It May Be Time to Review Your Purchasing Program

Franchisors are always looking for ways to boost cash flow and build greater trust with franchisees. One way to help accomplish those goals is to offer an effective purchasing program.

Purchasing represents a big cost for almost all systems and experts say it is possible to find a significant potential or actual savings from the right program.

"It's like money in the bank," says Darrell M. Johnson, president of FRANdata. "A five to 10 percent impact on a franchise system's bottom line is not unrealistic. Further, a dollar saved from purchasing product directly benefits your franchisee's bottom line whereas an additional dollar of revenue has a much smaller impact on the bottom line," he adds.

To find out how purchasing programs are working in the franchise industry today, FRANdata reviewed 899 franchise

systems. It found that about eleven different types of purchasing programs are

being used by franchisors. They include third party suppliers, approved vendors and distributors, franchisor-only purchasing, and independent purchasing cooperatives.

As you know, franchisors are typically involved at some level with product purchases by franchisees. These plans have a number of objectives. For example, a purchasing program should provide efficient and effective product selection as well as a flexible response to ordering needs. They also should minimize inventory costs while having the right products in the right place at the right time.

If you are lucky enough to be experiencing growth, it may be time to reconsider the type of purchasing program you have in place. "Changes in purchasing programs come about because the franchise system outgrows the way products are purchased and delivered," says Johnson. He also says that no single program is right throughout a franchise system's lifecycle.

As the number of franchise units grows and the geographic area expands, the task of arranging purchasing and delivering products becomes much bigger, he explains. The franchisor is faced with adding staff and associated costs or looking at alternatives.

Johnson says if franchisors add staff, they face a decision about whether to seek rebates from suppliers and hold the rebates as an offset to their costs or to pass the rebates on to franchisees. "If they look at alternatives, they are basically seeking a way to outsource the product purchasing function, which impacts cash flow at the franchisor level," he adds.

Consider an Independent Cooperative

When reviewing your purchasing arrangement, you may want to consider setting up an independent purchasing cooperative. It can provide a number of benefits that will work to your advantage as well as that of the franchisees. For example, co-ops help save money and improve cash flow. The bigger the cooperative, the larger the co-op's buying power, says Friedlander.

Before you make your decision, Johnson recommends determining what your purchasing needs are likely to be in three to five years. In addition, do you have some way of measuring whether the purchasing program you now have in place is meeting your system's current needs? Further, do you know the true cost of your current purchasing program at the franchisor and franchisee levels and how has it changed over time?

Keep in mind that co-ops are user-owned and controlled operations that provide benefits on the basis of use. Since franchisees use vast amounts of raw materials or ancillary services, volume discounts as well as customized service can be negotiated with vendors when a purchasing cooperative is put in place.

Members of a co-op generally purchase all of the goods used in the franchisees' outlets and agree that the co-op may collect a fee to fund the program. The co-op also reduces the costs to franchisees by assuming many credit, sales, marketing, and billing functions that would otherwise be performed by multiple suppliers.

Co-ops help create goodwill for franchisors. Franchisees appreciate the fact that co-ops can obtain goods and services that they would not be able to obtain as economically and efficiently if they were purchasing these items on their own. In addition, co-ops speak with one consistent voice with suppliers.

Another plus to consider is the fact that co-ops help save money on freight costs. "A co-op knows what (freight) is in route, how many loads, bags, or cases are being delivered from the processor to the distributor and when the freight is going to arrive," explains Jerry Friedlander of Janjer Enterprises in Silver Spring, Md., and chairman of Supply Management Services (SMS), a purchasing cooperative for AFC Enterprises Brands.

Independent cooperatives also help to build trust with franchisees. "As long as the cooperative is independent of the franchisor, it is possible to build trust with the franchisee," he says.

With an independent purchasing cooperative, purchasing contracts as well as financing are an open book to every member. One area of dissatisfaction between franchisees and franchisors in the past has been how procurement was managed. "Franchisees always believe that the corporation is getting some special benefits from suppliers," says Jeffrey Spotz, a consultant to SMS.

Another advantage is that all operators, including corporate and franchise units, are eligible to be members, and all receive the same benefits. Franchisees have a role to play in a co-op, which gives them a stake in the system. They serve as directors on the board and help set operational and finance strategy.

What kind of responsibility does the franchisor have with regard to independent co-ops? Friedlander says that main job is quality control. "The franchisor has to make sure that the product that is shipped to stores meets their quality specifications. In addition, the franchisor also has to approve the distributor and the processing plant to protect the franchisee from a quality standpoint."

If there are any problems with product or the delivery of product, the franchisee will call the franchisor for assistance. "Franchisors have specialists who will look into any snags," says Friedlander.

Above all, he says, an independent cooperative is a great way to sell your franchise. Franchisees know how the goods are purchased and that the co-op is taking all the necessary steps to keep costs down. Says Friedlander: "The franchisees feel better about the price of goods because they know they are part of a negotiated contract with the co-op."

- Joan Szabo is a Virginia freelance writer who specializes in finance.