Supply Chain Due Diligence for Restaurant Franchisees

When you’re ready to invest in a franchise, make sure due diligence includes a close look at its supply chain strategy. Here’s a checklist of areas to evaluate.

So you’ve found an emerging concept that’s a great fit for your market. You’ve analyzed the Franchise Disclosure Document and Agreement, have done your pro forma and market analyses, and have scouted prospective locations. But as part of due diligence, don’t forget to investigate the organization’s supply chain management.

Why?  Because reliable supply chain systems are essential to keeping food costs competitive and predictable. They help promotions run more efficiently also help ensure brand and product consistency, a key issue as the brand grows and expands. You want to know that a franchisor has the expertise to support your capital investment.

A Checklist for Due Diligence

For starters, let a franchisor know early in the process that supply chain arrangements will play a significant role in your investment decision. Indicate that you’ll be looking for contract documents and other evidence of how it manages these functions.

At the same time, don’t turn your inquiries into “third degree” questioning. Instead, emphasize that you believe supply chain issues are often overlooked in terms of how critical they are to the success of the business and to strong franchisee relationships.

It’s helpful to have a checklist to use in discussions or during a visit to headquarters. Here are key areas to consider and some basic questions to ask.

Procurement

  • How much transparency is there in the purchasing process? How are manufacturer rebates or marketing allowances accounted for? Is it clear to franchisees how these are accrued and/or reflected in net pricing franchisees pay for product?
  • Ask for a list of key product specifications. It should identify products that are “hard spec’d” and “soft spec’d.” If substitutions are allowed, ask how substitutions are approved.
  • What is the franchisor’s strategy for managing food costs? How does it seek to keep costs stable and predictable for franchisees? Does the franchisor employ contract pricing for the top 20 percent of items most critical to a given brand? What system is used to manage these contracts and keeping them up to date? How are food cost changes and forecasts communicated to franchisees?
  • Are the franchisor’s relationships with key vendors stable and productive? How are vendors selected? How are they evaluated over time?
  • Does the franchisor use any 3rd-party providers to gain additional procurement leverage? What advantage does this offer in terms of brand spend, and how will you see the benefit of this arrangement?
  • How does the franchisor limit risk? How does it manage commodity price volatility? How does it minimize obsolete inventory following promotions? What procedures are in place to handle food safety-related recalls and to ensure that vendors have strong food safety programs in place?

Logistics & Distribution

  • Ask for a copy of the franchisor’s distribution agreement. How long has it been in place and how often is it reviewed? If your franchise territory will be served by a new distributor or operating company, make sure there is a formal rollout plan for opening new stores.
  • Ask how distribution costs are managed and optimized. How do costs differ from region to region? How much oversight does the franchisor exert over transportation and freight costs? How is the distributor’s compliance with brand specifications audited?
  • Take a hard look at how proprietary products are handled in the distribution agreement. How many proprietary SKUs are essential to the concept and how many slots are guaranteed at the distributor for them? Are they readily available in all parts of the country?
  • Does the franchisor have a system for monitoring regional supply chain performance? How are supply chain issues resolved and by whom? Consider issues like distributor “out of stocks,” product substitutions, missed delivery windows, delivery of outdated products, etc.
  • What kind of risk management strategies are in place to protect the franchisee from unexpected contingencies? How does the franchisor hedge commodity price volatility? Does the chain have a formal food safety recall plan (ask for a written copy). How does the franchisor vet suppliers to make sure their operations minimize food safety risk?

 

Data Analysis & Business Intelligence

  • Who bears the responsibility for reconciling pricing variances? Will you receive easy-to-review reports that help identify variances between contracted and invoice prices? Does the franchisor help reconcile variances or is it up to the franchisee to work this out with the distributor?
  • What data analysis tools are provided to help manage the business? Does the franchisor provide dashboard metrics? Actionable commodity price forecasts? Market basket cost comparisons? Regional benchmarking reports?
  • What franchise data is shared with trading partners, and what data do they share in return? How does it improve the brand’s operations, purchasing, menu development?
  • How does the franchisor track and manage LTOs and other promotions? How are regional demand variances dealt with in terms of optimizing LTO-specific inventory levels? Minimizing obsolete inventory when a promotion ends?