Outsourcing Your Supply Chain Can Boost Profits
When—and when not—to seek outside help is a critical management decision for chains of all sizes.
It’s a tough world out there for restaurant operators. They see profit margins being squeezed by rising commodity, health care, and labor costs. Changing consumer taste preferences are forcing them to scramble to improve their menus. Such diseases as the recent avian flu and porcine virus are striking without warning and disrupting the supply chain. Operators are also at the mercy of geopolitical crises and catastrophic weather events that impact the availability of commodities and the prices they must pay for them.
In light of these factors, operators of chain restaurants are increasingly searching for new ways to maintain profit levels without cutting costs to the point that they damage their brand, alienate loyal customers, and fail to attract first-time diners. More effective supply-chain management is one of the areas operators have focused on during the last few years to improve the bottom line.
As many of them are discovering, it’s impossible to have the expertise in all aspects of the supply chain to anticipate problems and act to resolve them with minimum harm to operations. As a result, they have outsourced management of the entire chain, from procurement to distribution, as a way to leverage their buying power and protect themselves against unforeseen disruptions in the flow of commodities to their restaurants.
When to Outsource: 3 Scenarios
Small-sized chains with plans for rapid growth, ranging between 30 and 40 new units a year, are the most likely candidates to benefit from contracting their supply chain management to an independent provider. To successfully implement growth on that scale, the supply chain infrastructure also must expand. And that’s a big expense that could dilute the profitability of expansion. Chain executives ask numerous questions during the planning phase, and another one they must ask is this: Do we want to build that infrastructure ourselves, or have someone else provide it?
There’s another scenario for deciding to outsource. This occurs when a restaurant chain is basically stagnant. It’s not growing, but it’s not dying. Sales are acceptable, but they’re not keeping pace with competitors in the same segment. Profitability is sliding due to the normal cost pressures, and the chain is struggling to cut expenses. At this point, it makes sense to outsource supply chain management for heightened cost efficiency, allowing the chain to devote full attention to its core business: focusing on the customer and driving brand equity to increase profits.
Even large chains sometimes reach a critical point where they lack the resources to manage their supply chains. They’re challenged by the same costs with which small and mid-sized chains contend. Or they simply lack the expertise to ensure that commodities arrive when they should and in the right amounts—and that they meet longstanding quality specifications.
When Not to Outsource
Not everyone should consider outsourcing. For small independent chains and small regional chains, it doesn’t make sense, as the return on investment isn’t worth the effort. This is not to say they don’t need help. However, it may be in the form of using a traditional Group Purchasing Organization, where operators can get allowances for products off the shelf at the distributor. Based on their distribution agreement, operators may not be able to stock items due to volume requirements. In this case, finding a GPO that can secure rebates/allowances off list price is a good strategy.
The very largest of chains already come with leverage and expertise, and adding additional leverage will not help.
For chains that are chef-driven, where the menu is decided on the local level, outsourcing can also be difficult due to the lack of consistency in product selection.
The trend we see with many chains is a combination of both in-sourcing and outsourcing. There is still a tremendous amount of support an in-source supply chain offers to the brand, including menu development, marketing, operations, training, and franchise relations, areas in which an outsource provider may not succeed. Instead, the chains use outsourcing to help them with business intelligence, leverage, and expertise when they don’t have the support for those activities.
What to Outsource
Restaurant chains achieve maximize efficiency when they outsource the management of all aspects of the supply chain: procurement, distribution, commodity risk-management, and business intelligence. This allows them to concentrate on day-to-day operations without the added stress of dealing with suppliers and monitoring events that affect the supply chain.
Operators can, however, choose to outsource specific categories, such as center-of-the-plate proteins. Whatever the category, however, it has to be large enough to make its management lucrative for the outsource provider.
Benefits of Outsourcing
Cost savings are one benefit for sure, but working with a supply chain management firm provides other benefits that are equally important to a chain’s operations. When a chain outsources, it gains access to a high level of business intelligence that can predict where commodity and distribution costs are heading. This eliminates the necessity of reacting—often with poor results—to potentially devastating events. Armed with intelligence, and based on years of expertise in the restaurant industry, the supply chain firm can immediately act on a risk management strategy to alleviate the danger and prevent the chain from suffering a loss in profits.
It’s important to remember that both parties are working toward the same goal. Suppose a chain wants to expand its menu by adding seafood. It may have ideas about what to offer but doesn’t have the expertise to know what products are available and in what amounts, or which suppliers can fulfill the restaurant's demands in terms of quality as well as in the timeliness of delivery. The supply firm has this knowledge. Suppose a chain has plans to go national with its operations. Does it have the supply chain infrastructure in place to do that, or even the ability to build one? Perhaps not, but the outsourcing partner is equipped with the strategy and tactics to implement a national expansion.
Proceed with Caution
Outsourcing is a complicated process that demands comprehensive planning and strict attention to detail. The biggest risk is obvious: the restaurant chain will choose the wrong provider.
Here are some considerations to keep in mind:
Look for full transparency. Never should you have to be hit with unexpected costs. The company you choose should be able to manage unanticipated events—severe weather, geopolitical developments affecting commodities, volatile swings in costs, diseases that harm crops or animals—to your advantage, not your loss.
Insist on clear and concise communication in a timely manner. Global commodity markets can be volatile, and your provider should quickly inform you of any increases in costs and have a strategy in place to lessen the increase.
State your goals precisely, and make sure your provider understands them. Outsourcing involves two levels of expectations, one by the chain and the other by the provider. Confusion about what to expect from outsourcing results from vague communication by one party or the other. Disappointment comes from unrealistic goals, so it’s essential that you carefully analyze what you want to achieve by outsourcing, and resist goals suggested by the provider that you are convinced are impractical.
A provider needs to be on the cutting edge. It must have technology that delivers real-time actionable data, 24 hours a day, seven days a week, so its clients can react to changes in their business when and where they happen, without delay or missed opportunities. If the provider can’t guarantee this, consider looking elsewhere.
A provider needs to understand your brand and be able to support the unique needs of the brand.
Is outsourcing supply chain management right for you? Whether the answer is yes or no, how to respond to the question lies in the meticulous process of making the decision. And it could make the difference between profit and loss.
The opinions of contributors are their own. Publication of their writing does not imply endorsement by FSR magazine or Journalistic Inc.