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:
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.