Why mid-size and emerging chains should consider group purchasing to cut costs

April 1, 2013

By John Davie, president and CEO of Consolidated Concepts

Ask any seasoned franchise owner and he’ll tell you that the most important aspect to any menu is your supplier. Quality and cost are paramount, and last year’s epic drought, was a wake-up call for many restaurant owners- particularly for emerging franchises.

Staying profitable in the face of surging commodity costs is a concern, and the large national chains have been staying ahead for years by using group purchasing. Small and emerging chains need to do the same to keep competitive. One way to do that is to participate in a group purchasing organization.

What is a group purchasing organization?

A GPO is an organization that helps pool the buying power of its individual members to help get the best possible prices and quality on products and services. Most people would be familiar with the idea of Group Purchasing through places like their local grocery store and their insurance company. Both industries use the practice to get the highest-quality goods and services while keeping their costs as low as possible.

It wasn’t long before the large national chain restaurants started acting as their own GPOs to help them with all of their purchasing from food items to cleaning chemicals to toilet paper. The combined clout of all of their individual franchisees’ buying power allowed them to bargain hard with suppliers – gaining favorable pricing and first-in-line delivery when supplies were short, among other benefits.

The benefits of joining a GPO

Competitive edge: Group Purchasing helps franchises stay abreast of trends and new products. As last year’s drought proved, being alert and nimble in the face of dramatic shifts in market prices can make all the difference.

Trust and safety: With huge scares and recalls such as the salmonella in lettuce disaster of a few years ago, it’s more important than ever for restaurant owners to be able to trace their supplies. Most GPOs make members sign agreements with suppliers who have traceability.

Fighting for the little guy: Emerging and mid-size chains often are at a disadvantage compared to the larger chains, both in commanding a good price and the best quality. The big chains have more purchasing power and better bargaining power for price, access and quality. The big guys have entire teams of accountants and specialists going over spending, and those teams bring huge buying power to the bargaining table. GPOs combine the resources and buying power of many mid size and emerging chains to create a well staffed and strong bargaining unit for their benefit on a par with the “big guys.”

Saves time: Tracking and comparing prices, vendors and services is overwhelming for most independently owned restaurants (typically done by the owner/ chef). This is incredibly time-consuming and takes away from the most important focus: customer satisfaction.

Higher expertise with less need for supervision: Using a third party GPO or consultant to act as your purchasing department or VP of purchasing will save a considerable amount of money and administrative and supervisory time compared to hiring one or more additional employees to handle the job. On top of that, with a GPO you are afforded the skills of an industry veteran coupled with the added buying power of a GPO.

Vendors reap benefits, too: The benefits are hardly limited to the restaurants. Vendors who partner with a GPO gain hundreds, if not thousands of new clients, and are able to lock in large contracts with less selling time.

What to look for when selecting a GPO to help your chain

Check to see if your GPO works on a pay-for-performance basis. This model helps ensure that you’re getting the best deals and quality with no out of pocket costs to you. Also, look for a GPO that offers value-added services, such as alerts on industry-wide price or supply issues, and tips and insights on best practices to maximize profits.

Here are a few more tips that will also help you succeed as a member of a GPO.

1. Be flexible on what you put on your menu. Commit to quality, but not to brands, species, etc. For example, If you have fish n’ chips on your menu, there are many quality options to use for a white fish. If you list that your fish n’ chips uses cod, you are going to potentially suffer a negative cost impact if cod goes up.

2. Be creative on your LTOs. There are always great opportunities to take advantage of proteins that are a great value that can be fabulous menu items for your guests and at the same time be food cost friendly.

3. Try to use products in multiple recipes. Minimizing your number of SKUs can have positive effects on productivity and food cost.

4. Purchase reputable brands whenever possible as opposed to distributor label. This will provide more consistent quality.

5. Look outside the box on how you purchase. As large as your volume may be, if you are able to piggyback your volume with others, you can save money.

6. Take a very hard look at yield. There is a tendency to look at raw cost without yield implications. This is not only on yield after cooking, but also on the type of produce you are buying. For example, romaine hearts may be more expensive at the outset, but if you are not going to be using the outer leaves of heads of romaine, the overall yield of the heads of romaine will cost you more.

7. Be sure to purchase products in larger case packs if you are able to use the products without having waste. This procedure will save you money in mark ups from distribution.

Read more about operations management.

Topics: Operations Management

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