When one company acquires another, there usually are opportunities to reduce costs in both companies' supply chains. That was the case when Applebee's, the restaurant company I worked for, was acquired in 2007 by IHOP Corporation, the parent of the International House of Pancakes restaurants.
Following the acquisition, I had responsibility for both Applebee's and IHOP's supply chains. It wasn't hard to see that the synergies to be gained by aligning the two brands' supply chains would have a positive and significant impact on product costs. Given that the restaurants' annual spend for products—all food plus "non-food" items, such as dishes, cutlery, disposables, and so forth—exceeded US $1.6 billion, the opportunities were large indeed. The spend under management also included distribution and logistics services, so there were opportunities there as well.
But aligning the supply chain activities of two separate brands, even in the same industry, would be a formidable task. In order to achieve the level of cost benefits we believed were possible, we would need an effective way to coordinate the management of both restaurants' supply chains.
The best way to go about that, the parent company (now known as DineEquity) determined, was through a supply chain cooperative that would serve both restaurant brands. The benefits the cooperative could provide would derive from a variety of supply chain activities. These activities included rationalization of suppliers, distributors, and products; alignment of specifications; better management of freight and inventory; alternate sourcing; and commodity hedging, among others.
Throughout 2008 we held a series of meetings with the franchise owner/operators to explain the value that a supply chain cooperative could achieve by leveraging the scale of both brands. There were more than 40 Applebee's operators and almost 400 IHOP operators, representing about 3,300 restaurants in total. It took an entire year to bring the plan to fruition, and we finally launched our cooperative, Centralized Supply Chain Services LLC (CSCS), in February of 2009. Headquartered in Lenexa, Kansas, USA, CSCS is an independent company owned by its members, which include Applebee's and IHOP franchisee and company restaurant operators. It is responsible for negotiating all purchasing agreements and distribution arrangements, and for determining the level of business awarded to each vendor. CSCS is overseen by three boards of directors: one representing the Applebee's operators, one for IHOP operators, and one joint board that is responsible for the overall business and strategy of the cooperative. (For more about CSCS, see the sidebar on Page 45.)
Once all participants had agreed upon the need to establish the cooperative, the question then became how to align the supply chain processes we would have to manage.
We needed a tool that could help us analyze the current situation and identify where to consolidate and streamline processes. That tool, we agreed, was supply chain mapping.
Mapping essentially makes a process visible, illustrating how that process happens so that it can be viewed, analyzed, and improved. With such an understanding, stakeholders can align their activities to achieve better execution, communication, and enhanced relationships—all of which help to make the process more productive than it was before. In our case, however, we not only had to map component processes, we also needed to map the supply chain itself.
What follows is an overview of the steps we took to develop our supply chain process maps. This article also looks at the benefits all four companies—DineEquity, Applebee's, IHOP, and CSCS—have achieved through streamlining supply chain management with the help of process mapping.
Centralized Supply Chain Services LLC (CSCS) is the sole purchasing agent for the Applebee's and IHOP (International House of Pancakes) restaurant systems. The cooperative, with headquarters in Lenexa, Kansas, and another office in Glendale, California, USA, currently manages approximately US $1.8 billion in spend on behalf of its member operators.
CSCS's primary mission is twofold: first, to assure that member operators receive the benefit of continuously available goods and distribution services in adequate quantities at the lowest sustainable delivered prices; and second, to coordinate with Applebee's and IHOP in their ongoing efforts to develop new and innovative products and programs to promote their respective concepts.
Some interesting facts about CSCS:
Five steps to supply chain mapping
Supply chain mapping allows a company to identify bottlenecks by: providing visibility into how processes are carried out; identifying where the processes are executed; identifying who is doing what within the processes; revealing how processes affect other processes; and determining why a process is being executed. Mapping also makes it easier to identify activities within a process that are not adding value; these can then be targeted for elimination and/or modification.
