Supply chain management often ranks low on the totem pole for franchise candidates and franchise sales people alike. Face it, it's just not all that sexy. Yet, while franchise prospects initially may have no idea what a supply chain is, they quickly warm to the idea that a brand with a well-managed supply chain has a competitive advantage over those that don't. Paying less for necessary supplies is definitely a plus in franchise sales. Thus, in response to the perennial "How much can I make with your brand?" question, the answer for a company with an efficient supply chain is "More."
Joyce Mazero and Len MacPhee, attorneys with Gardere and co-chairs of the firm's Global Supply Network, wrote an article earlier this year called "Setting the Stage for a 'Best in Class' Supply Chain" that was published by the American Bar Association. What follows are lightly edited excerpts. The full article can be found here.
Overview. This article focuses on setting the stage for "best in class" supply chain management, including selected key considerations, processes, and material provisions the authors believe provide a baseline for negotiating and drafting approaches to supply chain arrangements that franchise counsel may want to consider. This article will identify and discuss the following considerations:
1) the selection of qualified suppliers;
2) identification of fundamental terms for supply agreements critical to achieving timely supply of conforming products;
3) methods of managing supplier performance through key performance indicators and corrective action plans to resolve performance issues; and
4) corporate responsibility and transparency considerations.
Competitive advantage. A competitive supply chain is critical to the success of a franchisor and its franchisees. Without timely, accurate, and safe distribution of high-quality products to franchisees and customers, a franchisor's brand performance expectations will not be met and relationships across the supply chain spectrum will suffer, ultimately resulting in significant harm to the customer experience every franchisor seeks to competitively optimize.
Unit economics. Integration of disciplined supply chain practices and measurement of supply chain performance is a critical linchpin for improving overall unit economics. Unit economics are the fundamental financial predictors of the franchise business model. Measuring unit profitability is a strategic tool that smart franchisors and franchisees use to leverage the parts of their business having the most significant level of marginal investment.
Service excellence companies measure unit economics by focusing on the customer experience - businesses today have increasing access to real-time data regarding customer experience and there has never been a stronger focus on service delivery. Amazon and Zappos have created a significant competitive advantage based on customer loyalty with their online retail services.
Product excellence companies focus on the supply chain holistically, driving costs out of each leg of producing, buying, and selling goods - delivering and requiring their suppliers to deliver the highest value at the lowest cost. Apple is a competitive example.
Other companies focus on eliminating waste following lean management principles in managing their supply chain at each stage and anticipating problems at the earliest stage possible. Companies in the banking, technology, insurance, consulting, food service, and health care industries are prime examples of active integrators of lean management principles. Franchise companies care about excellence in each of these areas.
Raise the bar. However, the supply chain management bar for many franchisors has too often been set low, limiting their ability to use serious strategic planning processes that the brands noted above have adopted. As a result, analyses of unit economics may not provide the economic benefit to franchisors that a more studied approach could provide. The reasons vary.
Issues. Sometimes franchisors believe it is too costly and time-consuming and that they have insufficient leverage to drill down into supply chain costs when they are hostage to large distributors or believe their "practical experience" is sufficient. Others rely on form contracts or standard terms and conditions, which may include boilerplate or old language that is not applicable to the franchisor's supply chain relationship or appropriately tailored to the franchisor's business needs.
Best practices. Integration of certain best practices conducted by brands known for superior supply chains is possible on a cost-efficient basis when franchisors consider the aggregate spend contemplated by their manufacturing, distribution, supply, and logistics contracts; the projected monetary value of those contracts to the franchise system; and the potential risk and liability to the franchise system if any of those contracts fail.
Conclusion. Implementing an effective supply chain is one of the most important things a franchisor can do to promote the success of the franchise system and its franchisees.
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