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May 01 2018
In February 2018 the UK press took a break from reporting about Brexit for a few days and led with a story about KFC's supply chain crisis, which saw almost two thirds of its over 900 stores in the United Kingdom close due to a lack of chicken.
Most KFC stores in the United Kingdom are franchised and the resulting loss of revenue and negative publicity could not have come at a worse time given the current pressures that all businesses in this sector are facing.
The story highlights the importance of supply chain management and illustrates how parties that rely on the functioning of a supply chain must protect themselves from a contractual and legal perspective.
The root cause of the closures appears to have been operational issues under a new chicken supply contract between KFC and DHL.
In November 2016 Yum Brands-owned KFC revamped its supply chain in the United Kingdom by ending its relationship with delivery company Bidvest and entering into a three-way partnership with DHL and Quick Service Logistics (QSL).
It has been reported that DHL uses only a single depot from which to deliver all of the KFC ingredients to its stores across the United Kingdom and deliveries were compromised by a new and malfunctioning IT system. Poor planning and risk and contingency mitigation also exacerbated the problems.
In most franchise supply chains, the franchisor or its nominated supplier will supply certain products to the franchise network. Where the franchisor is the supplier, the terms of supply will often be set out in:
The third option is the best for the franchisor as it enables it to update supply terms periodically and ensures that the network is supplied on uniform terms. In an international context, franchisors and their developers or master franchisees may enter into a supply agreement for that particular market.
Managing supplier liability
Where the fulfilment of the supply is outsourced to a third party, a franchisor should ensure that it has in place a robust agreement covering the following key aspects:
Due diligence, contingency planning and managing reputational damage
Putting all of its eggs in one basket with a new supplier operating from a centralised warehouse was a gamble KFC would not take with the benefit of hindsight. The use of a 'hub and spoke' warehousing and distribution model would have mitigated this effect.
Franchisors should also ensure that they have in place contingency plans and protocols for when something as potentially serious as a supply failure occurs. KFC turned to Stowga, a warehouse on-demand start-up service (think Airbnb for warehouses). KFC's property consultants contacted Stowga, who bid for and secured eight warehouse spaces within minutes and within days these sites were operational. This flexible model could be adopted in the future by a number of businesses, and not just as a contingency measure.
Contingency plans should also include clear guidance for how franchisees can best mitigate their losses, as well as a PR strategy to minimise damage to the brand and customer goodwill. KFC responded to this crisis with an advert that has been hailed a "masterclass" in PR crisis management: the full-page image on the back cover of London's Metro newspaper showed an empty bargain bucket with the company's logo rearranged to read "FCK", with an apology to customers and thanks to its staff and franchises.
Managing franchisee liability
In addition to regularly reviewing their template franchise agreement, the franchise manual and any separate terms of supply, franchisors should consider the following points:
Ultimately, supply chain management is a significant but often neglected aspect of a franchisor's business. If a franchisor mismanages the types of risk highlighted by the KFC crisis or other issues such as franchisee credit, it may quickly face an existential crisis.
Given the standardised nature of most franchise agreements and any related supply terms, franchisees may not have much recourse against their franchisor for failing to provide products. Nevertheless, franchisees should consider the following points:
While a single franchisee (unless it is a substantial operator with multiple units) is unlikely to be able to influence changes to the supply chain and the terms which govern it, if the franchise system has a franchise council, this would be the appropriate forum for engaging with the franchisor to ensure that when these types of event occur, their interests are adequately protected.
Out of every crisis comes an opportunity. The KFC chicken supply crisis offers franchise businesses an opportunity to review the management and procurement of their supply chains and the terms which govern their upstream relationships with third-party manufacturers and suppliers and their downstream relationships with franchisees.
The obvious starting point is to perform a risk analysis of:
For further information on this topic please contact Gordon Drakes or Tim Rickard at Fieldfisher LLP by telephone (+44 20 7861 4000) or email (firstname.lastname@example.org or email@example.com). The Fieldfisher LLP website can be accessed at www.fieldfisher.com.
The materials contained on this website are for general information purposes only and are subject to the disclaimer.
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