Restaurant Logistics: Serving up the Perfect Meal
To satisfy consumers’ hunger for quality food at low prices, the restaurant industry adds enhanced supply chain management processes to the menu.
In many ways, the restaurant industry is defined by paradoxes. Consumers want quality food at affordable prices. Product freshness is a must, regardless of seasonal variability. Cost and customer service come bundled—not à la carte.
On the supply side, menu selection competes with supplier selectivity. Restaurants demand sourcing reliability and consistency, when Mother Nature is nothing if not fickle.
Beyond that, restaurants want replenishment fast. Consumers want orders faster. "What you want is what you get" and "Have it your way" aren’t simply slogans. They are expectations.
So when consumer and market pressures pull restaurants in different directions, the supply chain logically becomes a platform for leveraging these opposing challenges to find shared gains.
Extra Value Meals
The U.S. economic recession put a cinch on discretionary spending. As budgets tightened, many consumers opted to eat in rather than dine out. Consequently, the restaurant industry endured a noticeable drop in demand.
The total number of restaurant visits in the country fell from 62.7 billion in 2008 to 60.6 billion in 2011, according to consumer market research firm NPD Group. More telling, 87 percent of the loss was in visits to independent operators, even though at the start of the recession, only one-quarter of all restaurant visits took place at these non-chain restaurants.
One notable exception, however, is quick-service restaurants. The U.S. fast food industry is growing more rapidly than the restaurant industry at large, according to research analyst RNCOS. It expects the quick-service segment to register a compound annual growth rate of about four percent between 2011 and 2014, thanks to a growing younger population, changing social dynamics, expediency, and cost.
In fact, some chains proved to be recession-proof, expanding even as the economy contracted. Subway, for example, added 6,000 restaurants between 2008 and 2010. Restaurants that were able to keep costs down and prices low still capitalized on demand for fast food convenience. The supply chain played a key role in these successes. Now, it is more important than ever.
Given current drought conditions in the United States, managing commodity costs is one of the foremost challenges food service companies face, says Todd Bernitt, general manager for C.H. Robinson. The Eden Prairie, Minn.-based 3PL has an established presence in produce sourcing and transportation, and has been recognized by T.G.I. Friday’s and Subway for its work.
"Managing commodities starts at the ground level with grains," Bernitt says. "Due to the summer 2012 drought in many regions of the United States, grain prices are on the rise as crop yields plummet compared to years past. In turn, this creates a tighter market for grain, resulting in higher feed prices for cattle, poultry, and pork. When those costs go up, so do the costs of purchasing the raw meat, and in the end, the final consumable product on our plates."
These types of capricious cause-and-effect situations challenge food service companies. Many are targeting specific ways they can better predict demand, and work closer with suppliers to level these variations. Darden Restaurants, for example, has automated ordering between restaurants and suppliers, and is using intelligent forecasting tools to help restaurants more accurately measure demand—which directly impacts transport and purchasing costs.
Overall, however, supply chain solutions that drive down costs are unique to individual restaurants. "What may fit for a casual dining concept—which has room for more inventory and fewer weekly deliveries—won’t fit at a quick-serve restaurant that drives volume and has less cooler and freezer space," explains Bernitt.
"One thing all restaurants are doing is managing labor farther up the supply chain, and pushing inventory levels back to suppliers to manage, thereby controlling costs, keeping inventory fresh, and allowing menu planning variability," he adds.
Cost is often the deciding factor for fast food consumers. But in some instances, they are willing to pay more for quality. One chain that has found such a niche is Chipotle Mexican Grill.
"Chipotle buys higher-quality food, and therefore can charge more. It isn’t buying based on the lowest margin," says Rupert Spies, chef and senior lecturer, food and beverage management, at Cornell University’s School of Hotel Administration.
Chipotle plans to source more than 10 million pounds of locally grown produce—including bell peppers, red onions, jalapenos, oregano, and romaine lettuce—up from five million pounds two years ago. The program procures food from farms within 350 miles of restaurants where it will be served. Committed to supporting local farms and sustainable agriculture, Chipotle is also receiving fresher product and reducing transportation costs—even if it sacrifices economies of scale.
Law & Order…and Food
While managing costs is an important challenge, the food service industry’s top priorities will always be quality and safety. The ramifications of food-borne illnesses and product recalls are costly, so companies have been proactive in exploring ways to create new and better standards throughout the supply chain. For example, the Produce Traceability Initiative—an industry-wide effort to integrate corporate and market-driven traceability programs—is driving much of the technology investment.
"Having visibility to the entire supply chain—not just from distribution centers to stores, but all the way down to suppliers and growers—allows for better information gathering and, in the end, better decision-making," says Bernitt.
The government has standards, too. When the U.S. Food and Drug Administration (FDA) passed the Food Safety Modernization Act in January 2011, it presented the food service industry with new traceability requirements. The long-overdue action was largely attributed to a spate of high-profile food-borne disease outbreaks. The pending provisions instruct the administration on better managing and responding to product recalls, while creating a regulatory architecture that seeks to prevent epidemics from occurring.
The new legislation is expected to bring dated food-safety protocol in line with current industry needs. But many companies are already well down that road.
