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In This Together: Chain Restaurants Seek Help from Suppliers

Purchasing executives are turning to suppliers to cope with the downturn.

By David Farkas, Senior Editor -- Chain Leader, 6/1/2008

Fazoli's, Austin Grill and CiCi's Pizza

Fazoli's, Austin Grill and CiCi's Pizza

Fazoli's, Austin Grill and CiCi's Pizza

Amid a difficult economy that is battering their sales and profits, purchasing executive at three chains (from top)—Fazoli's, Austin Grill and CiCi's Pizza—are discovering new ways to work with vendors to help blunt rising commodity costs.
Of the tasks purchasing departments are typically assigned—sourcing, logistics, contracts, cost savings, food safety, product specs—guess which one is now center stage.

Trimming costs is so much on the minds of purchasing executives that it is hard to have a conversation with one of them without the subject dominating it. After all, they haven't seen anything like this economy.

“No one in the business today has gone through a period quite as unique,” offers Bob Kulick, president of JMC Restaurant Distribution, a division of and exclusive distributor to CiCi's Pizza.

To find out how “unique” and how they are dealing with rising prices, we spoke with three industry veterans: Kulick; Judy Hollis, vice president of supply chain, R&D and quality assurance for Lexington, Ky.-based Fazoli's; and Chris Patterson, president of Austin Grill in Alexandria, Va.

Feeling the Pressure

Hollis is no stranger to working under intense pressure. During eight years as senior vice president for supply chain at Wendy's International, she remembers institutional investors leaning on the burger giant to boost margins, which were not comparable to competitors.

“We had to do the same things: very detailed and very careful work on costs,” recalls Hollis, vice president of supply chain for Lexington, Ky.-based Fazoli's System Management, where she's trimming about $2 million from the cost of sales.

At Wendy's, the problem was beef. Today, it's the high cost of commodities in general. “With the commodities market so difficult, profit is even more of a priority,” she says.

Sales and profits were slumping at the 300-unit, fast-casual chain when Sun Capital Partners acquired it for an undisclosed sum in October 2006. CEO Robert Weissmueller hired the veteran purchasing executive a few months later to improve both.

Fazoli's

Fazoli's

Good relationships with suppliers are crucial for the development of new products like sauces and pastas. Vice President of Supply Chain Judy Hollis says that effort involves making sure vendors “get in the restaurants and understand them.”
Fazoli's purchasing department had already been wringing out costs by the time Hollis arrived. “It's not that when I came in we had lots of low-hanging fruit,” she explains. “We had to take $2 million out by being much more creative and looking all through the supply chain.”

Hollis began by vetting suppliers. Two criteria were especially important: low overhead and access to resources like market research that Fazoli's that didn't have.

Snapshot

Concept Fazoli's System Management

Units 300

Projected Size of Purchases Managed, 2008 $100 million

Number of SKUs 150

Distributor The Sygma Network

Top Product Categories Pasta, bread, cheese

Procurement Goal for 2008 Enlist supplier support to keep impact of raw product price increases on food cost to 1 percent or less

“I reached out to key manufacturers and asked them to share consumer research with me in depth to help develop a menu strategy,” she says.

One manufacturer offered Fazoli's its test kitchen after Hollis promised to keep the company informed of the chain's initiatives. “I said, 'I will give you opportunities at projects as we develop our strategy and tactics.' So we did just that,” she recalls.

Hollis visited the supplier's test kitchen and, with the help of its culinary staff, developed an Italian beef sandwich that tested well with consumers but exceeded the chain's tight cost standards. The product was changed and eventually rolled out, profitably, last summer. “We always want to be involved in the process,” Hollis says of the time she spent in the test kitchen and with focus groups.

The Right Stuff

Involvement saves more than money. Early in her career, Hollis saw vendors bringing products that didn't fit a chain's menu positioning. “It was wasted time and effort,” she says. To avoid such missteps, Hollis insists suppliers visit Fazoli's units, talk to managers and watch kitchens produce food.

Hollis isn't entirely unsympathetic to suppliers' problems. “If you are going to weather times like this, you can't turn a cold shoulder to their pressures and refuse reasonable price increases. You have to be in it together,” she explains. “Not that you don't challenge them.”

Leveraging Relationships

CiCi's Pizza's Bob Kulick knows that drill only too well. “We really battle to make sure prices are the best they can be,” he says of his relationship with suppliers, with whom he keeps close ties.

Snapshot

Concept CiCi's Pizza

Units 633

Projected Size of Purchases Managed, 2008 $150 million-plus

Number of SKUs About 300

Distributor JMC Restaurant Distribution

Top Product Categories Cheese, flour and sauces

Procurement Goal for 2008 Protect the CiCi's system from this year's unprecedented rising costs

Kulick wears two hats: buyer and seller. He operates JMC Restaurant Distribution, which sells supplies to CiCi's Pizza, a one-price buffet chain. He is also purchasing $150 million worth of supplies each year for manufacturers.

The costs of cheese, flour and sauce—the buffet chain's top three product categories—have climbed steeply since the first of the year, and Kulick, who once operated restaurants, understands how dangerous that is. “Costs are escalating much faster than franchisees can raise their prices. There's going to be a disconnect for a period of time,” he says.