There are five steps involved in developing a map of the supply chain. As the experiences described here demonstrate, each is crucial to achieving success.
1. Form a cross-functional team. Forming a cross-functional team tasked with identifying and prioritizing processes based on the strategic and financial impact to the business is a foundational requirement for success. The team must include multiple functions and not just the supply chain organization. When we began the mapping initiative, we grouped processes within the context of "key relationship points" associated with five areas: 1) supplier/distributor engagement; 2) product development; 3) testing of products and services; 4) support for promotions and limited-time offers; and 5) support for menu changes. These are all fundamental elements for supporting restaurant operations. All of them involve numerous processes, some of which can stand alone but most of which are intertwined.
To understand these connections, consider the Supplier and Distributor Contracts process, shown in Figure 1 as BP (Business Process) 520. In a very simple way this process map demonstrates the need for a cross-functional team. Note that four separate companies are shown as participants, with staff from each involved in the process at some point. These include both IHOP and Applebee's corporate organizations; DineEquity (because quality assurance and information technology are shared services used by both brands); and the cooperative. Although they are not formally included in the map, we also consider input from the franchisees of both brands.
There are numerous interactions among departments and/or functional organizations, such as quality assurance, menu development, marketing, operations, finance, legal, procurement, and logistics. Looking to the far right of the process map, you will see letters corresponding to where responsibility lies, which functions are accountable, and who needs to be consulted.
This is important because the process will be suboptimized if all of the right functions and people are not involved. No one functional group or manager has the knowledge or experience to represent all of the functional areas involved in the process. Moreover, individual managers cannot possibly see all of the interrelationships, nor can they understand all of the trade-offs that impact the organization. Finally, implementing changes through the actions and collaboration of a cross-functional team will help to minimize resistance to change.
2. Map the process. There are a number of ways to approach mapping, but typically it begins with a high-level map that identifies the major internal linkages and potential bottleneck areas. The map must also consider the key linkages with customers and suppliers. The primary customers of CSCS are the operators of both Applebee's and IHOP restaurants. In addition, our customers include the functional areas of the two brands, such as menu development, operations, and marketing, as well as DineEquity's shared-services quality assurance department. We serve them all, and they all have differing priorities. But they share a common goal: the successful, sustainable profitability of the two brands.
Once we assemble a cross-functional team that represents the appropriate functional disciplines of our customers and of CSCS, we begin the mapping process. By bringing this cross-functional team together we can identify various inputs, outputs, delays, decision points, and flows. The three basic flows we typically map are material, financial, and information flows.
To some degree mapping is a negotiation, as one objective is to agree upon priorities. In the contract development process shown in BP 520, for instance, negotiating the requirements for approval of a distributor or a supplier is part of the internal discussion. We need to have cross-functional involvement to ensure that the supplier/distributor, its facility(ies), and the product(s) it provides are approved by the brands. Those approvals rest with the DineEquity quality assurance department and the respective menu development team of the brands, with input from CSCS.
Although CSCS is responsible for most of the actual process of contracting with suppliers and distributors, we are dependent upon the collaboration and support of the brands and of DineEquity. Therefore, in BP 520 you will see references to other business processes, each of which has also been mapped. Figure 2 illustrates BP 110 (the Supplier Approval process), which is referenced in BP 520.
3. Identify the delays and bottlenecks. Process mapping facilitates identification of delays and bottlenecks, which can take many forms. Because the maps are all interconnected, they can bring to light potential problems that otherwise might not be evident.
For example, as noted above, BP 520 (the Supplier and Distributor Contracts process) references BP 110 (the Supplier Approval process), which is heavily dependent upon DineEquity's quality assurance department. When the cross-functional team looked at the level of contract development activity generated by CSCS, it became clear that the quality assurance group would find it challenging to keep up with those demands without additional resources. In other words, thanks to mapping, we could see that activity in one process could potentially cause problems in another, related process.
