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Fixing a Fractured Restaurant Supply Chain

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How networks help restaurants and their suppliers become more demand driven
By Siva Arumugam and James Cooke April 2017 Vendor Bylines

Despite all the major advances in supply chain management and technology in recent years, most restaurants and their suppliers still don’t have a single, unified, real-time view of supply and demand when working together in an extended enterprise. This lack of visibility creates a fractured supply chain; one in which the restaurant operator and its suppliers do not operate in sync, resulting in bloated inventory, excessive waste, supply uncertainty, and poor customer service for all parties concerned.             

Complicating the restaurant supply and demand challenge is the increasing use of limited time offers (LTOs). Needless to say, this is a huge problem as inadequate forecasts for LTO demand combined with poor supply chain visibility results in restaurants ending up with either running out of stock for promoted dishes, which leaves customers unhappy, or building too much stock, which increases food waste. Although these promotions attract customers, they require that the restaurant can adequately stock the menu items being promoted. Because LTOs can swing sales of multiple dishes on the menu, the restaurant chain needs to be able to sense where demand is going for a promoted meal and estimate the corollary impact on other regular items. The chain must also be able to quickly respond to those demand changes. For this reason, restaurants need the ability to revise their forecasts based on real-time fluctuations in menu consumption and then translate that forecast into stock keeping units (SKUs) for supplier replenishment on a daily basis.

Reducing Waste by Removing Blind Spots

The absence of visibility in an extended enterprise creates problems for all the supply chain partners in the restaurant chain’s network. These blind spots result in excess inventory, food waste, higher costs, and lost revenue for both the restaurant operator and its suppliers. One reason for the blind spot is that the restaurant operator generally collects location data by sales item and recipe. However, and as noted, the eatery needs to be able to translate recipe and sales to the level of SKUs that can then be shared with suppliers and distributors.

Current ordering and replenishment practices in the industry exacerbate demand and supply blind spots, especially for handling LTOs. Typically, a restaurant manager uses their “gut feel” or a rule-of-thumb based approach to order supplies for these offers, which generally lasts two weeks. The result of this approach is a flawed forecast. In fact, all too often the restaurant manager doesn’t realize until too late that there will not be enough supply to last through the promotion period. 

However, that problem doesn’t just happen at the individual restaurant. The flawed forecast ripples throughout the network. The food distributor takes the order history from each restaurant as a guide to generate the distributor’s own independent forecast and then second-guesses inventory requirements. The supplier of the food distributor does the same, adding more “second guesses” to compound the extent of demand problem across the network. Given that the restaurant and its suppliers are basing their inventory needs on intuition or previous sales history rather than the present pulse of demand, it should come as no surprise that forecast accuracy is dismal, especially when LTOs are involved. Consequently, for the casual- and fine-dining segment of industry, forecast accuracy hovers around only 60 percent.

Also, because many corporate headquarters lack up-to-the-minute visibility into local eatery demand and on-hand store inventory with SKU precision, it has no way of coordinating resupply to meet spikes or dips in demand. Moreover, the chain’s headquarters does not know what the individual restaurants are buying until after the fact. This blind spot further contributes to overstocking as well as food waste and spoilage. A study conducted by the Bureau of Applied Research in Anthropology at the University of Arizona found that food waste in restaurants ranges between 3 and 10 percent. The lack of coordination between the restaurant operator and its suppliers only intensifies overstocking as well as the shortages.

A related problem is that local restaurants place their own replenishment orders using the supplier’s information system. This practice often results in the inability to enforce contracted price compliancy from the supplier at the time of ordering, which requires the restaurant headquarters to spend inordinate amounts of time fixing inaccurate billing issues. Worse, when restaurant managers place orders on multiple supplier order management systems, it takes away valuable time that could be better spent improving customer satisfaction.     

3 Tips for Dishing Up a Better Supply Chain

Today, some leading restaurant chains are embracing digital business networks. Similar to a social network but used for conducting and transacting business, restaurant chain owners are implementing a single platform that brings together restaurants, franchises, distributors, and suppliers into a single operating network to improve both visibility and course corrections. These networks are providing instrumental value to all parties and are quickly gaining in popularity when done correctly. When considering a digital transformation journey of your own, here are three tips to keep in mind to help you get the most out of your initiatives:

1. Integrate Demand Sensing with Demand Translation and Replenishment

Many companies invest in sophisticated forecasting algorithms to get a better handle on demand; however, visibility into point-of-sale (POS) trends is useless unless insights lead to timely actions. After-all, real business value only comes when the supply chain is able to respond to detected consumer response to both LTOs and changes in dining trends. The digital network must be able to sense demand patterns, generate corrected forecasts, translate these forecasts from menu-items to supply forecasts for SKUs, and orchestrate replenishment from suppliers—all in real-time.

