profitability
    Supply chain management data shows more clearly how food costs, menu pricing, and consumer demand interact. It identifies the Total Cost of Ownership – not just purchase price – for food and supplies and makes menu and operational costing more accurate. It helps you identify the most profitable products and customer types so that marketing activities, culinary development and menu management are focused in ways that drive bottom line results.
  6. Your Supplier Relationships Are More Productive
    Supplier relationships improve when key suppliers and restaurant chains understand how their business opportunities are interrelated. SCM insights help reduce inefficiencies in their mutual supply chain processes and drive more value from the relationship over time. That makes it easier for brands to obtain the most attractive pricing and development of proprietary items optimized for their operations.
  7. New Product Development Becomes More Strategic
    New menu items are critical to restaurant chains, fueling promotions, and repeat business. SCM’s expertise in ingredient sourcing and commodity price forecasting go hand-in-hand with culinary R&D and promotional margin control. And once new items are introduced, supply chain managers ensure that supply and demand are balanced, keeping enough supplies in the pipeline to meet unit needs without obsolete inventory buildup. Marketing managers who coordinate with supply chain management have more successful LTO executions.

Finally, learning to take full advantage of SCM insights can help you see your company’s existing limitations in terms of how well it manages its supply chain. If it’s not being managed as well as it should be, that’s an opportunity to look for more supply chain talent or to find an SCM provider that can optimize your systems. In today’s highly competitive restaurant market, chains that ignore the advantages of better supply chain management do so at their peril. To learn more about how SpenDifference can assist in optimizing your supply chain systems, please contact us.

10 Keys to Effective Supply Chain Management

Two restaurant chains may have similar concepts, similar menus, and similar go-to-market strategies, but one may regularly outperform the other. A better-managed supply chain is often what makes the difference. If you want to perform a quick supply chain performance audit of your organization, consider how well it follows these ten key practices.

  1. Be Transparent

The primary commandment in supply chain management is to seek transparency across a company’s full range of sourcing, procurement, and logistics relationships. Transparency is essential to managing costs and to defining and meeting expectations. Transparency builds trust among supply chain partners. Over time, it establishes the kind of strong, reliable relationships that undergird every successful business.

“If there is one word that sums up the essence of supply chain management, it is transparency,” says Frank Lucero, III, vice president of supply chain for SpenDifference.

“Transparency allows you to see beyond the ‘funny money’ pricing that is common in foodservice and to get at the true costs of procurement and of doing business in the market,” he adds. “You strive for full transparency in all your sourcing and logistics relationships, but it is essential in your strategic partnerships. That’s where a restaurant brand and its key suppliers must act as if they are in business together, and it is what drives true efficiencies across the entire supply chain.”

  1. Manage Risk

Strategic supply chain management is not just about obtaining products and services at the best price—it is also about planning for contingencies and reducing a brand’s vulnerability if the unexpected happens.

Sound risk management means that critical commodities and ingredients are dual-sourced; that you fully understand the strengths, weaknesses, and capabilities of your suppliers; and that your sourcing arrangements have redundancies in cases of regional disruptions. It also means having formal contingency plans that can be put in place immediately in case of product recalls or other kinds of supply chain disruptions.

  1. Honor Contracts

Contract compliance goes without saying, right? Yet complex supply chains always require ongoing compliance audits, invoice reconciliations, and evaluation of freight costs, cost-plus clauses and other contract details. If compliance is allowed to slip, it immediately adds costs to the operation. This is not a process that can be hit or miss: hire the talent and invest in the technology to manage it tightly.

  1. Communicate

Consistent, two-way communication is what keeps the different parts of your supply chain playing well together in the same sandbox. It is one thing to purchase a product at an attractive price, and another entirely to get it to end users on a timely and reliable basis.

As commodity prices go up and down, as weather variances affect crop yields, as a product moves from processor or factory to warehouses, as LTO demand makes inventory needs rise and fall… communication back and forth between the players keeps them all in the loop and on schedule. Supply chain management is just a buzzword if you don’t ensure that suppliers, service providers, logistics managers, and unit operations all communicate effectively, on a regular basis.

  1. Leverage Technology

Managing a brand’s logistics, formula pricing, contract compliance, and distribution service levels are complex jobs. Technology is what makes them manageable, and what provides the actionable data you need to drive sound decision-making. Make sure you or your supply chain provider has the technology in place to head off logistics problems before they happen, and to provide you with the customized dashboards and reports you need to manage your cost of goods sold and unit operations.

