EXECUTIVE SUMMARY. Meeting the Demands in Today s Supply Chain

Transcription

1 EXECUTIVE SUMMARY Meeting the Demands in Today s Supply Chain

2 August 5 6, 2014 Buffalo, NY Meeting the Demands in Today s Supply Chain Introduction IFMA began its 2016 Strategic Issues Series (SIS) with its session titled Meeting the Demands in Today s Supply Chain. The session, held in April in Chicago, focused on how third-party supply chain options are becoming more prevalent in today s foodservice landscape. Maryanne Rose, founder and CEO of SpenDifference, presented Outsourcing the Supply Chain in the Foodservice Industry, setting the foundation with key insights outlining the rise of third-party supply chain options. Additionally, Sherri Hager, VP of Client Solutions at SpenDifference, moderated a discussion with three chain operators who provided perspectives on and experiences with outsourcing their supply chain. The SIS forum enables IFMA members to come together and explore the operating environment to be better prepared for the future, its nature, and requirements. The concept of SIS began with The Hale Group s White Paper Foodservice 2020: Global, Consolidated, and Structured. The subsequent sessions focused on: Distributor of the Future Market Coverage Requirements by Foodservice Manufacturers Consumer of the Future: The Arbiter of Success Foodservice Category Management: Opportunities, Challenges, & Solutions Framework for Distribution Strategy Building Category Plans & Using Analytics How to Win in Grocery Foodservice Navigating Foodservice Opportunities in C-stores Building Alternate Strategies in Distribution Outsourcing the Supply Chain in the Foodservice Industry Maryanne Rose from SpenDifference offered insights on the market forces driving third-party involvement, evolution of third-party options, and key challenges within the supplier and distribution community. Maryanne also addressed how suppliers and distributors should evaluate and work with third-party options. Evolution of Restaurant Industry Supply Chain Outsourcing Profitability in the restaurant industry is squeezed today by a wide range of pressure points, including consumer demand for supply chain transparency and consistency in products, government regulations that add costs to operations, as well as food safety issues that disrupt the supply chain. There also is the blurring of market segments that has provided consumers with more choices for food away from home beyond restaurants. What s Driving Change 2

3 Faced with shrinking margins, operators are looking for solutions to reduce their costs, manage corporate and store level profitability and quickly respond to customer demands. Cutting food quality and service are not options in today s environment, as that would damage their brands. A key question is how to use technology to remove costs from the supply chain. The answer is a collaborative platform that requires integrating technology among restaurants, distributors and manufacturers to ensure that all supply chain costs are accurate. Many operators have found a solution in outsourcing their supply chain needs to a third party, a model that has evolved over the years. Fifteen years ago, Group Purchasing Organizations (GPOs) made their first entry into the restaurant industry. They offered rebates on products the restaurants were already using, or rebates if the chains agreed to switch products. Distributors began to evolve their roles beyond moving products from one point to another. Many became both manufacturers and technology providers, offering solutions for supply chain problems. They were an effective choice for smaller restaurant chains that could not manage costs effectively. Everything changed with the Great Recession in As margins became thinner, the restaurant industry was forced to rethink the traditional way of doing business, and an alternative became available through various third-party solutions. Restaurants that initially were not interested in outsourcing explored their options as commodity and labor costs rose while their profits began to decrease. Technology and transparency also changed supply chain strategy. The largest brands in the industry have great technology to manage costs and eliminate unwanted costs, but 80 percent of chains can t afford the high cost of these and other critical resources because their spending goes toward remodels, developing new units and marketing to drive top-line sales. But all brands need contract management, product compliance and price accuracy, which sophisticated technology provides. This technology has advanced significantly since 2008, but comes at a high cost. Another key development in the evolution of outsourcing is access to supply chain expertise, which is hard to find. Employees entering foodservice, except at the largest chains, are not being trained in the intricacies and innovation of today s sophisticated supply chain. The costs of the skills and benefits associated with the necessary talent further impact the challenges restaurant brands face. Fortunately, the evolution of restaurant supply chains has led to new options. Supply Chain Approaches Including Third-Party Options There are various levels of supply chain support and options. Each has different characteristics. The first is internal staffing. Resource constraints often limit personnel to being generalists, not specialists; leverage is confined within the one brand; access to supply chain expertise is challenging; investment in supply technology is difficult. Additionally, there are third-party/outsource options: Group Purchasing Organizations: Manage a set catalog of products, which are not brand-specific items; rebate driven; restaurant spend managed is between 5% and 15%; depth and breadth of program is limited; none, or limited, custom and proprietary contracting. Category Management: Can be very effective in a specific category; ability to leverage spend is limited; examples are indirect, energy and risk management. Supply Chain Consulting: Provides the why and the what, but not the how; expertise in supply chain of many industries; engagement can be costly; companies lack the talent internally to execute the consultant s recommendations and gain the intended results. Co-Ops: Leverage varying brands and unique specifications; closed system; funded by franchisees through a patronage model; end-to-end supply management; sophisticated supply chain technology to drive activity and business intelligence. Benefits to Manufacturers from Third-Party Supply Chain Management Being competitive in today s hypercompetitive restaurant market requires new thinking and a new level of collaboration between manufacturers and operators. Working together creates the best value for restaurants and leads to long-term supplier partnerships. In a third-party model, manufacturers gain access to multiple brands at the same time, allowing manufacturers to grow their business in ways not possible before. Restaurant operators value suppliers who offer new ideas on products and innovative marketing insights, and tend to maintain relationships with them for many years. 3

