Supply Chain Management

in a Quick Service Restaurant

Environment
The Burger King System Example

Presented by
George Hoffman
Restaurant Services, Inc.

Michigan State University

March 28, 2006
 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 to
Integrated Supply Chain Management
• Current Industry Challenges
 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
 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
 Burger King System Restaurants
14,000

12,000

U.S. International
10,000

8,000

6,000

4,000

2,000

0
67 77 86 88 89 90 91 92 93 94 95 96 97 98 99 '00 '01 '02 '03 '04 '05
 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
 Supply Chain Value Added
(typical restaurant)

= $310K
+ $60K + $15K
Supplier
$250K Manufacturing Freight
Freight
Warehousing + $25K
Raw
Materials
Delivery

Restaurants
= $350K

Customers
$1,100K
 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 DC’s
• 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 a
member-owned coop accountable to all restaurants, franchised
and company
• Franchisees still choose from among approved distributors
• 1999 – RSI scope expanded to include distribution
contracting
• 2000-2004 – Integrated Supply Chain Management
Systems development and implementation
Why Separate Purchasing from the
Corporation?
• 90%+ of restaurants franchised vs company
owned and operated
• Corporation cannot require franchisees to
purchase under company contracts: inability to
commit franchisee volume
• Financial model of the Brand owner is different
than 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 for
Brand owner benefit.
 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/Church’s – Joint cooperative
• Subway – Independent cooperative
• Arby’s – semi-independent cooperative
 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
 Why Delaware; Why Coop Form?
• Delaware offers substantial corporation
structure 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 via
patronage formula
• Members individually subject to taxes on
patronage dividends (1099Div Forms issued)
 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
 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 Board’s option
• Regions of reasonably equal number of
members
– Periodic redistricting required
 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 to
Products
• 20-year initial term due to expire March, 2012
(with 5-year automatic renewal provisions)
• 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
• RSI Rights and Responsibilities:
– Negotiate purchasing agreements for all products
(except soft drinks) including prices, marketing
allowances and fees, funding and promotional
activities
– Insure timely and consistent availability of products to
restaurants
– Advise BKC of supplier noncompliance with
specifications
– Supervise build-up and balancing of inventory in
support of new product introductions
– Develop and implement standard purchasing terms
and conditions of supply with approved suppliers
– Supervise recalls, withdrawals and product holds
– Actively promote utilization of minority suppliers
 RSI Purchasing Scope

$ Mill
• Food & Packaging $2,400*
• Equipment & Décor 200
• Premiums & SLO’s 200
• Distribution Services 200
• TOTAL $3.0 billion
* Includes soft drinks purchased by BKC
Food & Packaging Products
$ 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%
* Purchased by BKC
 Equipment and Facilities
• Kitchen Equipment
– Broilers - Shake machines - Parts
– Fryers - Stainless - Micro
– Freezers - Drink equipment -
Lighting
• Décor items
• Signs
Electronic catalog
• Playgrounds
• Uniforms
• Small wares
• POS/BOH
 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. DC’s
• Distribution management to restaurants
• Filler inventory management
 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
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)
 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
 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, requires
consensus building
• Financial Performance
– Company – EPS – reasonably clear accounting rules
– Franchise – Brand owner vs franchisee – ambiguous
measures depending upon business entity
BK System Supply Chain
Evolution
• Level 0 – Localized/fragmented purchasing and
distribution (BK system pre-RSI)
• Level 1 - Consolidate purchasing leverage with existing
suppliers to eliminate excess margins (RSI in 1992)
• Level 2 - Get better product prices by sponsoring
approval of new suppliers with lower cost structure (RSI
in 1994-96)
• Level 3 - Apply longer-term purchasing strategies with
the most competitive suppliers (RSI in 1996-99)
• Level 4 – Integrated Supply Chain Management - focus
on supply chain efficiencies from supplier to restaurant
and electronic commerce (1999-2005)
• Level 5 –Value engineering products and delivery
processes; Build commercial reality into all
production/promotion specifications from concept stage;
rationalize supply/distributor network (2005-2008)
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 team
collaborations
“Go-Forward” Objectives (1999)
• Develop and implement a cost effective, quick
response system supply chain that will
provide competitive advantage for BK in the
QSR 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
Integrated Supply Chain Management
• A vision for transformation: To actively
manage the entire supply chain, from
supplier to restaurant, to improve the
system’s efficiency and effectiveness.
• Enabled by emerging information
technology that allows real-time retail
sales visibility to all supply chain
participants.
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 successful
world-class companies in recent years.
1999-2004 Plan
Implementation
 Focused Plan Objectives
• Improve overall efficiency and effectiveness of the
BK system’s supply chain through new e-
commerce technology applications and
information 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
 Key ISCM Projects
• Restaurant Daily Menu Item Sales data collection
• Restaurant – distributor electronic ordering (F&P)
• Restaurant - Supplier electronic ordering (non-
food)
• Distributor - supplier electronic ordering and
invoicing
• Standard nomenclature/numbering & bar-code
systems
• Data Warehouse; Analytical Data Processing
Tools
• Collaborative planning and forecasting
• Web-enabled electronic data reporting and
feedback
 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 RSI
have access to relevant restaurant sales data
 Supply Chain Response Time
Product delivered Supplier delivers Ingredients delivered
To restaurant Product to DC To supplier
Day 7-22-36 Day 18 - 32 Day 25

7-days 7-days
3.5-days

Restaurant Distributor Supplier Ingredients

3.5-days 7-days 7-days
Customer
purchases Order placed DC places Order Supplier orders
Product at To DC - Day 4 to supplier – Day 11 Ingredients – Day 18
Restaurant
Day 1
 Translating Sales to Product Demand
on a large scale
• Menu Items: • Products:
BK
– Whopper Recipe – Whopper beef
– Hamburger – Burger beef
– Original Chicken – Volpak
– Fries - Medium ketchup
– Vanilla Shake – 5” Buns
(m) – Sliced Cheese
– Soft Drink (s) – 5-Gal BIB
– etc. – etc.
Requires Standard Naming and Numbering
Conventions and recipe translations
 Standard Naming and Numbering
• Standardized data naming and numbering
conventions are required
– GTIN - UCC Standard
– Bar-Code capability
– Standard numbers already established and
communicated 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 Items
will facilitate collection & recipe translation
 Integrated Supply Chain Management Model

POS
Restaurant

BOH
Distributor
ISP
Restaurant Supplier
2 Order
Placement
Restaurant Polling
3
Restaurant
Owner
Restaurant
4 Raw
Materials
Receive
Data
Product Flow
Data
Electronic feedback
Warehouse
Secure Internet
Data Feeds Access
Order Placement
Electronic Reporting and Feedback
2005 Current State
 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 service
levels; on-time deliveries and fill-rates
Web-Site Access to Product Sales
• Daily sales and traffic data updated each
afternoon reflecting previous day’s activity
• Daily promotion sales tracking and
measurement vs previous forecasts
• Regional/local sales and traffic variances
from national averages
• Daily product mix
• Restaurant product landed costs
– All restaurants
– All products
 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
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
Emerging Consumer Attitudes
• 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
 The End
Restaurant Services, Inc.