  1. Collaborate

If suppliers, distributors and operators are gears in the supply chain machine, collaboration is the clutch that lets them interact effectively to drive results. Collaboration between culinary R&D, procurement and suppliers ensures the right product is available at the right price for the envisioned menu application. Collaboration between culinary, marketing and operations is what drives successful promotions.

Collaboration is also essential if procurement specialists are to know how a supplier’s raw material costs are affected by yield, labor and margin needs. The ability to negotiate the best pricing and distribution contracts depends on such information, but it only comes from knowledgeable collaboration among suppliers, customers, and logistics players.

  1. Understand Who’s Accountable

An attractive contracted purchase price is only part of the sourcing/procurement story. Transportation costs, redistribution and freight forwarding costs, fuel surcharges and other factors are all part of the supply chain cost picture. Variances in the cost of regional distribution are another complicating factor when it comes to analyzing the total cost of ownership to a national brand. Expert supply chain oversight sorts these issues out so that they can be managed and accounted for, helping keep a brand’s food costs predictable and under control.

  1. Manage Relationships

Every multi-unit brand knows the importance of managing relationships with unit operators and franchise holders. Corporate relationships with vendors and distributors require the same kind of attention, with regular performance reviews, top-to-top meetings and joint business planning to strengthen partnerships and achieve greater efficiencies.

“Greater transparency is never achieved all at once,” adds SpenDifference’s Lucero. “True sourcing and supply chain partnerships evolve over time. The mutual transparency increases as the relationship deepens and the two parties better understand the value and business each can bring to the other. For that to happen, the relationships need care and nurturing along the way.”

  1. Require Customization.

When restaurant brands rely on proprietary products to distinguish their offerings and add value to their menus, supply chain relationships become even more important. Strong supply chain management helps a brand identify reliable sources for customized products and distribution networks to keep them stocked. It will also customize data reports to match the unique needs of a restaurant’s brand management. Every brand is unique and an effective supply chain needs to reflect that.

  1. Hire Specialists

It takes specialized knowledge and experience to manage the different parts of a supply chain and to effectively understand and take advantage of commodity market trends. Successful chains hire the best talent available in each specialty area, from strategically sourced protein categories to logistics and distribution management. They either hire a specialized team with needed, top-drawer experience in those areas, or a third party provider that already has that kind of team in place. Relying on procurement generalists will never achieve the same results as a team with a full range of critical competencies.

As a result, many successful restaurant chains have teamed up with SpenDifference and taken advantage of their best-in-class technology and category expertise to help navigate all aspects of the supply chain. To learn more about how a partnership could positively impact your business, please contact us here.

How a Commodity Sourcing Forecast Sets the Stage for a Top-Grossing LTO

The ingredients for a successful LTO are hardly a secret: a high-quality menu item, at the right price, with the right food cost, plus service execution that provides an awesome dining experience. But one less-known factor in LTO success is the way supply chain forecasting helps make these elements align. Here’s a textbook scenario from an actual promotion that illustrates how these interlocking factors fit together.

Supply Chain Challenge: A national, quick service restaurant chain needed a fresh take on its annual Lenten season promotion. The LTO development relied heavily on supply chain management’s research into the future availability and cost of a custom-cut and sourced product that would deliver a “high quality, high value” seasonal menu special and dining experience.

Advance Work: The chain’s marketing and culinary teams wanted a new twist on its traditional Lenten entrée. Based on a commodity cost/availability trends, a preliminary forecast was prepared 40 weeks in advance based on multiple protein options that the brand’s culinary team had identified as suitable for anchoring the LTO.

The preferred option was for thick, hand-cut Pacific cod filets that could be shipped frozen and then prepped, battered and cooked at restaurant sites as part of a meal bundle. The chain also established preliminary base food and other component costs and target promotional pricing as part of its planning.

Sourcing Evaluations: Because cod and many other fish species are wild-caught, not farmed, buyers could only work with directional pricing forecasts so far in advance of actual seasonal harvests. But, using these for guidance, they investigated sourcing opportunities for the preferred protein item as well as alternates that could be used in the case expected harvest supplies were not available at the price point or in the volumes needed.

As weeks passed by, supply chain specialists also worked with top seafood suppliers, outlining specs and prices for the chain’s LTO application, all the while tracking the original forecast against developing price and availability data for the specified items. The advance work also included evaluation of suppliers and facilities that could provide hand-cutting and fabrication/packaging to the chain’s cost and quality specifications.

As sourcing opportunities were firmed up, a primary supplier of the cod and, in this case, an opportunity to obtain the needed portions and volume of prime cod loin at an attractive price point was identified. Representatives of the chain’s culinary team then visited the selected processing plant for a week, evaluating samples of the proposed final product that would be packaged and shipped to stores.