It was important to prevent that from happening. If insufficient support from quality assurance were to create a bottleneck, then the potential for conflict between the cooperative's boards and the brands would be quite high. The primary reason for this was that the members of CSCS are also its owners, whether they are franchisees or corporate operators. They all wanted a return on the investment they had made in the cooperative. If the members couldn't fully realize the potential synergies and related savings, then there would be turmoil among the stakeholders.
Because we were able to identify the potential bottleneck, the quality assurance group recognized that it had limited capacity. Now, where appropriate, the group enlists third-party quality experts to assist in conducting supplier and distributor audits. This helps to keep our process and contributions flowing.
4. Identify and implement process changes. When we mapped the overall contract development process, it became apparent that there were some redundant steps. For example, category managers must periodically get a manager's review and "sign off" on the progress being made. We found that we were repeating the review of strategic objectives and strategies for the negotiations with multiple layers of management.
That recognition led to a review of the requirements for internal approvals, and we subsequently streamlined that part of the contract process. We developed a matrix approach that defined contracts by the annual spend, the risk level of sole versus multiple suppliers, and whether the items are "critical applications"—items that represent a high percentage of sales—or other offerings on the menu that have less impact. For example, a special promotion item or a center-of-the-plate entrée, like steaks at Applebee's and pancakes at IHOP, are critical applications.
Because the matrix analysis shows the relative importance and risk of each menu item, we can use it to determine the level at which management really needed to be involved in a contract. Essentially, the lower the value and the less strategic or critical the item is, the fewer people need to be involved and the less often it needs to be reviewed. Said another way, the lower the value (think broccoli), the more authority the category manager has to make decisions. The higher the value (steak or pancakes), the more the contract needs management review.
This change cut many hours out of the contract development process and helped to accelerate the development of "spend under management." This term refers to the dollar value of the contracts and agreements we have in place as a percentage of the total value of what we purchase.
For example, if we have contracts that represent US $1 billion out of a spend that totals US $1.5 billion, then we have 66.7 percent of our spend under management. This measurement is a critical indicator of a company's ability to manage its costs.
For CSCS, streamlining the internal approvals process resulted in a substantial increase in spend under management. That's because we were recognizing the higher-value product contracts and so could prioritize those with the largest impact and get them under "managed spend" before we dealt with the less critical products. Revising the approvals process also allowed us to increase our net positive financial impact (NPFI) in 2010 compared to the level in 2009. By NPFI, we mean: when all increases and cost reductions are considered, did we achieve net savings in the products we can control? For example, we can't control commodity markets, but we can manage overage or processing costs.
All this was achieved in the face of some of the most challenging economic circumstances in foodservice procurement history. One need only consider the price increases of the past few years for restaurant staples like pork, coffee, orange juice, eggs, and dairy, to name just a few, to understand what an accomplishment that was.
5. Measure the results. The leadership trainer John E. Jones famously said, "What gets measured gets done, what gets measured and fed back gets done well, what gets rewarded gets repeated." That is why it is important to measure the result of the changes you make. There is no other way to know whether the actions you took actually benefited the organization. Additionally, when you measure results and can therefore demonstrate the value gained from the enhancements that were made, you will build support and credibility for future change. It is ironic that so many people believe in the concept of continuous improvement, yet they resist change. Improvement by definition is change, so you would think more people would want to embrace measurement, which provides the means to identify improved results.
At CSCS, we recognize the importance of measurement. And because we measure our results, our boards have embraced the process we use to track, measure, and report our contracting activities. The Audit and Finance Committee of each board, as appropriate, selectively audits our documented savings via our cost impact reporting process. This process is commonly employed in the foodservice industry, with some variations from one company to another.
There is a direct correlation between spend under management and cost reductions, as noted above. For our fiscal year 2010, we not only had an objective relative to spend under management, but we also tied it directly to NPFI targets and measured the progress of both brands monthly. The category managers and vice presidents knew exactly where they stood throughout the year, as did all three boards.
