Supply Chain Management in a Quick Service Restaurant Chain

8/4/2019 Supply Chain Management in a Quick Service Restaurant Chain

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Supply Chain Managementin a Quick Service Restaurant

EnvironmentThe Burger King System Example

Presented by

George HoffmanRestaurant Services, Inc.

Michigan State UniversityMarch 28, 2006


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Agenda

Burger King System overview BK Purchasing and Supply Chain History

Restaurant Services, Inc

Corporate structure Purchasing Scope

Supply Chain management evolution

From narrowly-focused purchasing toIntegrated Supply Chain Management

Current Industry Challenges


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Burger King History 1954 - Founded in Miami, featuring:

Flame Broiled Hamburgers @ 18 Milkshakes @ 18

1957 - Whopper introduced @ 37 1967 - BK Acquired by The Pillsbury

Company: Purchase Price - $18 million 274 restaurants

1988 - Grand Metropolitan acquires Pillsbury

and subsidiaries - $5.79 Billion 1997 - Grand Met + Guinness = Diageo 2002 - Burger King Corporation goes private 2006 Burger King IPO forthcoming


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Burger King Today

11,200 restaurants worldwide (7,400 U.S.) 90% franchised

50 States; 61 Countries

$11 Billion system sales ($1 million/rest) 340,000 people employed

5.7 million hamburgers sold/day

1.5 million pounds of fries sold/day

7 million customers served/day

59% Drive-thru


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Burger King System Restaurants

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

67 77 86 88 89 90 91 92 93 94 95 96 97 98 99 '00 '01 '02 '03 '04 '05

U.S. International


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BK System Supply Chain

7,400 restaurants (U.S.) 100 Million cases/year

Average 13,000 cases/restaurant/year

400+ Primary Suppliers

High commodity content 27 Regional Distribution Centers

Average 275 restaurants/DC

1 Re-Distribution Center

Premiums manufacturing in China Increasing China sourcing

2 Kitchen Equipment Consolidators


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Supply Chain Value Added(typical restaurant)

RawMaterials

Supplier

ManufacturingFreight

Warehousing

Delivery

Restaurants

+ $60K + $15K

+ $25K

= $350K

$250K

Customers

$1,100K

Freight

= $310K


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Burger King Supply Chain History Pre-1990 restaurant operators purchase their products

from their choice of approved distribution centers All distributors independently purchase products from suppliers The only national distributor is a wholly owned subsidiary of BKC

Restaurant operators independently negotiate terms with the DCs

1990 BKC decision to divest BKC distribution subsidiary

1992 Separation of Purchasing from Distribution Change distribution format from wholesalers to distributors

Create RSI: Consolidation of all System purchasing into amember-owned coop accountable to all restaurants, franchisedand company

Franchisees still choose from among approved distributors 1999 RSI scope expanded to include distribution

contracting

2000-2004 Integrated Supply Chain ManagementSystems development and implementation


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Why Separate Purchasing from theCorporation?

90%+ of restaurants franchised vs companyowned and operated

Corporation cannot require franchisees topurchase under company contracts: inability to

commit franchisee volume Financial model of the Brand owner is differentthan franchisee Top line sales generates royalty Franchisees model of success is individual restaurant

profitability Trust Best for restaurants or best for

corporation? Opportunity to tax system forBrand owner benefit.


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Other QSR Models

McDonalds

corporation department,regional advisory councils

Wendy corporation department

YUM Brands (KFC, Taco Bell, Pizza Hut) Unified Purchasing Coop

Umbrella Board; Brand Boards

Popeye/Churchs Joint cooperative

Subway Independent cooperative Arbys semi-independent cooperative


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Restaurant Services, Inc.

Formed in 1992 Delaware Charter Corporation

Operating Agreement with BKC

Subchapter (T) IRS Status

Not-For-Profit Coop

Net Income Distributed Annually

Patronage Formula

Democratic Governance

Voluntary Membership


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Why Delaware; Why Coop Form?

Delaware offers substantial corporationstructure flexibility

Coop (sub-T) is IRS designation (not

provided for in Delaware law) Allows for no taxation provided:

Democratic governance (one member; one vote)

All net earnings distributed to members viapatronage formula

Members individually subject to taxes onpatronage dividends (1099Div Forms issued)


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RSI Ownership/Membership RSI Membership:

Burger King Corporation

U.S. Franchisees of Record Individuals

Corporate entities Partnerships

Membership is voluntary Members must sign agreement to be

member Eligibility to vote for RSI Board members

Eligibility to receive patronage dividends

100% U.S. membership


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RSI Governance

Established by Charter/Bylaws Governance structure approved by IRS

21-Member Board of Directors 2 elected from each of 9 regions

1 recommended by BKC 1 appointed by Minority Franchise Association

1 independent director, at the Boards option

Regions of reasonably equal number of

members Periodic redistricting required


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RSI/BKC Operating Agreement

Defines BKC/RSI Roles and Responsibilities BKC recognizes RSI as exclusive Purchasing

Agent for restaurants in the United States

Food & Packaging products (ex soft drinks) (4/92)