Contingency Planning: As part of the initial sourcing research, a secondary supplier was identified as a backup source in case LTO demand ended up exceeding forecast supply needs. An alternate seafood protein was also identified as a fallback center-of-the-plate ingredient in the event of unexpected supply shortfalls. Finally, contingency plans were made for how the chain would use any excess product that might be left over after the promotion period ended.

Execution: Once sourcing arrangements were established, the chain’s marketing and culinary teams worked together to develop operational procedures to produce the finished item at unit sites. Beta sites tested product samples to ensure thawing, prepping, cooking and holding could be executed effectively by typical unit staff.

Meanwhile, marketing developed the descriptors and details needed to differentiate the offering from that of competitors and for timing and launching a promotional campaign. The latter emphasized the cod’s quality, value, custom cut and onsite battering and preparation. The supply chain team continued to work closely with its Alaskan seafood suppliers to finalize volume/pricing commitments, coordinating with the brand’s finance operations.

Finally, as the launch date approached, unit management was apprised of final publicity and advertising plans and locations stocked with promotional support point of sale materials. Close communication with distribution centers ensured that adequate supplies were available regionally and ready for delivery in advance of the LTO launch.

Results: The chain experienced system-wide sales gains year over year, with the best Lenten season promotional results in 12 years.

Learnings/Observations: We asked Jeff Franzblau, a SpenDifference senior director of procurement, for his observations in terms of the most important lessons to be learned from foodservice promotion executions like this one.

“Supply chain coordination throughout the entire process is key to making LTOs like this one work effectively,” he says. “Advance and updated forecast information guides culinary and marketing planning from the outset as well as sourcing arrangements and commitments along the way.

“Also, an important part of advance sourcing is to look at how different processors are utilizing the raw commodity in question, and for opportunities to obtain cuts that have a higher quality, a lower price or that meet some other criteria advantageous to LTO applications,” he adds.

“You try to play against and complement other demand for the same commodity that the supplier may be dealing with. At the same time, buyers need to work with culinary and finance to make sure sourced product meets the established specification, availability and price targets. Contingency plans are critical in case the unexpected happens.

“As a chain closes in on the final weeks before an LTO, real-time communication among all the players in the supply chain—from source to processor to distributor to stores—is essential. There needs to be constant, real-time updates in terms of how actual demand is meshing with forecast demand, and how that affects inventory in the channel. Chains that do all those things well can look forward to results that regularly meet and exceed expectations.”

Are you looking to unlock increased LTO potential? Contact us to see how leveraging deeper supply chain connections can help.

Looking Ahead: Will Foodservice Be Part of Blockchain’s Future?

Blockchain—what some say will have the most significant impact on accounting since double-entry bookkeeping was invented—may also revolutionize food supply chain management in future years.

Think about some of the more challenging issues the food industry faces these days:

  • the need for quick and reliable food traceability in the event of product recalls
  • the complexity associated with reconciling purchasing invoices and pricing contracts
  • the fragmented nature of food distribution, warehousing and shipping logistics
  • and growing customer demands for verified sourcing information about everything from sustainably-caught seafood to fair trade coffee to antibiotic-free chicken

Blockchain technology promises practical strategies to address such issues more efficiently and reliably than existing systems, while providing better supply chain transparency. That’s why companies like Nestle, Tyson, Cargill, Walmart and Kroger are actively testing blockchain’s application across these issues.

But just as in the past, the foodservice side of the industry seems likely to lag behind its retail sibling in any move to adopt the new technology. We’ll get to that, but first let’s look more closely at blockchain’s promise.

A New Approach to Data Sharing

Blockchain technology is basically a new approach to digital record keeping. It can create a secure, encrypted and unchangeable data ledger that permanently documents all of the transactions and data associated with a given business function or process.

Only authenticated data that complies with strict transactional rules built into the specific blockchain can be entered.  Once entered, the data cannot be changed.  And because the block chain record is distributed – that is, identically stored across a network of multiple computer “nodes” with multiple, participating owners – it is further protected from any manipulation.

Simply put, blockchain can allow business partners to securely and privately agree to share data associated with nearly any product or transaction associated to their business. And it lets them do so far more efficiently than is possible with the systems in place today.

Public vs. Private Blockchains

Unlike the public blockchains used to enable crypto-currencies like bitcoin, the private blockchain networks envisioned for the food industry would be user-restricted, with various levels of permissioned access. Trading partners that own transaction data embedded in a network would have to agree in advance about what information can be shared and by whom.

