What’s In Today’s Supply Chain Technology Toolbox?

Supply chain data—and the right tools to use it—can give chain management both strategic insight and competitive advantage.

How Technology Optimizes Supply Chain Strategy

A long time ago, in a galaxy far, far away … supply chains were managed with handwritten ledger books, by bookkeepers with green eyeshades and buyers who made handshake deals.

The advent of spreadsheet software and electronic data interchange (EDI) standards in the late 1980s began to change that. But even then, many restaurant chains remained heavily dependent on reports supplied by distributors, often in hard copy or non-standard formats. The information they did get was hard to use for strategic purposes. Technology made it far easier to generate data, but also created a new problem: so much data that it often became overwhelming.

“What restaurant chain management needs is business intelligence—distilled information that is actionable and offers strategic insight,” says Jeff Kelly, Director of Business Development at SpenDifference, the Denver-based supply chain management company.

“That means tools and reports to help cope with ongoing business conditions, gain credibility with franchisees and plan for what will likely happen in the future.

“Analyzing endless spreadsheets of past sales and purchases isn’t enough. It’s like trying to drive a car while looking only in a rear-view mirror.”

Looking Beyond a Rear-View Mirror

Over the past decade, the development of tools that provide focused intelligence of this sort has had a major impact on the way successful restaurant chains manage purchasing, menus, promotions and operations. It has also tended to level the playing field between very large national chains and medium-sized, emerging concepts. Chains whose size makes them more nimble can act more quickly on the strategic insight such intelligence provides.

That’s why, when combined with third-party purchasing leverage, customized supply chain dashboards and reports can give corporate chain management the insight it needs to out-perform larger competitors. Consider the advantage such technology offers in these key operational functions:

Data Warehousing and Data Mining.  Invoice Data. Monthly Spend. Category Spend. Unit Purchasing Reports. Contract Expirations. Inventory Outages. Pricing Changes. …. The way to manage the flood of supply chain data from multiple sources is to store it in a common format and a relational database structure. That way, data can be mined as needed, plugged into customized algorithms and reported on management-friendly tracking dashboards. That gives management real-time oversight of the factors critical to a given concept and the ability to flex quickly with market and demand changes.

Price Forecasting. To negotiate the best contract prices with manufacturers, it’s important to understand the commodity trends affecting a supplier’s costs. Technology lets product category specialists evaluate commodity trends and forecast likely future price changes for specific categories and items. That information makes it possible to seek more advantageous contract terms and longer-term pricing before commodity supply and price changes hit the market. It allows tactical menu pricing changes and aids promotional planning.

Distributor Price and Invoice Audits. President Reagan’s famous statement, “Trust—but Verify”—certainly applies to a restaurant’s delivered product costs. Are previously-negotiated supplier prices correctly charged to a chain’s distributors? Are they appropriately reflected in the distributor’s regional order guides? Do a unit’s landed prices match what they are supposed to be? Technology-based audits at critical points in the supply chain can catch, avoid and correct variances before they turn into pricing reconciliation headaches.

Inbound Logistics: As restaurant competition increases and margins shrink, supply chain logistics offer chains another way to cut costs without compromising on product quality or service levels. Supply chain technology plays a key role in managing inbound freight and transportation costs as well as other delivery variables.

Unit Purchasing Compliance. Chains often need to monitor franchise unit procurement to ensure that it complies with purchasing and distribution agreements and that units maintain product consistency standards. Technology-based compliance reports highlight any variations so that franchise policies can be enforced. Reports also can show the relationship between contract and non-contract spend and where increases in non-contract purchases may offer new opportunities for negotiated pricing.

Market Basket IndexingIt is one thing to negotiate competitive pricing with suppliers. It is another thing to show how much relative advantage that provides, or be able to clearly communicate it to franchisees.

Customized market basket indexes offer a way to compare a restaurant’s actual costs for core items against the same purchases made on the open market. They can illustrate how contract pricing minimizes price fluctuations and demonstrate how corporate hedges supply chain uncertainties. Combined with forecasts, they let culinary and marketing do better LTO planning to take advantage of market conditions. They demonstrate the transparency of a chain’s decision-making process and build credibility in the field.

