Thursday, October 16, 2014

Proactive Procurement in the New Supply-Chain

Today’s discussion tackles the question of whether a food service organization can change the new supply-chain enough to reduce food costs and thereby increase profits.

The answer depends on whether or not you can distinguish between a distributor managed pricing program from a true-cost of goods model which correlates production costs, commodity markets with finished goods pricing.

Most emerging restaurant chains pay less attention to true costs than they do pressing the distributor for lower delivery margins and suppliers for rebates.  From my 20 years consulting with more than 60 restaurant and hotel chains, I guarantee that any direct cost associated retaining a purchasing professional is an extremely sound investment.

What’s wrong with the new food service supply chain?

Traditionally, chains worked hard to move away from distributor managed purchases; managed product sourcing and structured pricing agreements with limited outside influences, and developed manufacturer sales advocates. 

Pre-2000, the transport of contracted products was handled by the supplier directly with the foodservice chain or co-managed with freight carriers.  While there was never was "true" pricing transparency; in past years supply partners discussed freight, production costs, overhead, sales overages, and distributor discussed financials.  

Today's new food service supply model or should I say, the“multi-income stream approach” that is taken by many distributors. This splits costing areas into watertight distributor profit centers.  All this is happening even as chains rush to reduce their purchasing staff  or delegate responsibility to non-procurement managers. You can bet the tremendous growth of group purchasing organizations (GPO's) can be traced to staff reduction.  However, this comes at considerable bottom line cost to the food service operator.   

Where the essence of procurement supply chain management has been transparency, and management of the cost components to the purchase there are two drivers changing this model, the are;  manufacturer segment specialization (ie: designated as a local chain, regional, national or broker /distributor managed program) and distributor category management. 

Both systems limit the chains ability to source the best product available at the best price. Making the task harder is direct collaboration between the manufacturer and distributor operating the single source system. 

Consider the 100-unit chain buying 15,000 lbs. per month of a standard breaded chicken tender under the distributors private label, for $2.55 per pound.  The chain opens a restaurant 500 miles away and discovers the same product under the manufacturer label sells for $2.40 per pound.  At the NRA show the buyer meets with the supplier directly and they reach an agreement for a private label program for only $2.25 per pound!  

Lets look at this example from the product sourcing perspective.  The distributor’s single-source buying system offers chicken tender for $2.55 lb. and they do not inventory a competitive product. The chain buyer asks the supplier for a special price based a volume purchase commitment, and the supplier refuses, stating "this is not allowable under the agreement we have with your distributor".

Every seasoned buyers reading this blog is shouting "foul" and will be quick to point our there are laws against price-fixing, The “Robinson-Patman Act”  or Interstate Commerce regulations; ...inside the ropes, however, they lament about how earned income,  single sourcing, and greed have distorted  the "true" cost of goods in the new age supply-chain.  

Is our buyer daunted by these obstacles?  Never!

Not wanting the chains' purchasing power to go down the drain and wishing to use his strategic buying plan for 2015, a lower cost supplier is sourced from outside the controlled supply system.  The new price is only $2.30 per pound and the supplier offers firm pricing.  Now the bad news!  The potential program is derailed because the new supplier does not have a financial relationship with the distributor resulting in higher inbound freight

Purchasing managers must develop missionary zeal in making the right distributor and vendor selections, and implement proactive procurement programs that allow the chain to take back the management of their supply-chain. It's the key to improved purchasing, higher profits, future cost-controls, and culinary independence.

To Higher Profits,   Fred                                                                                                   

Fred Favole is Founder/CEO of Strategic Purchasing Services (SPS), America's most experience foodservice consulting firm specializing in staff outsourcing and cost reduction management. Contact SPS for a free spend assessment or purchasing consultation: Office: (912) 634-0030, Email: