A breakdown in the supply chain – how to overcome it

5th April 2018 (Last Updated April 5th, 2018 11:32)

The publicity earlier this year surrounding the temporary closure of hundreds of KFC outlets is a timely reminder of the vital role which supply chain management plays in a successful restaurant business. Andrew Tate, partner at Kreston Reeves, chartered accountants and financial advisors, offers his top tips on how to avoid a breakdown in your supply chain.

A breakdown in the supply chain – how to overcome it
Andrew Tate, Kreston Reeves

The publicity earlier this year surrounding the temporary closure of hundreds of KFC outlets is a timely reminder of the vital role which supply chain management plays in a successful restaurant business. Andrew Tate, partner at Kreston Reeves, chartered accountants and financial advisors, offers his top tips on how to avoid a breakdown in your supply chain.

When creating a successful business, it can be difficult to have the discipline to look over the precipice at the worst possible scenario. However, imagining a perfect storm and thinking about the risks your business is running is always a useful exercise. For example, can you picture a situation like this:

• One of your main suppliers, which has been providing you with good quality perishable stock at excellent prices starts to suffer cash flow difficulties, possibly because of the failure of one of their other customers

• As a result, they are forced to cut staff and to cut corners on a temporary basis. This is not particularly noticeable to you other than a couple of late deliveries

• Over one weekend, you suddenly get your customers complaining of food poisoning and when you contact your suppliers to alert them to the issue, there is a deafening silence from the supplier who has been under cash flow pressure

One of the lessons we can learn from this sort of scenario is supply chain management and thinking about how you choose suppliers. Price is important but is by no means the sole determinant of choice. Food quality, certainty of supply and traceability are also key factors in choosing a supplier. Clearly some ingredients present a higher risk than others and it is logical to focus more attention on these areas.

It is important to foster a partnership approach with suppliers of higher risk produce: a partnership approach meaning that there should be a close working relationship, sharing information about business metrics and day-to-day management of each other’s business so that there is a mutual support mechanism and, just as important, no surprises!

The failure of a supplier can have an immediate knock-on effect. Traceability can be impacted, particularly if the supplier is closed down and, for the safety of your own business, you may decide that even nonperishable goods cannot be used. The reputation of your own business could be irreparably damaged if problems arose and the appropriate accountability was impaired.

Choosing a supplier can be difficult so what steps can you take to protect yourself? Suppliers should be ready to answer any questions that you have and you should be able to view their facilities and ask any questions you like. You should also be able to take references from other customers of the supplier.

Looking at the finances of a key supplier is also useful. There are many credit reference agencies who can provide useful information regarding key suppliers and a finance professional in your business or with your accountants should be able to look at the profitability of a key supplier, its liquidity and availability of working capital, it’s stock ratios and, in some cases, to benchmark your supplier against others in the same industry.

Contingency planning is also a helpful exercise. Whilst the provenance of your products can be a selling point, there is great value in establishing alternative supply lines ready for any emergency. This is the best way to ensure your business can continue uninterrupted.

Of course, other non-food suppliers can also impact your business. One increasingly risky area is storage of your data. Many businesses now hold their data in the cloud through an IT provider and, again, contingency planning is important in the event that your IT and data provider fails.

Any IT supplier should be prepared to discuss this and assure you that you will have access to your data, even in the (hopefully unlikely) event that their business fails. The safest way to ensure this is a physical backup of your data on a regular basis onto a hard drive owned by you, even if this is kept on the premises of the IT provider.

Do spend a little time on a regular basis looking over the precipice and thinking about contingency planning to safeguard your business.