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 Plays Key Role in HuHot’s Growth Strategy

The HuHot Mongolian grill concept demands tight specs, proprietary ingredients and brand consistency across regions. A centralized supply chain strategy has been critical to its expansion.

HuHot, a 62-unit Mongolian grill concept with restaurants in 18 states, has been growing its casual dining footprint with 6-8 new locations a year and has recently added a new carry-out option to increase unit sales and patron dining frequency.

A specialized menu, proprietary ingredients, and a high-touch customer experience have been key to the chain’s success. HuHot emphasizes a strategic ratio of franchise holders and company-owned locations; as it has grown it has embraced a strong supply-chain philosophy to manage costs, strengthen vendor relations and maintain brand and ingredient consistency.

Customer engagement a hallmark

Customer engagement has been a hallmark of the HuHot concept since its beginning as an independent restaurant in Missoula, MT in 1999. An environment in which each customer creates his or her own “eatertainment” experience undergirds the concept’s popularity across demographic groups, says HuHot COO Jeff Martin.

That experience begins as patrons individually select a protein, produce, sauce and noodle entreé mix before it is rapidly cooked in front of the customer by chefs “who are encouraged to demonstrate their grill showmanship,” Martin says. Additional meal customization occurs at a custom toppings bar.

In contrast to some Mongolian grill restaurants, HuHot customers never lose sight of their entreé, from the time they select its ingredients to the time they carry it to their table. Martin notes this adds to the experience and is especially important to those who are particular about their ingredient mix or have various dietary concerns.

Ingredient specs are critical

Service is fast. HuHot uses a two-sided food line and up to five cooks at one time to expedite throughput in peak periods. “Name me another full service casual dining concept in which you can walk in, be seated and be enjoying your entreé within five minutes,” Martin adds.

“In one respect, our menu is simpler than you would think,” he observes. “We essentially offer a single entreé at a single, all-you-care-to-eat price. But execution is more complex—nine to twelve protein options, more than 20 produce ingredients, three noodle types, 12 proprietary sauces and a toppings bar. Many of the ingredients come from international sources. Customers also can choose from a full menu of appetizers, soups, desserts and beverages (including alcohol),

“Specifications for grill items are tightly engineered in terms of the cuts they are taken from, the slicing and sizing required,” he adds, noting this ensures they all cook on the grill at the same rate, in 2 to 2-1/2 minutes. That is essential to meeting the chain’s quality and speed-of service standards.

Supply Chain Key to Expansion Strategy

As HuHot expanded into new territories, we “needed to have a rock-solid supply chain” to ensure that new units had reliable regional access to identical ingredients. Martin looked to standardize logistics, procurement and distribution agreements, but first had to convince franchisees that centralizing supply chain operations was in their best interests. Up to then, individual franchise holders had been responsible for their own supply chain arrangements.

“We needed more expertise and leverage in the commodity area and knew it would help us improve our procurement costs” he says. “90 percent of our spend is on protein, proprietary sauces, produce and noodles—that was an important part of our rationale.”

Once franchisors bought in to the strategy, Martin decided the best way to move forward quickly was to use a third-party supply chain service provider. A long-term agreement was signed with SpenDifference, a Denver-based restaurant supply chain service provider offering a portfolio of service options.

That decision helped HuHot improve operating financials while letting it focus corporate resources on growth planning and marketing. For example, HuHot is now rolling out a new carryout program nationally, a strategy that Martin believes should help increase sales and repeat visits at the unit level. SpenDifference helped it source signature packaging supplies as that program evolved.
“Bringing in outside supply chain expertise also helped us improve other things—our RFP process, the strength of our custom contracting, and the speed with which we move new items into the system,” he says. “Also, while SpenDifference handles our purchasing, we still maintain direct, one-on-one relationships with all of our key vendors.”

Looking back at the results of its supply chain decision, “our fiscal and financial results have been positive—with seven figure savings in many of those years—and we successfully navigated some very troubled commodity issues,” Martin says. Commenting on HuHot’s recent decision to again renew the supply chain contract, he says, “I am not the kind of restaurant leader who would ink a third multi-year deal unless the partnership had been successful.”

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.

SpenDifference Offers Supply Chain Strategies to Counter Restaurant Sales Slump

With restaurants facing soft sales, supply chain firm SpenDifference has ideas that will help drive traffic, control costs and protect margins. Short and long-term actions can drive sales and protect profits.

How Supply Chain Strategy Supports Growth

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Ensure Your Supply Chain Supports Brand Growth

For chain restaurants, expansion into new markets is essential to growing sales and increase profitability. Often, brands do not realize there are many supply chain challenges that can derail efforts to seize top-line growth opportunities.

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Founded in 2008, SpenDifference helps emerging and mid-size restaurant chains be more competitive across the supply chain. Also, the company understands the challenges faced by restaurants, and it can provide the infrastructure its clients need to gain market advantages.