The boards and the CSCS management team had put in place objectives for contributions to NPFI for each category manager as well as for all other managers, such as freight managers and inventory managers. The results we attained relative to the agreedupon targets were supported by a bonus structure that incentivized and rewarded us. The results reflected a very strong level of achievement during the 2010 fiscal year.
A framework for collaboration
The challenge we faced in setting up a collaborative supply chain was to determine how to best serve two different companies, two different cultures, two different methods of operating restaurants, and two separate infrastructures through a single management structure. Interestingly, both IHOP President and CEO Julia Stewart, who is now the CEO of DineEquity, and I had both been talking to our companies' respective stakeholders about the value of a supply chain cooperative prior to IHOP's acquisition of Applebee's. Although we started from different perspectives, following the acquisition we were aligned in our belief that a supply chain cooperative would make rational financial sense as a way to leverage the scale of both brands.
Once the various constituencies had agreed to form the cooperative, we embarked on collaborative development of agreed-upon processes that defined the roles and responsibilities of all involved. The examples of process maps I have used in this article came directly out of that work.
The process maps help to define how CSCS, its members/owners, the brands, and its parent company work together—critically important, since various constituents may have differing objectives. For example, CSCS sometimes seeks a change in a product specification in order to reduce cost. The brands and DineEquity's quality assurance group want to protect the integrity of the specification, while the franchisee members want to reduce cost and increase the return on their investments. Without a process for establishing guidelines and a structure for how specification- related projects would be approached, this could create a difficult situation. But with a process map in place, we all know the rules we must play by in order to gain alignment.
In fact, the processes we have in place, which involve the functional departments of both brands and DineEquity, have assisted in educating the stakeholders on the importance of each one fulfilling its role and responsibility. The maps even became a part of the agreement that governs the relationship between the franchise restaurant operators and DineEquity.
The maps also give all parties a framework for reviewing and resolving actual and potential problems. They are not static, moreover. The world changes, so the process maps must change to keep current with our circumstances. Because we revisit processes that are identified as needing refinement, they serve as a starting point for making further improvements. For example, when Applebee's recently reassessed its product-promotion process, management requested that CSCS participate in the review of the existing process and the discussion of how to improve it.
Supply chain mapping has certainly played an important role in helping CSCS deliver quantifiable benefits to the stakeholders in the cooperative's first two years. First and foremost among those benefits is the improvement in the owners/operators' net positive financial impact. We have documented tens of millions of dollars in actual net cost reductions through our cost impact reporting process. This process documents all savings, cost increases, and cost avoidances. (Avoidances are not part of the NPFI calculation, however.) We have created a value scorecard to keep stakeholders apprised of our progress and the value we contribute to their businesses.
During those same two years CSCS has managed all of the promotions, menu changes, and tests for both brands. Issues related to inventory, suppliers, or distributors have been minimal.
Because we have documented processes that everyone understands, we have made rapid progress in the rationalization of the distribution network that serves the two brands. To date, we have reduced the network by consolidating or reducing the number of warehouses/ distribution centers and carriers used by 12.5 percent, and we expect to scale it back by another 15 to 20 percent in 2011. With every consolidation we achieve financial benefits while increasing the synergy and economies of scale of the Applebee's and IHOP brands.
Most importantly, by having a collaborative process with established "rules of engagement" (the process maps), we have established a firm foundation of mutual support and respect. Just two short years ago, Centralized Supply Chain Services LLC was a new company supporting two brands that became aligned because they were owned by the same parent. Regardless of any cultural or business management differences, we had to achieve the objective of gaining alignment among our many stakeholders. It's not a perfect world; we still have differences of opinion. But those differences, addressed positively with the intent to find the best solution that will add value for all involved, only make us better.
We could not have achieved all that we have done without the process mapping activity, which is ongoing, or without the support of the leadership of DineEquity, nor without the willingness by the stakeholders to find common ground that could create value for all involved.