Building an Effective Supply Chain and Distribution System

October 3, 2012 By R. James Straus
American Bar Association 35th Annual Forum on Franchising

I. The Importance of the Franchise System Supply Chain

A supply chain provides the means by which a company brings its products or services to the marketplace.[3] A supply chain usually involves several parties, including, among others, manufacturers or raw product producers, logistics providers and distributors. For a supply chain to be effective, all of the involved parties must be aligned to common goals and the company’s supply chain strategy. For the value of the supply chain to be maximized and cost savings realized, a company’s supply chain strategy must be executed efficiently. A franchise system’s supply chain can provide significant value to the system, but problems in a franchise system’s supply chain can cause severe disruptions and derail franchisor/franchisee relationships. Therefore, a franchise system’s supply chain is one of the most important factors in determining whether a franchise system functions effectively and will continue to expand.

It is no secret that competition among franchised businesses in many sectors is fierce and that many franchised businesses operate on thin margins,[4] meaning that every dollar spent directly impacts the bottom lines of franchisees and franchisors. Improvements to a franchise system’s supply chain represent one of the few opportunities for positive impact to a franchise system’s financial returns that do not require increased sales, or even, depending on the strategy chosen by the franchisor, a significant investment of capital. A franchise system with a solid supply chain will usually see significant returns on its investment.

The distinct competitive advantage that a franchise system may obtain by lowering costs is often the primary reason why many franchisors pursue supply chain improvements, but it is not the only reason that a franchise system’s supply chain is an important part of the system. A hallmark of franchising is the ability of multiple outlets to operate under a common name and system and to offer uniform, high quality products and services. Many parts of a supply chain contribute to help the franchise system achieve those quality goals. For example, as discussed in detail in Section IV below, many franchisors employ stringent standards for supplier approval. In addition, as discussed in detail in Section II below, many distribution agreements provide for timely delivery of products and service level agreements to support services to the franchise system. A strong supply chain is necessary for a franchise system to be able to achieve its goal of offering uniform, high quality products and services to its customers.

Franchisors are also increasingly recognizing that a reliable and strong supply chain is an important part of retaining the best franchisees and helping them to expand into multiple units, as well as in recruiting new franchisees, particularly sophisticated, multi-unit operators. Franchisees often lead the charge to improve their franchise system’s supply chain, sometimes going so far as to create a cooperative or other group purchasing organization that is owned exclusively by franchisees. More and more, franchisees are sophisticated companies that bring broad and deep experience to franchise systems, and therefore expect their franchisors to employ the best strategies to help them succeed. Many franchisors recognize that an efficient supply chain is an important part of such success.

However, there are many franchise systems that do not immediately realize the potential advantages of a strong supply chain. What is problematic, however, is not a failure to realize the benefits that a strong supply chain may bring to an organization, but a failure to realize the perils associated with poor supply chain management. Beyond the positive effects of an efficient and well run supply chain, there are distinct disadvantages to an inefficient and poorly run supply chain that highlight the importance of giving a supply chain due attention. Many companies, to their detriment, place supply chain issues as a low priority until a problem causes them to focus on supply chain issues. Until a problem arises, a company may “expect the supply chain to work efficiently without interference, as if guided by [an invisible hand].”[5]  Problems may force the company (or franchise system) to then focus on the supply chain. A key distributor may suddenly become unreliable, or worse, enter bankruptcy or liquidation proceedings with little warning. Or, like Cisco in the early 2000’s, a company may over commit to supply chain partners and then be forced to dispose of or repurpose excess inventory during a downturn in customer demand.[6] In considering priorities, franchisors and franchisees should therefore be mindful of the negative impact that supply chain problems may have on the franchise system.

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