Franchise Supply Chain Consistency- Approved Suppliers & Rebates

Author: lori@lorikarpman.com

Date: AUG 29th, 2014

Topic: Industry Experts

One of the most frequent questions that prospects ask before buying a franchise is: Can I choose and buy from my own suppliers even though the franchisor gives me a supplier if I can get the same or a similar product myself for less money? The answer is simple: NO.

One of the biggest advantages of franchising is the ability to purchase inventory and supplies at a discounted rate based on the volume of purchases placed by all the franchisees in the system. Generally franchisees can get their supplies at a cost much lower than they would be able to obtain on their own. As well, consistency is the key to success in franchising and therefore all franchisees must use the same products to ensure that customers have the exact same shopping experience at all outlets, that is, the same products are on the shelves and the food is the same quality. Furthermore, the franchisor has already done the research to select the appropriate suppliers so that the franchisees do not have to. In fact, the established supply chain is one of the most important factors in the decision to buy a franchise.

It does happen on occasion that a product can be sourced at another supplier for a lesser rate. The most common example is sodas where franchisees can go to their local BigBox store and purchase soft drinks at a lower rate than the franchise’s supplier. However, the lower rate is really not lower at all. First off, there is the time and effort it takes, including gasoline and time away from the business (where sales can be made) that has to be figured into the cost of self supplying. Additionally when the franchisees purchase from the franchisor’s supplier the price goes down as the price is based on the volume of purchases in the entire system. Franchisors often receive volume rebates and discounts based on system sales as well. This latter revenue is essential to the operations of the franchisor as it is not profit, but investment funds that are invested back into the business and used for a variety of functions such as research and development, new marketing campaigns, and overhead costs, to name a few. A franchisor cannot provide all the support that franchisees require based on royalties alone and need other sources of income to be able to do that. Volume discounts and rebates are an essential source of income to the franchisor. To the extent that franchisees self supply, this support money goes down and all franchisees are hurt by it. It is important to note that franchisees do not always get the lowest price but the price must at least be competitive.

There are cases however where a franchisee does in fact find a better or cheaper product that meets the franchisor’s standards and in this case, the franchisor is very open to testing the product. The franchisor will analyze the product and if it is acceptable the franchisor would then list the supplier as an approved supplier and allow all franchisees to purchase from them.

It is the franchisor’s responsibility to ensure that suppliers deliver on time, have the right products and reasonable pricing. It is often the case that the franchisor is a supplier itself and in this case, it too is allowed to make a profit, providing the price is reasonable, just like any third party supplier.

Consistency is the key to success in franchising, and so the supply chain must be adhered to strictly. Franchisees must only purchase from approved suppliers and the franchisor’s field team must ensure that this procedure is being enforced to ensure the consistency required for the success of all franchisees.