Supply Chain Management in a Quick Service Restaurant Environment

The Burger King System Example

Presented by

George Hoffman Restaurant Services, Inc. Michigan State University

March 28, 2006

Agenda
Burger King System overview BK Purchasing and Supply Chain History Restaurant Services, Inc
Corporate structure Purchasing Scope

Supply Chain management evolution

From narrowly-focused purchasing to Integrated Supply Chain Management

Current Industry Challenges

Burger King History

1954 - Founded in Miami, featuring:
Flame Broiled Hamburgers @ 18 Milkshakes @ 18

1957 - Whopper introduced @ 37 1967 - BK Acquired by The Pillsbury Company:

Purchase Price - $18 million 274 restaurants

1988 - Grand Metropolitan acquires Pillsbury and subsidiaries - $5.79 Billion 1997 - Grand Met + Guinness = Diageo 2002 - Burger King Corporation goes private 2006 Burger King IPO forthcoming

Burger King Today

11,200 restaurants worldwide (7,400 U.S.)
90% franchised 50 States; 61 Countries

$11 Billion system sales ($1 million/rest) 340,000 people employed 5.7 million hamburgers sold/day 1.5 million pounds of fries sold/day 7 million customers served/day 59% Drive-thru

Burger King System Restaurants

14,000 12,000 10,000 8,000 6,000 4,000 2,000 0 67 77 86 88 89 90 91 92 93 94 95 96 97 98 99 '00 '01 '02 '03 '04 '05 U.S. International

BK System Supply Chain

7,400 restaurants (U.S.) 100 Million cases/year
Average 13,000 cases/restaurant/year

400+ Primary Suppliers High commodity content 27 Regional Distribution Centers

Average 275 restaurants/DC

1 Re-Distribution Center Premiums manufacturing in China

Increasing China sourcing

2 Kitchen Equipment Consolidators

Supply Chain Value Added

(typical restaurant)

$250K

Supplier Manufacturing Freight Freight

+ $60K

= $310K

+ $15K
Warehousing + $25K Delivery = $350K $1,100K Restaurants Customers

Raw Materials

Burger King Supply Chain History

Pre-1990 restaurant operators purchase their products from their choice of approved distribution centers
All distributors independently purchase products from suppliers The only national distributor is a wholly owned subsidiary of BKC Restaurant operators independently negotiate terms with the DCs

1990 BKC decision to divest BKC distribution subsidiary 1992 Separation of Purchasing from Distribution
Change distribution format from wholesalers to distributors Create RSI: Consolidation of all System purchasing into a member-owned coop accountable to all restaurants, franchised and company
Franchisees still choose from among approved distributors

1999 RSI scope expanded to include distribution contracting 2000-2004 Integrated Supply Chain Management Systems development and implementation

Why Separate Purchasing from the Corporation?

90%+ of restaurants franchised vs company owned and operated Corporation cannot require franchisees to purchase under company contracts: inability to commit franchisee volume Financial model of the Brand owner is different than franchisee
Top line sales generates royalty Franchisees model of success is individual restaurant profitability

Trust Best for restaurants or best for corporation? Opportunity to tax system for Brand owner benefit.

Other QSR Models

McDonalds corporation department, regional advisory councils Wendy corporation department YUM Brands (KFC, Taco Bell, Pizza Hut)
Unified Purchasing Coop Umbrella Board; Brand Boards

Popeye/Churchs Joint cooperative Subway Independent cooperative Arbys semi-independent cooperative

Restaurant Services, Inc.

Formed in 1992 Delaware Charter Corporation Operating Agreement with BKC Subchapter (T) IRS Status Not-For-Profit Coop
Net Income Distributed Annually Patronage Formula

Democratic Governance Voluntary Membership

Why Delaware; Why Coop Form?

Delaware offers substantial corporation structure flexibility Coop (sub-T) is IRS designation (not provided for in Delaware law)
Allows for no taxation provided:
Democratic governance (one member; one vote) All net earnings distributed to members via patronage formula Members individually subject to taxes on patronage dividends (1099Div Forms issued)

RSI Ownership/Membership
RSI Membership:
Burger King Corporation U.S. Franchisees of Record
Individuals Corporate entities Partnerships

Membership is voluntary
Members must sign agreement to be member
Eligibility to vote for RSI Board members Eligibility to receive patronage dividends

100% U.S. membership

RSI Governance
Established by Charter/Bylaws Governance structure approved by IRS 21-Member Board of Directors
2 elected from each of 9 regions 1 recommended by BKC 1 appointed by Minority Franchise Association 1 independent director, at the Boards option

Regions of reasonably equal number of members

Periodic redistricting required

RSI/BKC Operating Agreement

Defines BKC/RSI Roles and Responsibilities BKC recognizes RSI as exclusive Purchasing Agent for restaurants in the United States
Food & Packaging products (ex soft drinks) (4/92) Equipment and Facilities (4/92) Premiums (7/94) Distribution Services (5/99)

