6 Considerations When Setting Up Supply Chains for F&Bs

Originally published at www.chefatwork.com.sg on May 5, 2017.

For established food and beverage brands who have consolidated their market position, supply chain management is an exciting journey to undertake where one can take the brand to its next peak and increase sources of revenue.

This time round, we share with you 6 key factors to consider when deciding to undertake this F&B business expansion strategy.

1. Direct Benefit: Cost Reduction
The most obvious motivation for setting up supply chains for food businesses is naturally cost reduction. By reworking current operation procedures and implementing a new workflow, business owners are able to push a huge percentage of their outlet production to a central kitchen. Pre-processing, preparation work, and partial cooking undertaken at central kitchens can reduce outlet production up to 60%. Depending on the type of food business, this can leave finishing, packaging or simply final touches and service to outlet staff. This can significantly cut down per outlet labour and wastage costs, as well as space allocation per outfit. Excess labour need not be retrenched, but can, in fact, be relocated to new or other outlets or departments to maximise utility.

2. Further Benefit: Profit
Cost reduction is important. Profit is even more so. The 2nd, but more important reason for getting into supply chain management is that it opens up the possibility of undertaking food process Original Equipment Manufacturing (OEM) for business-to-business (B2B) sales. With a clear mastery over food production processes, business owners will be able to take apart the formula to their success and reapply it. For instance, a brand who is famous for its signature beverage will be able to undertake bulk orders and supply other businesses. Goods can be sold on omnichannel platforms, ranging from retail to supermarkets, hotels, restaurants and cafes.

3. CapEx & Running Cost
That said, supply chain and central kitchen setups do require significant amounts of upfront capital outlays. Development steps consist of workflow design, renovation and purchase of machinery. It’s been estimated that an establishment with 4 outlets would, on average, require an investment of over S$1 million for central kitchen setup. This is excluding the consideration of monthly overhead costs for labour, rental, utilities, and maintenance. Suffice to say, steady cash flow is critical.

4. Requires Scale to Operate
For central kitchen setups to unlock economies of scale, the existing business has to attain a certain level of scale or risk losses from under-utility. For this reason, supply chain businesses are typically undertaken by mature F&Bs who have built up their brand and have a mastery over their operations. Established food brands have a steady and forecastable demand and thus will keep the central kitchen in operation. A negative scenario is where a business owner has a central kitchen facility but unable fully utilise it from day to day due to a lack of demand, yet still need to undertake running costs.

5. Need To Rework A Clear Business Prospectus
Given the level of investment and capacity involved business owners need have in a mind a clear growth direction for the company for at least 5–10 years down the road, be it to undertake franchising, or enter OEM business. Whichever way, business owners have to take apart the existing business model, and rework it from scratch and make room for new business processes. This is because once the manufacturing facilities and processes are up, it will be costly and difficult to make drastic adjustments. While this can be a tedious process, it is necessary as it streamlines existing business processes and breaks down change management processes in stages for practical implementation.

6. Is State Of The Art Tech Infrastructure Truly Necessary?
Lastly, supply chain technology is always improving. From RFID tags to scanners, readers, and tablets, newer tech provides deep data insights and help reduce human error. Centralised inventory systems track valuable information on shelf life, stock count, and can even be linked up with preferred suppliers to automate ordering processes when stocks are running low.
Similarly, when end products are in excess, systems can trigger the management to undertake promotions or other measures to push demand. However, given the high replacement rates of tech products, even cutting edge equipment can be obsolete within 3–5 years of introduction. That’s why when it comes to technology outfitting, we advocate the due diligence of cost-benefit analysis to ensure the tech infrastructure will adequately support future business operations at an acceptable price point.

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