HOW DOES A SUPPLY CHAIN WORK?

Many franchisees depend on a consistent and reliable supply of products to ensure customer satisfaction, brand reputation and franchisee profitability.

In franchising this can give you a competitive advantage.

The purpose of a supply chain is to provide franchisees with a competitive advantage. The franchisor will negotiate a deal with approved suppliers, and may or may not receive a rebate from the suppliers.

When a franchisee buys their business, they may be required to buy, use and sell specific products that either meet the franchisor’s standards or can be purchased only through the franchisor’s approved suppliers.

Sometimes, the franchisor will supply franchisees with the key products or services.

The larger the system, the more likely it is there will be a countrywide agreement in place.

WHAT IS THE BENEFIT OF AN APPROVED SUPPLIER?

Firstly a national deal sees all franchisees in every state using the same products, which delivers consistency of quality across all outlets.

A large scale national supply chain will also ensure reliable delivery of the products.

A well-structured supply agreement should be a costeffective solution for franchisees. Franchisors negotiate deals and franchisees benefit from the discounts available through the volume purchase of supplies.

A franchisor-organised supply chain also removes from franchisees the stress of having to find providers and then negotiate an arrangement for each product.

FOUR SUPPLY CHAIN ADVANTAGES

• Certainty over delivery, costs and payment terms.

• Group discounts or competitive arrangements.

• Consistent quality of products and services.

• Extra business time as the franchisee doesn’t need to source

and negotiate their own supply arrangements.

HOW DO YOU FIND OUT ABOUT THE SUPPLY CHAIN?

Two key documents, the franchise agreement and disclosure document, should specify whether or not the franchisee has the freedom to source their own suppliers. If there is flexibility over the supply, these documents should outline any rules around the supply choice.

A cafe owner, for instance, may be required to purchase bread and milk from an approved supplier and coffee beans from the franchisor itself. But the franchisee might be able to locally source additional ingredients such as salad and fruit.

WHAT RULES GOVERN THE SUPPLY CHAIN?

A franchise supply arrangement is subject to the Competition and Consumer Act. Under this law, the compulsory purchase of goods or services from an approved supplier is known as thirdline forcing and s generally prohibited. However, franchisors can and often do operate this system if the AustralianCompetition and Consumer Commission (ACCC) approves the exclusive supply arrangements. The ACCC is able to withdraw its approval if it believes the exclusive dealing is anti-competitive. An alternative supply chain arrangement is called full-line forcing. This is when a franchisor itself supplies the goods The ACCC is able to withdraw its approval if it believes the exclusive dealing is anti-competitive.

An alternative supply chain arrangement is called full-line forcing. This is when a franchisor itself supplies the goods and services and draws an income from the mark-up.

DOES IT ALWAYS BENEFIT THE FRANCHISEE?

There are occasions when using the franchisor’s preferred suppliers can be detrimental to a franchisee.

For instance, if the franchisor is driven by the lure of greater rebates for using its products, rather than focusing on premium products or service arrangements. Or if the approved suppliers provide a more expensive, less competitive or less reliable product or service than the franchisee may be able to source themselves.

Rural, regional and interstate franchisees may find themselves disadvantaged by a supply chain if there are extra delivery costs or freight charges imposed to get the products to their businesses.

However, if the franchisee chooses to select their own products rather than use the approved supply chain, they risk breaching their franchise agreement. This could lead to legal action, or even the termination of the franchise agreement.

WHAT NEXT?

The 2018 parliamentary inquiry into the Franchising Code of Conduct put the spotlight on rebates, and the fair and appropriate use of approved suppliers. Expect to see some tighter regulations come into force.

ADVICE

Franchise buyers need to understand any mandatory supply deals and any benefits to the business before they sign up to a franchise.