There’s No “Black Box” Solution

Technology has vastly improved supply chain management capabilities, but “there is no technology-based ‘black box’ that automatically solves every supply chain problem” says Matt Heckroth, Senior Director of IT for SpenDifference.

“The human element remains critical,” he adds.

“Technology lets you create tools, but dedicated supply chain expertise lets you leverage those tools to address the specific challenges of a restaurant brand. Applied correctly, they keep you on top of changing trends so you can address potential challenges in advance, not react to them as they happen.”

Supply Chain Sourcing Partnerships: What’s the Value Proposition?

A supply management philosophy emphasizes procurement partnerships with a multi-dimensional value proposition.

When the foodservice industry talks about procurement, terms like “partnership” and “win-win” are so common that they often aren’t taken at face value. That’s especially true if the relationships in question are based strictly on raw purchasing volume and price.

In contrast, the best supply-chain partner relationships also emphasize deeper, information-sharing relationships that offer value and strategic business opportunities in other areas as well. It’s also what distinguishes this approach from that taken by general-purpose group purchasing organizations.

To explore how such value propositions work out in practice, we spoke to DeWayne Dove, Vice President of Supply Chain for SpenDifference, a Denver-based restaurant supply-chain management firm that specializes in emerging and medium-size restaurant chains.

A value proposition based on custom specifications

“When we leverage the volume of nineteen client brands, we source the vast majority of purchases with custom contracts that match each brand’s specifications.” Dove says.

“A restaurant brand’s ability to customize and own those specifications is what makes it unique in the marketplace and allows it to differentiate itself from its competition. This is much different than a typical GPO approach, which is to establish a single specification for all members to buy.

“It’s also a difference that encourages suppliers to develop stronger direct relationships with the brands. It presents important opportunities for them to achieve more efficient raw product utilization and distribution logistics planning.”

Better pricing certainty is another benefit, he says.  “We develop very buttoned-up contracts for key categories. They have volume commitments that drive growth and are tied to escalator and de-escalator formulas so that variances directly affect pricing.”

 “Building out the bird”

Dove uses poultry as one example. “It is obviously a key category for most of our client restaurant brands and represents in excess of $100 million in category spend for us. But one brand may specify a six-ounce boneless breast; another may want a five-ounce breast with a marinade pump; others may use wings or pulled tenders or dark meat strips.”

“With that aggregated mix of demand, a supplier can better define how a bird will be processed and portioned in production and plan where the components will go post-production. ‘Building out the bird’ in that way enhances a supplier’s ability to fully utilize raw materials. It drives tremendous value for every stakeholder in the relationship.”

Dove points to similar opportunities in other categories, from beef to pre-cut produce to disposables and to a potential for optimizing regional shipment logistics as a result of data-sharing with customers about menu changes that may shift demand.

Demand patterns as business intelligence

Monthly and annual food price forecasts drive this kind of supply chain opportunity because of the business intelligence they generate, he says.

“We regularly develop commodity price forecasts to guide brands’ food price planning,” Dove says. “Technology lets us estimate the impact inflationary trends will have on individual menus by category and line item. The brands use this information to compensate for inflationary trends with LTO planning and culinary development strategy.”

The same technology generates data with significant value for suppliers, he says. “We normalize it across 150 distributor branches to identify where specific item volume will be going. That lets supplier partners match it against distribution volume voids they may have at the regional level in order to build more efficient regional delivery truckloads.

“Or, a supplier may have a 30 percent share in a given category and want to know what the other 70 percent looks like in terms of usage by specification and region. Such guidance can suggest growth opportunities and make it possible for them to enhance the value offering made to our brands.”

Efficient market reach

Suppliers put high value on the direct relationships they can develop with end users, and SpenDifference looks to facilitate these with the structure of its Supplier Advisory Council and meetings it has with the brands over the course of a year. There, strategic trading partners in key categories meet top management from multiple client brands to share information and find ways to work together for mutual advantage. This can include menu ideation sessions, market trend insights, cost saving opportunities and support for culinary development programs.

“The meetings give suppliers a deeper reach into the marketplace and a one-stop opportunity to gain insight into the plans of multiple restaurant brands,” says Dove.