Permission levels would allow different degrees of access by different users, depending on what is to be accomplished. And just as consumers do not see the code behind the websites they visit, blockchain users would access key data points through an interface geared to their needs and permission level.

In practice, private blockchain networks could be used to manage a company’s financial transactions, transportation network or warehouse inventory. They could authenticate product sourcing information beginning at the farm and continuing through processing, packaging, and distribution to the end user.

As an example, freshness data points like core temperature readings, dock transfer times and shipping dates could be logged in real time and reviewed later via smartphone scans at the point of delivery, or used as an audit trail for quality assurance. Because all the data in a blockchain is immediately recorded and always available, it is quickly accessible when needed.

Traceability Becomes a Driving Force

The value of that data immediacy was underscored in the romaine lettuce food safety recall last year, when retailers and distributors were forced to dump all stocks of romaine because they had no way to determine which product was affected.  It was a main driver in terms of why Walmart is exploring how blockchain can help it better deal with traceability issues.

In one experiment, Walmart tested how long it would take its supply chain to trace the sourcing details of Mexican-produced sliced mangos in its inventory. With existing systems it took nearly seven days. But in a follow-up experiment using blockchain, the same request was completed in seconds.

That dramatic comparison led the retail giant to require its grower-shippers to participate in a blockchain network by the end of 2019 that will collect detailed information about produce shipments sent to it. Developed for Walmart by IBM Food Trust, part of an IBM division specializing in blockchain solutions, it is one of many blockchain-enabled systems that are currently undergoing testing by some of the world’s largest food companies.

 A “Network of Networks”

No single blockchain could ever contain all of the data that could be collected in a given industry or market. Instead, applications in the future could be what IBM VP of Blockchain Solutions Jerry Cuomo terms a “network of networks.”

“What if individual blockchain solutions could interoperate,” he asks. “Might they produce even more value if connected together?”

As an example, Cuomo imagines a produce distribution company that wants to ensure the safety and quality of its product mix, streamline its logistics systems and receive timely payments from business partners. A blockchain solution might have the company join three networks: one to track quality and freshness, another to manage shipping and a third to handle financial transactions. While each network independently brings value to the company, interoperability among them could conceivably bring even more value.

Theory vs. Reality

So—blockchain technology clearly offers tantalizing promise, and it appears the retail food industry is poised to employ it soon. But will that promise extend to foodservice?

One significant constraint would be the foodservice community’s mixed track record in universally adopting the data standardization that blockchain would require. Despite many efforts since the mid-1980s to encourage the use of UPC codes, common product databases, EDI exchange standards, GTIN numbers, GS1 initiatives and other programs, foodservice continues to lag far behind retail in this area.

Other constraints include the cost of technology and labor to code and track product at the case and pallet level; scenarios like the one envisioned by Cuomo would likely also require individual RFID tagging and embedded sensors. The ingredient-based nature of foodservice and the many proprietary products it uses also presents challenges.

Further, there are “institutional” constraints in the reluctance of many foodservice trading partners to fully share information they view as proprietary or essential to competitive advantage. It is worth observing that the foodservice industry’s largest distributors—Sysco, US Foods and Performance Food Group—have been notably silent about any intentions to explore the use of blockchain systems.

Looking for Market Champions

That is not to suggest that blockchain solutions are not in the restaurant industry’s future. But for them to take root will require major market drivers and operational champions.

As in retail, the challenge of dealing with product recalls and a need to ensure food safety is likely to generate the first groundswell of support. Demand for traceability programs, especially from large customers like restaurant chains, could drive the first, limited, applications. Other types of customers—like large college dining programs, which put heavy emphasis on verified sustainability and sourcing origin details—could provide further impetus.

Third-party foodservice supply chain and logistics providers like SpenDifference, widely used by restaurant chains, could well become blockchain’s biggest champions. That’s because they are already heavily invested in the digital tools and technology that could provide a foundation for blockchain implementation. They also tend to manage the integration of sourcing, procurement and logistical functions, where blockchain could provide the greatest benefits

There’s an old saying—“Where you stand depends on where you sit.” And where third-party supply chain providers sit puts them in a clear position to identify the purchasing and logistics efficiencies blockchain could offer their customers.

For now, stay tuned—the first proof of concept demonstration cases in retail could well be just around the corner. Especially if that results in competitive or financial advantage,  players in foodservice will have some serious choices to make.

To learn more about SpenDifference’s supply chain and logistic solutions, contact us here.