4 How Manufacturers Can Work Effectively with Brands in a Third-Party Environment Although working with a third party has benefits, adding another layer to any business model may cause challenges in the manufacturer-operator relationship. Engaging others requires an understanding between partners and a high level of collaboration. Ensuring the clarity of roles and decision making between the brand, suppliers and third-party provider is paramount. This requires income stream transparency between all parties and a clear communication process to address concerns as soon as they arise. SpenDifference is addressing the challenges of third-party outsourcing with the establishment of its Client Advisory Council and Supplier Advisory Council, which meet together during the year to clarify the roles each participant plays in a third-party model. At least 50 percent of restaurant chains are using third-party leverage in some form. Manufacturers need to understand all the various third-party options to benefit from what is clearly a long-term trend in the industry. About SpenDifference SpenDifference is a full-service, nationwide supply chain management firm exclusively serving restaurants. SpenDifference manages $1.3 billion annually in purchasing on behalf of its clients. It is based in Denver, with offices in Atlanta and Louisville. The company was established in 2008 and now has a client base of 17 concepts across multiple segments, including Focus Brands 5,000-plus units (Carvel, Cinnabon, Schlotzsky s, Moe s Southwest Grill, Auntie Anne s and McAlister s Deli,), Long John Silver s, HuHot Mongolian Grill, Sizzler and others. SpenDifference uses a co-op like model, combining leverage and buying expertise across all categories to manage costs, increase profitability and drive growth, and is committed to complete transparency. Services are customized to each client s needs, from supporting current supply chain staff to a full outsource model. The company utilizes advanced technology and business intelligence to deliver real-time actionable data to clients. Breakout Session Discussion SIS attendees divided into three roundtable groups to discuss three separate questions. Do you think outsourcing is a long-term trend? Why/why not? Outsourcing is expected to be a long-term trend, especially if it provides cost savings and value to the operator. Do you see any obstacles to a brand outsourcing their supply chain? Any benefits? Obstacles may include the additional layer to the supply chain, role/responsibility clarity and trust between the partners. Benefits may include the opportunity to grow manufacturer s business with other operators and the added expertise as a resource. Which third-party supply chain options do you currently interface with? What are the key areas of opportunity to create value? Manufacturers currently interface with all types of third-party supply chain options discussed. Opportunities to create value include additional relationships, clarity of roles and driving compliance. 4

5 Outsourcing the Supply Chain: Customer Perspectives SpenDifference has developed three service models that allow customers the flexibility to outsource based on their needs. On-site: On-site SpenDifference team supports the client s supply chain needs; embedded in operations, culinary and marketing; provides full day-to-day client support. Off-site: Off-site supply chain services support through SpenDifference s offices; works with, but is not embedded in, operations, culinary and marketing; does not support the day-to-day activities of the client. Fractional: Part-time on-site SpenDifference employee to support client s supply chain needs; embedded in operations, culinary and marketing; does not support the day-to-day activities of the client. All SpenDifference service models include: leveraged spend, category management/supply chain support, supply chain strategy development, purchasing management, distribution management, business intelligence customized for each client that uses predictive analytics, transparency, project management, commodity risk management and a Strategic Sourcing Summit. During a moderated panel session, three SpenDifference customers, each reflecting a different business model, provided insights on such topics as key concerns for restaurant chain operators in 2016, how these concerns impact an operator s supply chain, and the reasons they seek third-party support. Speakers included: Richard Kamph, vice president of supply chain for FOCUS Brands, representing a partially outsourced model with a brand that has a core internal supply chain team. Jeff Martin, chief operating officer of HuHot Mongolian Grill, representing a fully off-site model. Kerry Kramp, president and CEO of Sizzler, representing an extended supply chain model. During their presentations, they made the following key points: Key Points Chains are increasingly looking to operate leaner, and more are turning to third-party supply chain support; the model is here to stay for the long term. Manufacturers have greater access to a large number of brands when they work with a third-party provider. On the brand side, restaurants gain access to a larger number of manufacturers. Manufacturers and restaurants both benefit from business intelligence from a third party that accurately tracks changes in commodity prices and disruptions in the supply chain. Chains rely on manufacturers who invest in innovative products. It s important for manufacturers to know the differences between each of the various third-party models. A common misperception is that they all offer the same services. Brands need to be involved in decisions made by the third-party provider and ask tough questions about their recommendations. Relationships with the third party require transparency; trust is essential to make the partnership work successfully. A critical point is the clear understanding of the roles each partner plays in the supply chain. Even in a third-party model, chains still interact with manufacturers. Chain executives have to explain in detail to their franchisees why it s best for them to have a third-party provider. The provider needs to have the same passion for the brand that executives and franchisees have. A third-party provider should be the facilitator of the brand s ideas and not offer ideas that would harm the brand s identity and reputation. 5