The value of a supply chain approach to procurement for an emerging or middle-sized restaurant brand is being able to function like a much larger multi-unit operator in terms of procurement and other functions like logistics management,” he says.

“The value to a supplier partner is very similar—being able to operate in the space of these fast-growing chains much more effectively than the supplier would otherwise be able to do.”

Know Your Vital Signs

What Spend Data Tells You That Sales Data Doesn’t

Sales data gives an incomplete picture of your restaurant chain’s financial health. Spend data helps you look deeper.

Think about the last time you were asked, “How’s Business?” Chances are, your answer reflected your restaurant brand’s latest year-on-year sales comparisons.

But if the question came from an investor, he or she would want you to speak beyond the chain’s sales, to its profitability—and to its likely profitability next year as well.

That kind of insight comes primarily from historic spend data and future cost forecasts along with current point of sale numbers. Spend data trends are vital to strategic business planning and help financial executives monitor a restaurant brand’s health in ways that sales data alone can’t. Cost forecast comparisons are essential to managing the enterprise with an eye on the future.

Spend data can guide strategy

Here are just a few examples of how supply chain spend data can help in big picture decision-making:

  • That successful LTO from last spring that you plan to run again? Supply chain spend data can tell you if associated food costs helped or hurt check average margins in that period and help guide the program’s re-launch planning.
  • Buying from more than one distributor? Supply chain software can aggregate and analyze the combined spend data to identify opportunities for consolidating purchasing.
  • Experiencing soft market conditions and looking for ways to cut costs without compromising brand integrity? Spend data can help identify opportunities to phase out non-signature menu items with expensive ingredients and low margins.
  • Looking to reduce the number of SKUs your brand requires in the distribution chain? Supply chain spend data can evaluate low velocity items and identify where minor menu changes can allow their elimination, or substitution by another stocked product.
  • Concerned about whether any franchise operators are going “rogue,” purchasing product off-contract or off-spec and potentially harming the brand? Spend data can show you when and where out-of-spec substitutions are being made. Driving compliance also helps ensure that strong food safety standards are consistently in place across regions.
  • Planning seasonal promotions for the year ahead? When combined with historical spend data from the past, commodity price forecasts will help you test their likely profitability in the future (and avoid cost over-run surprises).

Data needs to be actionable

The key to using spend data effectively is not based on how much of it can be collected. Reams of distributor data and endless spreadsheets are seldom helpful when strategy is developed.

In contrast, effective use of supply chain data depends on having systems that aggregate the mass of available data and then mine it for key trends and metrics that support decision-making. To be useful, data analysis must be actionable.

For example, you will want to keep an ongoing eye on whether key ingredient costs will likely decline, remain stable, or increase. If changes are in store, will they be modest or significant? Are alternate sources of supply available, and if they are, what pricing or other constraints are associated with the new source? What has been the spend on your top 50 items for the last six months, vs. forecast spend for them in the next six months?

Spend data also will have associated inventory data, an important metric to consider alongside changes in business demand. Historic usage patterns can help determine whether warehouse inventory levels need to be increased or decreased to match ongoing or expected demand changes.

Adding predictability to the future

Sales forecasts inherently face many unknowns, from changing economic conditions to shifting competitive environments. But supply chain spend data and cost forecasting bring an element of predictability to business planning and can help executives moderate and adjust for those uncertainties.

On a purely practical level, consistent auditing of supply chain spend data can ensure that contract pricing is adhered to and that invoices reflect the product prices and distribution fees that have been negotiated.

One key point to remember is that while sales data is essentially based on present-day comparisons against the past, supply chain processes inherently look to the future. They are based on commodity forecasts, contract pricing arrangements, negotiated distribution costs and pricing parameters established with supplier partners.

In competitive situations, supply chain intelligence can help management estimate the future cost pressures that they may face, as well as those that will likely be faced by competing restaurant concepts. Forewarned is forearmed, and spend data analysis is a key tool for developing effective menu, positioning and pricing strategies designed to increase market share.

How Supply Chain Strategy Supports Growth

Business intelligence
Business intelligence, buying power and resources are key, especially when facing economic pressures.

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