Equipment and Facilities (4/92)

Premiums (7/94)

Distribution Services (5/99)

No RSI or BKC obligation to take title toProducts

20-year initial term due to expire March, 2012(with 5-year automatic renewal provisions)


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BKC Rights and Responsibilities:

Approve/disapprove suppliers and distributors

Determine Brand standards Define Products (specifications)

Develop marketing programs

Establish quality and safety standards

Ensure supplier & distributor compliance with quality &safety standards

Determine need to recall, withdraw or hold products

Provide RSI timely information on new products and

promotions

Grant Exclusives

Purchase soft drinks


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RSI Rights and Responsibilities:

Negotiate purchasing agreements for all products(except soft drinks) including prices, marketing

allowances and fees, funding and promotionalactivities

Insure timely and consistent availability of products torestaurants

Advise BKC of supplier noncompliance withspecifications

Supervise build-up and balancing of inventory insupport of new product introductions

Develop and implement standard purchasing termsand conditions of supply with approved suppliers

Supervise recalls, withdrawals and product holds

Actively promote utilization of minority suppliers


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RSI Purchasing Scope

$ Mill

Food & Packaging $2,400*

Equipment & Dcor 200

Premiums & SLOs 200

Distribution Services 200 TOTAL $3.0 billion

* Includes soft drinks purchased by BKC


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Food & Packaging Products

* Purchased by BKC

$ Mill % of total

Beef 426 18%

Chicken 285 12

Soft Drinks* 262 11

Packaging 229 9

Fries & hash browns 222 9

Buns 199 8

Dairy 154 6

Ketchup & sauces 104 4

Pork 81 3

Fresh Produce 77 3

All Other 374 15

TOTAL 2,413 100%


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Equipment and Facilities

Kitchen Equipment Broilers - Shake machines - Parts

Fryers - Stainless - Micro

Freezers - Drink equipment -

Lighting Dcor items

Signs

Playgrounds Uniforms

Small wares

POS/BOH

Electronic catalog


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Premiums & Promotion Items 10-12 kids premiums programs/year

200-250 million units

Manufacturing and Logistics contracting

Self-liquidating offer programs (SLO)

Order processing (FOR) China manufacturing

Ocean freight contracting

Inland freight and logistics to U.S. DCs Distribution management to restaurants

Filler inventory management


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Distribution & Logistics

Distribution Service Agreements in U.S. Delivery terms & conditions Performance standards

Data reporting requirements

13 Regional distribution companies 27 distribution centers

Logistics cost management Supplier-distribution center

Least-cost solutions

Redistribution/LTL consolidations

Local Distribution Committee management


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Franchise System Purchasing Challenges

Purchasing services vs actual direct purchasing

Limited ability to commit volume

Multiple stakeholders Brand Owner

R&D Marketing

Operations

Finance

Suppliers

Distributors Franchisee restaurant operators

The Purchasing entity (company or cooperative)


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Purchasing Cooperative Risk Profile

Support of Members and Brand Owner

Perceptions of performance vs actual performance Purchasing performance measurement

Actual cost of goods to restaurant Commodity driven

Specification driven (brand owner controlled) New products (brand owner controlled)

Lead time impacted (brand owner controlled)

Perceived cost of goods (% of sales) GP% = Top Line Sales / Cost of Goods

Other actual/perceived benefits to members Strong advocate for members with Brand owner

Broader access to system performance measures


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Franchise vs Company Owned

Decision making process Company ability to absolutely commit

Franchise limited ability to commit

Relationship management Company limited points of contact with senior

management; clear decision authority

Franchise multiple points of contact, requiresconsensus building

Financial Performance Company EPS reasonably clear accounting rules

Franchise Brand owner vs franchisee ambiguousmeasures depending upon business entity


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BK System Supply Chain

Evolution


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Level 0 Localized/fragmented purchasing anddistribution (BK system pre-RSI)

Level 1 - Consolidate purchasing leverage with existingsuppliers to eliminate excess margins (RSI in 1992)

Level 2 - Get better product prices by sponsoringapproval of new suppliers with lower cost structure (RSIin 1994-96)

Level 3 - Apply longer-term purchasing strategies withthe most competitive suppliers (RSI in 1996-99)

Level 4 Integrated Supply Chain Management - focuson supply chain efficiencies from supplier to restaurant

and electronic commerce (1999-2005) Level 5Value engineering products and delivery

processes; Build commercial reality into allproduction/promotion specifications from concept stage;rationalize supply/distributor network (2005-2008)


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Pre-1999 Purchasing & Distribution

Product purchasing historically fragmented BK-owned distribution subsidiary No centralized authority acting on behalf of all BK

system restaurants

Typically managed by distributors various franchisee involvement

Significant excess/obsolete inventory costs

Distribution Agreements negotiated locally

Promotion Planning limited and fragmented

Key Business Processes sequential vs teamcollaborations


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Go-Forward Objectives (1999)

Develop and implement a cost effective, quickresponse system supply chain that willprovide competitive advantage for BK in theQSR Industry

Improve Supply Chain Performance

On-time deliveries to restaurants

Improved order fill rates

Order lead times and promotion response Effective inventory management

Reduce Restaurant Costs


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Integrated Supply Chain Management

A vision for transformation: To activelymanage the entire supply chain, fromsupplier to restaurant, to improve the

systems efficiency and effectiveness. Enabled by emerging information

technology that allows real-time retail

sales visibility to all supply chainparticipants.