Darden Restaurants is among the more familiar food service organizations in the world, counting restaurants such as Red Lobster, Olive Garden, Capital Grille, and Longhorn Steakhouse among its seven brands and more than 2,000 establishments. The company is America’s 27th-largest private-sector employer.
Darden’s supply chain manages more than $3 billion in capital and food product expenditures annually, and sources about 35 million cases of product from 1,500 vendors in 35 countries around the world. Because of its organization’s sheer size, Darden recently initiated a major supply chain overhaul that it expects will save $45 million annually through lower prices and less wasted food. In 2012, it named Jim Lawrence its new chief supply chain officer.
Under Lawrence’s guidance, the company is upgrading its internal communication infrastructure to better connect restaurants, distributors, and suppliers. Darden is also pushing a new approach to standards throughout its supply chain.
Presenting at the GS1 Conference in Las Vegas in June 2012, Jim Thomas, vice president of supply chain, shared Darden’s vision of total quality and the important role standards play in this process. The challenge he and other supply chain practitioners in the restaurant industry face is unpredictability.
"Nature makes food, but it doesn’t follow rules or have standards," explained Thomas. "Our manufacturers, as good as they are, face problems every day. Imagine there’s a food-borne illness and they need to stop the supply chain and notify warehouse providers to pull a product number. The warehouse providers have to look in their records and tell the distributors, who then have to translate that number and call our restaurants. That sounds more like a rumor than a recall."
Standard Operating Procedures
To address this complexity, Darden is in the process of rolling out GS1 standards—globally accepted measurements that define information collected, recorded, and shared to ensure traceability—among its disparate trading partners. This will allow the restaurant chain to immediately identify product; capture and share information; communicate with suppliers, distributors, and restaurants; rapidly respond to a food safety crisis to ensure diner safety; and create better supply and demand data exchange.
Darden is also working with various food service operators around the world and the U.S. FDA to counsel and educate regulators about the benefits standards can bring to the industry.
"Sometimes this type of collaboration can be viewed suspiciously," Spies says. "But Darden wants to do what is right and what is best to keep its guests safe."
As altruistic as Darden may be, it also recognizes opportunities where it can leverage this visibility to execute business process improvements that ultimately reduce supply chain costs.
"We can automate restaurant receiving practices, reduce labor expenses in our own restaurants, help expand unattended deliveries, and manage expenses," says Thomas. "The business case for the work we do in the restaurants easily translates upstream to the warehousing and manufacturing environments that support our operators. We can also enhance in-house restaurant inventory management, providing more accuracy in our replenishment processes."
Darden expects its growth to continue—in terms of guests, restaurants, geographic locations, and complexity. Thomas and others within the organization believe end-to-end supply chain visibility doesn’t have to add complexity. Rather, it can simplify processes. GS1 standards lay the foundation for such improvement.
"We can make better supply chain decisions when all partners have data available instantly," says Thomas. "It’s like walking into a room with the lights out. You can certainly make it across the room in the dark. But wouldn’t it be better to turn on the lights, and let everybody see what’s happening?"
Delivering Supply Chain Cachet
Darden has a simple motivation for implementing supply chain best practices that ensure food safety and quality compliance: Failure costs too much. "With so many restaurants and so much volume, the risk of anything going wrong with its food can have a profound impact on its entire chain," says Spies.
When sanctioned, the FDA’s Food Safety Modernization Act provisions will help fill in some quality and safety standard gaps that currently exist. The burden of risk and investment to comply with the new government regulations will hit small and medium-sized companies harder than most multinationals that already possess a high level of sophistication. Still, the perception that SMBs are the industry’s weakest link is misplaced.
"Any size operator assumes risk," Spies says. "But, when product gets into a large company’s supply chain, it can be anywhere. A small number of national producers supply an overwhelming majority. The multiplier effect with larger operators can be significant when something goes wrong."
As the local sourcing trend spreads, restaurants will have to manage compliance accordingly—whether they are dealing directly with growers or vetting co-ops and distributors that have their own standards and requirements. The exposure to risk and costly product recalls is too great for food service companies to gamble.
Bernitt has yet to see many national chains follow the local sourcing model. On the whiplash end of a recession, and with food prices expected to soar as a consequence of the recent U.S. drought, many consumers will be hesitant to pay more for produce coming from the neighborhood farm.
"No matter where product comes from, consumers have to feel they are getting a good value, or they won’t be willing to pay," he notes. "Regional-based supply programs have driven some national food suppliers to offer more local or regional products, but the volume is still a small share of the total supply.
"If the supplier has an efficient supply chain that can deliver the product with enough shelf life and create an end product where consumers feel they are getting a good value, then that supplier will continue to receive the business," Bernitt adds.
It’s no surprise that supply chain management is the means to enhancing quality and safety while reducing costs—two seemingly opposed ends. It’s why food service companies have been fast adopters compared to other industries.
But what Spies finds unique is that some restaurant chains are leveraging the supply chain to attract customers, especially a younger generation more sensitive to sustainability issues. Chipotle touts its supply chain on in-store menus. McDonald’s runs an ad campaign celebrating suppliers. These considerations leave an impression.
"Restaurants are leveraging supply chain as a marketing tool," Spies says. "They understand what customers are looking for."
They want it their way—and the supply chain makes sure that happens.