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.