No RSI or BKC obligation to take title to Products 20-year initial term due to expire March, 2012 (with 5-year automatic renewal provisions)

 BKC Rights and Responsibilities:

Approve/disapprove suppliers and distributors Determine Brand standards Define Products (specifications) Develop marketing programs Establish quality and safety standards Ensure supplier & distributor compliance with quality & safety standards Determine need to recall, withdraw or hold products Provide RSI timely information on new products and promotions Grant Exclusives Purchase soft drinks

 RSI Rights and Responsibilities:

Negotiate purchasing agreements for all products (except soft drinks) including prices, marketing allowances and fees, funding and promotional activities Insure timely and consistent availability of products to restaurants Advise BKC of supplier noncompliance with specifications Supervise build-up and balancing of inventory in support of new product introductions Develop and implement standard purchasing terms and conditions of supply with approved suppliers Supervise recalls, withdrawals and product holds Actively promote utilization of minority suppliers

RSI Purchasing Scope

$ Mill

Food & Packaging Equipment & Dcor Premiums & SLOs Distribution Services TOTAL
* Includes soft drinks purchased by BKC

$2,400* 200 200 200 $3.0 billion

Food & Packaging Products

Beef Chicken Soft Drinks* Packaging Fries & hash browns Buns Dairy Ketchup & sauces Pork Fresh Produce All Other TOTAL $ Mill 426 285 262 229 222 199 154 104 81 77 374 2,413 % of total 18% 12 11 9 9 8 6 4 3 3 15 100%

* Purchased by BKC

Equipment and Facilities

Kitchen Equipment
Broilers Fryers Freezers Lighting - Shake machines - Parts - Stainless - Micro - Drink equipment -

Dcor items Signs Playgrounds Uniforms Small wares POS/BOH

Electronic catalog

Premiums & Promotion Items

10-12 kids premiums programs/year 200-250 million units Manufacturing and Logistics contracting Self-liquidating offer programs (SLO) Order processing (FOR) China manufacturing Ocean freight contracting Inland freight and logistics to U.S. DCs Distribution management to restaurants Filler inventory management

Distribution & Logistics

Distribution Service Agreements in U.S.
Delivery terms & conditions Performance standards Data reporting requirements

13 Regional distribution companies 27 distribution centers Logistics cost management

Supplier-distribution center Least-cost solutions

Redistribution/LTL consolidations Local Distribution Committee management

Franchise System Purchasing Challenges

Purchasing services vs actual direct purchasing Limited ability to commit volume Multiple stakeholders
Brand Owner
R&D Marketing Operations Finance

Suppliers Distributors Franchisee restaurant operators The Purchasing entity (company or cooperative)

Purchasing Cooperative Risk Profile

Support of Members and Brand Owner
Perceptions of performance vs actual performance

Purchasing performance measurement

Actual cost of goods to restaurant
Commodity driven Specification driven (brand owner controlled) New products (brand owner controlled) Lead time impacted (brand owner controlled)

Perceived cost of goods (% of sales)

GP% = Top Line Sales / Cost of Goods

Other actual/perceived benefits to members

Strong advocate for members with Brand owner Broader access to system performance measures

Franchise vs Company Owned

Decision making process
Company ability to absolutely commit Franchise limited ability to commit

Relationship management
Company limited points of contact with senior management; clear decision authority Franchise multiple points of contact, requires consensus building

Financial Performance
Company EPS reasonably clear accounting rules Franchise Brand owner vs franchisee ambiguous measures depending upon business entity

BK System Supply Chain Evolution

 Level 0 Localized/fragmented purchasing and distribution (BK system pre-RSI) Level 1 - Consolidate purchasing leverage with existing suppliers to eliminate excess margins (RSI in 1992) Level 2 - Get better product prices by sponsoring approval of new suppliers with lower cost structure (RSI in 1994-96) Level 3 - Apply longer-term purchasing strategies with the most competitive suppliers (RSI in 1996-99) Level 4 Integrated Supply Chain Management - focus on supply chain efficiencies from supplier to restaurant and electronic commerce (1999-2005) Level 5 Value engineering products and delivery processes; Build commercial reality into all production/promotion specifications from concept stage; rationalize supply/distributor network (2005-2008)

Pre-1999 Purchasing & Distribution

Product purchasing historically fragmented
BK-owned distribution subsidiary No centralized authority acting on behalf of all BK system restaurants Typically managed by distributors various franchisee involvement

Significant excess/obsolete inventory costs

Distribution Agreements negotiated locally Promotion Planning limited and fragmented Key Business Processes sequential vs team collaborations

Go-Forward Objectives (1999)

Develop and implement a cost effective, quick response system supply chain that will provide competitive advantage for BK in the QSR Industry Improve Supply Chain Performance
On-time deliveries to restaurants Improved order fill rates Order lead times and promotion response Effective inventory management

Reduce Restaurant Costs

Integrated Supply Chain Management

A vision for transformation: To actively manage the entire supply chain, from supplier to restaurant, to improve the systems efficiency and effectiveness. Enabled by emerging information technology that allows real-time retail sales visibility to all supply chain participants.

