Supply Chain: How does your franchise stack up?

Author: jkealey@lavablast.com

Date: JAN 1st, 2014

Topic: Industry Experts

With FranchiseBlast, our franchise management software, we meet franchisors at very different points in their evolution. In this article, we study a particular aspect: the supply chain. Specifically, we describe how franchises typically manage their supply chain. By grouping these behaviors into five stages, you will discover how your franchise stacks up and the benefits which would result from moving to the next stage.

Stage 1: Autonomous Franchisee

Description: Each franchisee manages their inventory as they see fit. The franchisor potentially recommends or requires suppliers or certain methodologies, but has no visibility into the franchisee’s operations.

Benefits: The franchisor has less work and legal liability because they’re not involved. These benefits are, in most cases, actually a hidden problem which reduces the franchisee’s profits and stifles the growth of the franchise network.

Stage 2: Data Collection

Description: The franchisor receives a copy of the purchase orders for each of their franchisees from the franchisees themselves or, even better, from the suppliers. In addition, the franchisor may also receive current stock levels from each store. Ideally, everything is automatically collected in near real time and accumulated in franchise management software.

Benefits: The franchisor can now get involved and help franchisees to be more profitable through data analysis and benchmarking. This data helps the franchisor verify that high quality standards are respected across the franchise by ensuring that franchisees order only from approved suppliers. In addition, the franchisor can detect and prevent fraud in their franchise system thanks to this data. Finally, when the inventory data is centralized, franchisee interactions are facilitated (ex: stock transfers between stores).

Stage 3: Centralized orders

Description: The franchisor requires that all franchisees must place purchase orders within a central system. By receiving orders, he becomes an intermediary in the supply chain. However, there is no requirement for the franchisor to have their own warehouse and manage stocks because orders can be automatically dispatched to suppliers. Some franchisors brokers deals with their suppliers and probes the interest of the franchisees for these promotions via a group ordering system. They then combine the orders until the minimum level is reached before placing a bulk order.

Benefits: The main benefit of this stage is to reduce the cost of goods sold and ensure product availability, either by negotiating with suppliers or by opening your own warehouse. Rather than managing a warehouse and shipments themselves, which can be very expensive, many franchisors deal with specialized third-party firms which are much more efficient. This structure also allows for a transparent substitution of suppliers; the franchisor therefore takes a leading role to guarantee that franchisees can purchase quality products at an affordable price. Finally, some franchisors reduce or eliminate the traditional royalties in favor of a profit margin on purchases.

Stage 4: Order assistance

Description: What distinguishes this stage of the previous ones is the implementation of tools which effectively determine what needs to be ordered by a franchisee. These software tools allow you to use information on past sales to predict future sales and make sure you have the right amount of inventory on hand at the right time. For example, management software can be integrated with specialized software products such as Lokad to propose what should be ordered at which time. This tool predicts sales not only based on previous sales, but also on the macro trends in the industry.

Benefits: At this stage, the franchise optimizes inventory to minimize the likelihood that the franchisee with be out of stock, or at the opposite end of the spectrum, to avoid having funds unnecessarily locked up in excess inventory. This promotes efficient cash flow utilization, which is often one of the biggest challenges of a franchisee.

Stage 5: Automation

Description: When a franchise has reached the automation stage, it automatically places purchase orders instead of simply reviewing proposals made by the system. Furthermore, by analyzing sales following the automated purchasing, the system is continuously tweaked to learn from its previous actions (both successes and errors). This feedback loop is critical to the continuous evolution of an automated purchase order system.

Benefits: The main purpose is to eliminate the time-consuming manual processes and human errors by automating the ordering process with concrete data. We’re no longer simply optimizing the inventory of an individual store but rather are baking in the rules that lead to healthy inventory in the context of this franchise to ensure that the entire network is well managed. This level of abstraction is necessary when managing large quantities of products.

Conclusion

The different stages in this article are not necessarily appropriate for all franchises: some franchises skip some stages and others remain at a stage that is optimal for their franchise. However, a thoughtful analysis of your supply chain will certainly reveal improvements which can increase the profitability of all the franchisees in the network. This is an extremely important aspect of a healthy franchise system; franchisors often do not give enough attention to profits as their royalties are based on sales.