Procurement as a Non-Profit Center for Supply Chain Risk Consolidation

I spent some time this week with a group of procurement executives from Restaurant Supply Chain Solutions, a company that conducts all of the procurement and supply chain activity for YUM! brands (including Pizza Hut, KFC, Taco Bell, as well as A&W). This organization was created a number of years ago, in response to a lawsuit launched by KFC franchisees who were unhappy with the perceived pricing and costs of food contracts negotiated for them on behalf of Yum. As a result of the settlement, RSCS was created as a non-profit procurement center of excellence, that works with the franchisees, the brands, and the operators to negotiate contracts.

This is a very interesting organizational construct. RSCS does not take title to any goods – but has authority for negotiating contracts on behalf of all the brands and franchisees. They do not capture a profit, but are funded through the brands. They need to work with multiple stakeholders, and are constantly balancing many different issues. In effect, this organization is a focal point for transference of all pricing and supply risk from across the entire supply chain into a single entity, that is able to make decisions based on a truly neutral, third party perspective.

The volume of food purchased is also staggering to the imagination.  Some of the volumes include 9 aircraft carriers full of beef, 9 Olympic swimming pools of sour cream, and enough chicken wings laid end to end to cover the earth 2 1/2 times!  Many of these contracts are managed through commodity risk programs, often run through RSCS’s suppliers (such as Bungee and others).  This does two things.  It removes the risk from Yum Brand’s balance sheet, which is often a concern to share holders.  Second, it allows the organization to use hedging and other risk management instruments that most large brands would not be willing to use, but which make sense given the volatility of many of these commodity markets.  This also allows franchisees of these brands to better manage their margins at the store level – and not to have to worry about commodity markets that are going all over the place.

The biggest challenge with this procurement organizational model is that procurement has to manage multiple stakeholders.  Each brand (KFC, Pizza Hut, Taco Bell ) has a board representing franchisees from all over the country, often with diverging views.  Each brand also has a corporate office with brand-specific concern, and there are often multiple diverging views here as well.  Finally, there is also a need to commit to suppliers – with volumes of business related to franchisees that are not always willing to buy into these programs.

Despite this fact, this represents a highly unique and successful model for procurement, and possibly one that we may see more of in the future.  Procurement sustains itself only through its ability to drive value for the business, absorb and reduce risk, and continually drive collaborative relationships with the supply base.