Integrated Supply Chain Management

Envisions a comprehensive approach to:
development of products and suppliers purchasing of goods delivery of those goods to the end user predetermined system strategic objectives and performance standards ongoing improvement and refinement.

Best Practice implemented by successful world-class companies in recent years.

1999-2004 Plan Implementation

Focused Plan Objectives

Improve overall efficiency and effectiveness of the BK systems supply chain through new ecommerce technology applications and information systems
Improve speed to market for promotions & new products Improve promotion planning & inventory management
Ensure supply through all promotions & new product introductions Eliminate excess inventory at the end of promotions

Reduce landed costs to restaurants Reduce restaurant invoice processing costs & errors Implement distributor performance measurement Provide RSI members electronic access to food cost reports

Key ISCM Projects

Restaurant Daily Menu Item Sales data collection Restaurant distributor electronic ordering (F&P) Restaurant - Supplier electronic ordering (nonfood) Distributor - supplier electronic ordering and invoicing Standard nomenclature/numbering & bar-code systems Data Warehouse; Analytical Data Processing Tools Collaborative planning and forecasting Web-enabled electronic data reporting and feedback

Data Requirements
Improved supply chain product flow visibility:
Supplier distributor invoicing (pre-1999)
14-45 day information lag

Distributor restaurant invoicing (1999-2002)

7-28 day information lag

Restaurant order placement monitoring (2004 target)

3-day information lag

Restaurant daily menu item sales (2004 target)

1-day information lag

All supply chain participants (suppliers, distributors, members, restaurants, BKC and RSI have access to relevant restaurant sales data

Supply Chain Response Time

Product delivered To restaurant Day 7-22-36
3.5-days

Supplier delivers Product to DC Day 18 - 32

7-days

Ingredients delivered To supplier Day 25

7-days

Restaurant
3.5-days

Distributor
7-days

Supplier
7-days

Ingredients

Customer purchases Product at Restaurant Day 1

Order placed To DC - Day 4

DC places Order to supplier Day 11

Supplier orders Ingredients Day 18

Translating Sales to Product Demand on a large scale

Menu Items:
Whopper Hamburger Original Chicken Fries - Medium Vanilla Shake (m) Soft Drink (s) etc. BK Recipe

Products:
Whopper beef Burger beef Volpak ketchup 5 Buns Sliced Cheese 5-Gal BIB etc.

Requires Standard Naming and Numbering Conventions and recipe translations

Standard Naming and Numbering

Standardized data naming and numbering conventions are required
GTIN - UCC Standard Bar-Code capability Standard numbers already established and communicated to all BK suppliers and distributors Distributors now reporting to RSI with GTIN Suppliers will report to RSI with GTIN standard next year

Establishing a GTIN standard for Menu Items will facilitate collection & recipe translation

Integrated Supply Chain Management Model

POS
Restaurant

BOH ISP
Restaurant 2

Distributor Supplier
Order Placement

Restaurant 3

Polling

Restaurant Owner
Restaurant 4

Product Flow Electronic feedback Data Feeds Order Placement

Receive Data Data Warehouse Secure Internet Access

Raw Materials

Electronic Reporting and Feedback

2005 Current State

Current Electronic Data Reporting

All distribution centers reporting daily inventory and restaurant invoice data:
All products All restaurants

2,100 restaurants reporting daily sales

All products and product mix Menu item unit sales; $ sales and average check

60% of restaurants place electronic orders Distribution centers electronic reporting service levels; on-time deliveries and fill-rates

Web-Site Access to Product Sales

Daily sales and traffic data updated each afternoon reflecting previous days activity Daily promotion sales tracking and measurement vs previous forecasts Regional/local sales and traffic variances from national averages Daily product mix Restaurant product landed costs
All restaurants All products

Results: Goal Achievement

Lower restaurant landed costs Supply continuity - no gaps Minimal/No obsolete inventory Fewer distribution centers Improved service levels Increased supply chain responsiveness
New product introductions Product elimination Limited-Time Promotions

Current State: Industry Challenges

General Economic Conditions
Labor cost & availability Energy costs product, freight, restaurant ops

QSR maturing industry Historical rapid growth in sites Historical slow growth in total QSR sales Market Share battle Squeezing restaurant operating margins Best-Value proposition wins the day Tomorrow may be different Changing consumer tastes and preferences

Emerging Consumer Attitudes

Health awareness
Obesity Public health care costs

Food Nutrition
Calories Trans-fats Processed vs natural Consumer choices: reality vs aspirations

Food Safety concerns/intolerance

Animal diseases (Mad Cow; Bird Flu, etc)

Food Security Country of Origin and other labeling Biogenetics Animal Welfare

The End
Restaurant Services, Inc.