6 Overview of Operator Perspectives Richard Kamph said his company decided about three years ago to consolidate its supply chain. After hiring a consultant to advise it, FOCUS realized the recommendations were more difficult to implement than it thought. It became a SpenDifference client in 2014, using a partially outsourced model. FOCUS kept logistics, distribution and quality assurance in-house but outsourced procurement. Since the partnership began, FOCUS Brands has far more resources for procurement and more supply chain expertise, at a lower cost, than it could have developed by itself. Three full-time SpenDifference employees work at FOCUS headquarters and meet regularly with all departments, resulting in a truly collaborative supply chain organization. Although it uses a third-party model for purchasing, the relationships between FOCUS and its suppliers haven t changed; the company still maintains direct contact with suppliers. SpenDifference s role is finding additional suppliers. FOCUS values long-term relationships, and since its partnership with SpenDifference it has changed fewer than 10 suppliers. Jeff Martin said when he joined the chain of 60 restaurants in 2010, 70 percent of which are franchised, franchise owners had complete autonomy over purchasing and used a multitude of suppliers. His task was to centralize purchasing, and he knew he needed help. HuHot formed a partnership with SpenDifference five years ago to use a fully off-site model, relying on the company for all of the chain s sourcing of commodities and distribution. In the beginning, franchisees had to be convinced that bringing purchasing under one roof was beneficial. When he provided data that showed how costs had gone down, franchisees embraced the third-party model, and HuHot s credibility as a cost-conscious franchisor rose dramatically. HuHot works directly with suppliers and relies on them for their expertise in consumer insights. The suppliers who bring the most value to HuHot are those that come up with ideas before the chain asks for them. According to Martin, as long as manufacturers maintain transparency on prices, the third-party model is a win-win relationship for both HuHot and the suppliers. He also said he can t imagine ever returning to inhouse management of the supply chain. Kerry Kramp said working with SpenDifference has made the chain better at understanding its supply chain needs. Sizzler was one of the first SpenDifference clients and uses an extended supply chain model. According to Kramp, SpenDifference is a facilitator for the ideas Sizzler comes up with, finding suppliers who can accommodate the chain s goal. As an example, when Sizzler went back to making all of its menu items in-house, SpenDifference was able to narrow the number of suppliers who could provide the pre-trimmed steaks the chain needed. Sizzler also is a big user of chicken wings and SpenDifference found a supplier who met the chain s specifications and did not charge a premium price. For Sizzler, one of the most valuable aspects of the partnership is the business intelligence SpenDifference provides on commodity prices. The company also shares non-proprietary ideas of its other clients that Sizzler can use in its own operations. Kramp had misconceptions about the third-party model when he first considered using it, and he acknowledged that manufacturers today harbor the same feelings. He urged them to perform due diligence into the model to dispel those false notions. Entering into a third-party partnership may not be right for every supplier, but those who do gain wider access to more restaurant customers. Breakout Session Discussion SIS attendees divided into three roundtable groups to discuss three separate questions. What value-added services can manufacturers provide to the operator customers? Value-added services that manufacturers can provide include sharing strategic insights and understanding the operator s brand. How do you suggest outsourcing partners be included in your National Account strategy? Manufacturers can leverage their capabilities across other customers utilizing the same third-party supply chain solution. How do you suggest operators utilizing an outsourced supply chain and suppliers should work together to bring value to the brand? Manufacturers and operators should have a trusted partnership, including sharing insights, working together on innovation/ product development and sharing cost savings. Conclusion The demand for outsourcing the supply chain in the foodservice industry is growing rapidly and third- party suppliers are rising to meet those needs quickly. Manufacturers that better understand the variety of third-party supply chain options and how operators work with these providers are in a position to best leverage these relationships. 6