2. Integrate Logistics and Warehouse Execution

For even greater ROI, it is important that the network integrates both logistics planning and warehouse execution, which allows partners to optimize inventory and transportation cost at the same time. This transformation is truly disrupting the distribution network and added even greater efficiencies as it shifts delivery from static schedules to a demand-driven dynamic schedule model.

3. Implement Consumption-Based Replenishment and Allocation

Finally, the network should be able to make smart decisions when faced with scarce supply. For instance, if a supplier had limited inventory when confronted with multiple restaurant requests for additional supply during an LTO, algorithms need to be able prioritize stock resupply based on actual consumption in real-time to minimize lost sales.

Turning Dishes into Dollars: Seven Benefits of a Modern-Day Supply Chain Network

Restaurant chains implementing a network platform are better positioned to coordinate their supply chain in real-time to compete for customer dining dollars. Chains adopting this approach receive seven key benefits including:

1. A Single Version of the Truth

First and foremost, a network platform can ensure that every party uses a common foundation for data and provides data translation as needed to ensure consistent master data. Because the entire chain sees menu sales as they happen in the restaurants, networks share true demand across all partners. That way all parties to a network have access to the same real-time information for demand as well as inventory. Networks also track the performance of all parties and make key performance indicators (KPIs) transparent to all parties as well. Lastly, networks provide an information backbone such that all parties can recognize and track the occurrence of a transaction if they are authorized. 

2. Living Forecast

Since networks record point-of-sale data to track meal consumption as it occurs, the restaurant uses true demand and actual promotion uplift as the basis to determine which SKUs to order from suppliers. As a result, the restaurant uses a living forecast rather than a historical perspective for replenishment.

3. Spend Control

Networks can be configured to impose price control discipline as the individual restaurants now use a system that ensures the contracted price at the time of supply order.

4. Automation of Ordering

Because networks automatically convert true demand of menu items into SKUs, it frees restaurant store managers from having to devote time on ordering allowing them to focus on other management duties and to driving better customer satisfaction.

5. Chain of Custody

Apps on networks can keep a record on all orders, shipments, deliveries, and stocking across the network, to provide a trail for accountability that allows the restaurant chain to enable a product recall should the need arise. Apps can also ensure product shelf life, minimize waste, and guarantee freshness to improve overall customer satisfaction, which leads to higher sales.

6. Inventory Optimization

Apps on networks can automatically compute optimal inventory levels at various nodes in the network based on a number of variables: on-demand, supply, and lead-time variability. This enables the movement and allocation of supplies to the most efficient node in the network, reducing aggregate inventory held throughout the extended supply chain. 

7. Operational Agility

The restaurant chain can use the network to orchestrate its suppliers to respond to changing conditions in both demand and supply. The platform also facilitates the on-boarding of new restaurants, new distributors, or replacement distributors, as any supply chain adjustment no longer necessitates its own information technology project to set up the data connections. Furthermore, the restaurant owner gains agility in making operational changes, as it’s no longer captive to supplier information systems for managing supply planning and distribution.

Why a Shared Supply Network is the New Icing on the Cake

So, what does this mean for the restaurant chain’s efficiency? One chain that has implemented a network platform has seen its forecast accuracy percentage climb from the low 60s to the high 80s. With this approach, it’s conceivable that a restaurant chain could reduce its on-hand inventory by two-thirds while maintaining high service levels for restaurant sales. 

The adoption of this approach is certainly transforming how the restaurant industry is handling inventory, and it is already creating quite a stir. In a traditional restaurant supply chain, where each enterprise operates as its own silo, the weakest supplier often gets stuck holding the inventory. But a platform that can squeeze out inventory throughout the entire network can reduce overall costs and benefits to all the supply chain partners.

More importantly, the deployment of a network platform enables a restaurant supply chain to be demand-driven rather than forecast driven. This is because the network gives the restaurant chain and its suppliers the ability to make real-time course corrections to meet fluctuations in demand, such as those caused by promotions. For the restaurant industry, the agility provided by the platform results in cost reductions, decreased inventory stockpiles to free up working capital, reduced waste, and increased revenue, which is a win-win for all supply chain partners.

Siva Arumugam is executive vice president of the retail and consumer goods industry business unit at One Network Enterprises and previously led the supply chain business unit. Siva is a strategic, accomplished thought leader with extensive supply chain domain knowledge in multiple industry verticals and proven track record of delivering value to customers across the globe. Siva holds a patent for "implementing and managing multi-party value chain network in the cloud," and he was named as the first ONE Network Fellow for being instrumental and laying the foundation for the overall success and growth of the company.
As a proven thought leader, James Cooke has many years of experience covering industry, supply chains, software and technology. His book "Protean Supply Chains," published by Wiley, describes major trends impacting supply chain operations. James has vast expertise in research, journalism, advertising, and public relations. He led the launch of thought leadership journal, "Supply Chain Quarterly."