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Integrated Supply Chain Management

Envisions a comprehensive approach to: development of products and suppliers

purchasing of goods

delivery of those goods to the end user predetermined system strategic objectives

and performance standards

ongoing improvement and refinement.

Best Practice implemented by successfulworld-class companies in recent years.


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1999-2004 PlanImplementation


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Focused Plan Objectives Improve overall efficiency and effectiveness of the

BK systems supply chain through new e-commerce technology applications andinformation systems Improve speed to market for promotions & new

products

Improve promotion planning & inventory management Ensure supply through all promotions & new product

introductions

Eliminate excess inventory at the end of promotions

Reduce landed costs to restaurants Reduce restaurant invoice processing costs & errors

Implement distributor performance measurement

Provide RSI members electronic access to food cost

reports


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Data Requirements

Improved supply chain product flow visibility: Supplier distributor invoicing (pre-1999) 14-45 day information lag

Distributor restaurant invoicing (1999-2002) 7-28 day information lag

Restaurant order placement monitoring (2004 target) 3-day information lag

Restaurant daily menu item sales (2004 target) 1-day information lag

All supply chain participants (suppliers,distributors, members, restaurants, BKC and RSIhave access to relevant restaurant sales data


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Supply Chain Response Time

Restaurant

Customer

purchases

Product at

RestaurantDay 1

Distributor Supplier Ingredients

Order placed

To DC - Day 4

Product delivered

To restaurant

Day 7-22-36

DC places Order

to supplierDay 11

Supplier delivers

Product to DC

Day 18 - 32

Supplier orders

IngredientsDay 18

Ingredients delivered

To supplier

Day 25

7-days 7-days

7-days 7-days3.5-days

3.5-days


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Translating Sales to Product Demandon a large scale

Menu Items:

Whopper

Hamburger

Original Chicken Fries - Medium

Vanilla Shake(m)

Soft Drink (s) etc.

Products:

Whopper beef

Burger beef

Volpakketchup

5 Buns

Sliced Cheese

5-Gal BIB

etc.

BK

Recipe

Requires Standard Naming and Numbering

Conventions and recipe translations


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Standard Naming and Numbering

Standardized data naming and numberingconventions are required

GTIN - UCC Standard

Bar-Code capability

Standard numbers already established andcommunicated to all BK suppliers and distributors

Distributors now reporting to RSI with GTIN

Suppliers will report to RSI with GTIN standard next

year

Establishing a GTIN standard for Menu Itemswill facilitate collection & recipe translation

Integrated Supply Chain Management Model


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RawMaterials

SupplierDistributor

Restaurant

Restaurant3

RestaurantOwner

Restaurant2

Restaurant4

ReceiveData

Secure InternetAccess

OrderPlacement

POS

BOH

ISP

Polling

DataWarehouse

Integrated Supply Chain Management Model

Electronic feedback

Data Feeds

Product Flow

Order PlacementElectronic Reporting and Feedback


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2005 Current State


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Current Electronic Data Reporting All distribution centers reporting daily inventory

and restaurant invoice data:

All products

All restaurants

2,100 restaurants reporting daily sales All products and product mix

Menu item unit sales; $ sales and average check

60% of restaurants place electronic orders

Distribution centers electronic reporting servicelevels; on-time deliveries and fill-rates


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Web-Site Access to Product Sales

Daily sales and traffic data updated eachafternoon reflecting previous days activity

Daily promotion sales tracking andmeasurement vs previous forecasts

Regional/local sales and traffic variancesfrom national averages

Daily product mix

Restaurant product landed costs All restaurants All products


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Results: Goal Achievement Lower restaurant landed costs

Supply continuity - no gaps

Minimal/No obsolete inventory

Fewer distribution centers

Improved service levels

Increased supply chain responsiveness New product introductions

Product elimination

Limited-Time Promotions


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Current State: Industry Challenges General Economic Conditions

Labor cost & availability Energy costs product, freight, restaurant ops

QSR maturing industry

Historical rapid growth in sites

Historical slow growth in total QSR sales

Market Share battle

Squeezing restaurant operating margins

Best-Value proposition wins the day Tomorrow may be different

Changing consumer tastes and preferences

E i C A i d


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Health awareness

Obesity Public health care costs

Food Nutrition Calories

Trans-fats

Processed vs natural Consumer choices: reality vs aspirations

Food Safety concerns/intolerance Animal diseases (Mad Cow; Bird Flu, etc)

Food Security Country of Origin and other labeling

Biogenetics

Animal Welfare

Emerging Consumer Attitudes


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The EndRestaurant Services, Inc.

Supply Chain Management in a Quick Service Restaurant Chain

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