With more than half of UK outlets forced to close following KFC's switch to a new logistics supplier, how can procurement practitioners avoid chickening out when it comes to replacing a long term supply partner with a tasty new alternative?
When the news broke that around 700 KFC stores were forced to close completely due to a chicken shortage, there will no doubt have been some nervous looking buyers and supply chain managers turning up for work at the US fast food giant's Woking Headquarters. Whether the widely reported fiasco will have any enduring consequences remains to be seen, but with the underlying cause being identified as teething problems with new nationwide logistics supplier DHL, procurement teams across the country will be reviewing what precautions they can take to avoid edging up with egg on their faces.
Where did things go wrong?
KFC awarded their warehousing and distribution operations to DHL in 2017, replacing Bidvest Ltd, a South African owned specialist food distributor.
Bidvest utilised a six-warehouse system for fulfilling their contract with KFC. DHL proposed to do so from a single distribution centre based in Rugby. Many companies do service a UK-wide distribution network from a single warehouse, but dealing with limited shelf-life produce is a different kettle of fish... or chicken.
Had DHL been specialised distributors of food, it is possible that the transition would have be smoother, but one of the reasons that KFC selected DHL as a supplier was to harness its prowess from other industries.
The issues seem to have arisen from the management of data within the supply chain. All FMCG companies rely on supply and demand information to be constantly updated in the end to end supply chain operation. It is possible that DHL may not be used to the rate of change and agility required, or simply that errors were made in the system implementation.
DHL and supply partner Quick Service Logistics will undoubtedly adapt, but the lost sales and brand damage from the shortage will surely run into the £millions, feasibly wiping out some or all of the cost saving from the original switch.
Fellow fast food powerhouse Burger King made an abrupt U-turn following their own decision to drop Bidvest for a lower cost logistics supplier some six years previously. Advanced logistics and fulfillment are true areas of value-add in the FMCG industry.
What can be done?
Having the facility to feasibly switch even a long term, stable supplier is paramount to maintaining a competitive commercial relationship. The two factors that enable this both relate to the switching risk: the magnitude of risk itself and the buying organisation's ability to assess it.
These risks should then be evaluated as part of the supplier bid assessment and weighed against the size of the opportunity available to inform the sourcing decision.
Minimise the Risk
Keep key expertise in-house
The popularity of outsourcing those competencies perceived as non-core reached its peak in the early 2000s and in many cases has resulted in lean, cost effective operations for firms.
Indeed, many firms proceeded to outsource critical and value added facets of their operations. The problem arises when employees with relevant knowledge move on. New staff learn only to work with the supplier to perform the business operation, and the supplier seizes the opportunity to grab the expertise, knowledge, systems and even masters the corporate politics of an organisation better than the employees themselves.
This leads to a reliance on the knowledge and information of the supplier and makes them particularly difficult to replace.
Whilst it would almost certainly be commercially nonviable for KFC to own and run their own delivery fleet, in-sourcing their logistics data management would have identified - and therefore prevented - the issues they have faced.
Beware the dedicated team
It is commonplace for internal customers or end users to request or specify a dedicated person or persons to provide the service they require, citing consistency and a need for the supplier's personnel to know the brand or processes.
This convention, however, brings the aforementioned personnel clearly within the boundaries of the Transfer of Undertakings (Protection of Employment) or 'TUPE' regulations.
The regulations specifically refer to 'In service provision transfers' and this presents switching risk as it can result in additional cost and in some cases an inability to fulfill the contract if the supplier is unable to accept employees on differing contract terms to their existing staff.
Personnel don't need to be named or specified to be counted as dedicated. Thus procurement practitioners should always consult with their legal colleagues if they are unsure as to whether TUPE applies to their sourcing project.
Keep an open mind
With an increasing reliance on IT systems, supporting them has become big business. Long-term support or maintenance costs are often overlooked when sourcing decisions are made regarding information systems.
Buyers should at least ensure that there are competitive options for ongoing system support, such as the plethora of organisations that support SAP.
Often overlooked are systems such as security, fire and theft devices. These are commonly considered critical and many operators utilise hardware that only the manufacturer can support.
Selecting systems with open protocol hardware will enable re-sourcing of ongoing system management and maintenance and prevent buying organisations becoming cornered by their own systems.
Evaluate the Risk
Being aware of the prevalence of switching risk is something that most buyers will be able to garner from their specification. Accurately assessing it however requires in-depth category knowledge. For those procurement professionals who are category focused this becomes both possible and critical. Knowing the strengths, weaknesses, bottle-necks and points of failure of their supply area will provide a great base to be able to evaluate the associated switching risk.
For those buyers who are responsible for a more varied portfolio, engagement with key stakeholders, industry experts and buyers from competitors should be sought in order to identify and mitigate switching risk.
The scale of risk can then be included in the sourcing assessment - either as a non-commercial factor or, if possible, quantified and included on a bonus/malus (+/-) basis.
Combining an accurate assessment of switching risk with effective mitigation will help procurement professionals ensure that large scale re-sourcing disasters are as rare as hen's teeth.
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