Meanwhile, Kulick depends on manufacturers to help him trim costs by value-engineering certain products.

Getting Personal

According to Kulick, his social science background (his major in college) has come in handy, helping him to convince manufacturers to go the extra mile. “We sometimes surprise our vendors by asking them how we can be better customers,” he says. One took him up, inviting JMC to place orders later in the week.

Kulick also mentions a time when, lamenting that CiCi's popular Classic Chicken Pizza could only ever be an LTO because of protein costs, a supplier insisted otherwise. “He said, 'I will make my life's work putting this product on your buffet,'” he recalls.

CiCi's

CiCi's

CiCi's Bob Kulick, president of the chain's distribution arm, likes to contract ingredient prices for as long as possible. “We have a saying here: 'If the price works for us today, it will work for us tomorrow and the next day,'” he says.
CiCi's is now putting those relationships and attendant contracts to work. The company is encouraging manufacturers to look for ways to take costs out of products or make them more efficient to work with. For example, a change in brownie-mix packaging made it more efficient to handle. Flour is now bagged in sacks that match batch sizes for pizza dough. So far, one of two sauce manufacturers lowered Kulick's annual cost for a sauce product by about 10 percent after coming up with a concentrate.

Given fluctuating prices, Kulick is doing supplier reviews more frequently. “Let's look at things now and then again in two months instead of six months,” he explains. “Help us get through these incredibly difficult times.”

Kulick is reluctant to ask vendors to lower raw material costs, conceding they know more about the manufacturing process than he does. Still, he adds, his relationship with suppliers is such that they will call his company to make cost-saving suggestions. “They do come to us on a regular basis and say, 'What do you think of this?''' he says.

Outside Help

Austin Grill also maintains close ties to suppliers but uses an intermediary to stay in touch, says Chris Patterson, who until he left Austin Grill in May was president of the eight-unit chain. While examining purchasing practices “from all angles,” he retained a retired purchasing executive named Jim Husk to help trim the cost of goods. Austin Grill pays Husk a monthly fee; no commissions are involved.

Austin Grill

Austin Grill maintains a cost lid on products like glasses by negotiating directly with the wholesaler instead of a broadliner. 

Snapshot

Concept Austin Grill

Units 8

Projected Size of Purchases Managed, 2008 $2.2 million

Number of SKUs 455 (estimate)

Distributor Sysco

Top Product Categories Cheese, canned tomatoes, chicken breast

Procurement Goal for 2008 Manage cost of goods to avoid raising menu prices

“Jim allows us to go directly to the manufacturer to negotiate deals,” Patterson explains. “He will source chicken breast and cut a deal with a supplier. Then, we go to our primary distributor and pay a landed price and a mark-up we've already agreed to.”

The Atlanta-based consultant, who worked for Popeye's Chicken & Biscuits in the 1980s, also buys the Southwest-themed chain's skirt steak, rice, beans, paper products and chemicals. “I told him I'd do everything except heavy equipment, construction and liquor,” Husk says.

Patterson, who declines to reveal how much Husk has saved the chain, launched the cost-saving process early this year by giving Husk the company's supplier list.

“We started at the top and went to the bottom, trying to see which products we could put on national contracts,” Patterson recalls.

Today the company has leverage on some 20 items, which has helped lower Austin Grill's food cost by a quarter point year to date, Patterson claims. “We've been able to lower the cost on chicken and skirt steak,” he adds.

Check This Out

Managers and staff have also been enlisted in the cost-savings effort. They weigh each box that comes in the back door, particularly if it contains proteins. “We have found on more than one occasion a box of chicken breast or skirt steak 3 or 4 pounds off, and we go right back and ask for a credit,” explains Patterson.

Austin Grill can also count on Thompson Hospitality, the Herndon, Va.-based contract-foodservice company that acquired the chain two years ago, to help trim costs. Patterson cut a deal with the concessionaire's smallwares supplier, saving money.

The proximity of the eight units—all are in the Washington, D.C., area—has kept delivery cost low because one truck can make the rounds. Patterson also reduced the number of weekly drops from three to two per restaurant.

“Any time you go through challenges like these you become a better operator,” he maintains. “You have to get more creative and wiser.”

 

Seeking Common Ground with Suppliers

It's tough for operators to get along with suppliers when costs are rising. But doing so may lead to greater efficiencies, contends Lauren Cahill-LeFranc, a purchasing consultant with Charlotte, N.C.-based Results Thru Strategy. Here's how:

Avoid price shock on primary commodities by approving secondary product specifications as a default when raw commodity costs on key items reach a predetermined threshold.

Consider face-to-face conferences to get the support of key suppliers and generate ideas to reduce costs.

Every quarter conduct an offsite meeting at the distributor's test kitchen with both its purchasing and account-management executives.

Evaluate line-item costs of high-volume and proprietary manufactured products for alternate methods of manufacturing, labor, storage, packaging and raw-ingredient specifications.

Create cross-functional, intercompany teams including product development, operations, finance and marketing. This involves the purchasing departments early on in sourcing.

Drill down into the master distributor agreement to evaluate actual costs and potential for cost inflation associated with split-case fees, small deliveries and fuel surcharges.

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