Purchasing and Supply Management (KFC)

Abstract

Contents

1.0 Introduction
Kentucky Fried Chicken Corporation (KFC) was the world’s largest chicken restaurant chain and third largest fast-food chain. KFC held over 55 percent of the U.S market in terms of sales and operated over 10,200 restaurants worldwide in 1998. KFC first opened in Australia 1968. Present day KFC now serves over 2million customers a week. With over 600 stores Australia wide. This report will aim to analyse and critique KFCs purchasing and supply management activities. In particular the legal, ethical, sustainability and social responsibility issues in purchasing and supply management, as well as supplier selection, evaluation and contracting methods. This report will provide an in-depth analysis of the purchasing methods and hope to show areas open for continuous improvement through changes in supply management and purchasing initiatives.
1.1 Background of KFC
Kentucky Fried Chicken Corporation (KFC) was the world’s largest chicken restaurant chain and third largest fast-food chain. KFC held over 55 percent of the U.S market in terms of sales and operated over 10,200 restaurants worldwide in 1998. http://www.scribd.com/doc/53764758/Supply-Chain-Management-of-KFC. Since opening in Australia KFC has become ever growingly popular throughout the years, Though in recent times it has seen a gradual downfall which many believe is due to the sudden boom in healthy food options. Due to this boom KFC has seen numbers drop and other fast food outlets like subway have increased. Since then KFC has implemented a few pro environment social responsibilities initiatives such as “Ditching the palm oil contract” and opening its first ever energy efficient restaurant. When it comes to purchasing methods and supply management however there is always room for continuous improvement which is what this report aims to analyse.
1.1.1 Objectives & Goals
One of the major objectives of KFC that they run their campaign in such a way that KFC creates and image in the minds of customers that customers want to go in KFC and will be the first choice for the customers. KFC wants to become the first choice because its they become the first choice it is excellent for the health of the KFC business because if business is expands then there is eliminate scope and the opportunity to get the maximum profit and utility.
The Corporation has a vision KFC’s vision is to bring people of all ages, races and backgrounds together to enjoy ‘Soul Food’ – ‘proper food at reasonable prices’ – within bright and fun interiors. KFC is designed to be perceived as a fun and inclusive brand (KFC, 2011).
2. Purchasing and Supply chain management
In Recent years with a ever growing shift towards more environmental approach for multi national companies especially fast food giants, KFC has come under much scrutiny with such happenings as the Indonesian chicken antibiotics incident 2013, Green peace packaging incident when claims were made KFC packaging is coming from Indonesian forest in 2012 and the free roam chicken incident 2011 where KFC quickly removed its free range chicken advertising after an investigation was launched into its suppliers.http://www.smh.com.au/business/media-and-marketing/kfc-pulls-free-roam-ads-after-watchdog-bites-chicken-suppliers-20110913-1k7tj.html. All these instances sparking world news articles and putting immense pressure on brand name and reputation in the global market, this all comes down to the purchasing and supply management. At the moment KFC purchasing and supply management are running at a low risk and avoiding any anticipated supply bottlenecks and building long term supplier relations. Though in today’s extremely competitive and lucrative market this is no longer enough, one option is to reposition the purchasing supply management within the organisation to make a globally acceptable change towards a more environmentally friendly purchasing and supply methods. This could be achieved by shifting towards a more hybrid structure with better global sourcing councils or corporate purchasing and steering committees and by shared resources between distributors and suppliers and possible implementation of fixed price incentives contracting.
2.1 Ethical standard
Kentucky Fried Chicken is very keen about ethical standards both within and without the company as asserted by their company representatives. For instance the company is strict about is vendor engagements. Before a supplier can secure a contract with Kentucky Fried Chicken, they have to comply to similar ethical standards as KFC. This means that the supplier must not utilise under age labour to producer their commodities, they must pay fair wages and must also avoid placing harmful chemicals in their commodities. These concepts have governed the way KFC chooses other business partners too; they include contractors and manufacturers. One option here is to implement contractual renewals and to review the contract specifications annually with regards to global market and ever-changing ethical ideologies. This could see that KFC is the leader in ethical and social responsibilities, however could bee seen to add significant economic costs, which could be made up in brand name value and community awareness.
2.2 supplier section & Evaluation
KFC Australia franchise boasts that 97% of its chickens are delivered fresh not frozen, And that all of the chickens are allowed to grow naturally without any additives such as hormones or stediods, they source chickens from reputable Aussie suppliers like Inghams, steggles and baiada.http://www.kfc.com.au/kfc-australia/
In Australia in particular there is a ever growing trend for local fresh produce and this is showing through all major supermarkets. Just 10 years ago there were no farmers markets in SA or Victoria now there are more then 70 held regularly. (http://www.pir.sa.gov.au/__data/assets/pdf_file/0005/165974/safood_consumers_report.pdf) This trend has since had a knock on affect to the fast food industry and suppliers. With a majority of the main fast food distributors now moving to local markets and produce in hope to boost brand name whilst showing corporate responsibility and intern create profit margins for the company. Although KFC Australia already sources some of its supplies from local farmers there is more that could be done. One option could be to move towards a more local decentralized suppliers, though this would add logistical implications there is room to gain quality and cost through increased competition. Though considering huge infastrucal change that would be need to implement this the best option is to build on the supplier relationship currently active and create a mutually beneficial agreement with the implementation of
2.2.1 Supplier performance monitoring & measurement (Supplier code of conduct)- http://www.kfc.com/about/supplier.asp
KFC’s suppliers are all held to strict and stringent quality and control measures under contracts. Though this is a area that could be expanded on to create continuing control methods, as KFC is such a large name in the food industry and boast a reputable brand name. Such aspects as supplier quality monitoring and measurement really need to be looked at, currently it is up to the suppliers to monitor and measure their own quality. The importance of this was shown last year in shanghai when KFC cut over 1000 supplier contracts in Shanghai and their parent company “Yum” experienced a 6% market drop that year which was more then the 4% previously predicted due to high levels of antibiotics being found in the chicken. http://www.businessinsider.com.au/kfc-cuts-more-than-1000-suppliers-after-china-chicken-scare-2013-2 When it comes to food giants such as KFC emphasizing prevention over detection is a must and one must aim and reach almost zero defects as the fast food industry is one of the most competitive quality driven industries in Australia. One recommendation is to implement a quality control team that goes out and measures the quality and performance of each of the suppliers on a regular basis. This could also carry on to within the restaurants themselves as currently KFC only audits a set portion of their restaurants each year and quality could be improved by auditing all of the company’s venues at least annually. This could also provide vital supplier selection data and if collected and logged correctly a great monitoring and measurement system to judge suppliers by.
3. Means of Contracts
3.1 Means used for the obtaining of contracts
KFC has many suppliers from which Pilgrims’ Pride supplies them the huge amount of chicken and those chickens then go for further process and then to be served into KFC restaurants all around the globe. KFC must convey proper steps and methods to evaluate suppliers and their material as suppliers affect the overall operation of KFC. Furthermore Suppliers must focus on their improvement because if KFC is affected; they would be affected too.

There are three means whereby KFC, obtains its supply contracts from the suppliers. These three means are mentioned below:
Direct Purchase: KFC franchises sometimes purchase directly from the suppliers in case of urgent supplies or when there supplier cannot deliver on time due to some reasons. This is only temporarily to meet the urgent demand and allow the operations to run without any abruption.
Quotations: The KFC management after going through and analysing the supply needs requests the suppliers to prepare their costing data and send a quotation for supplies of raw materials necessary for the operation of the restaurants.
Tenders: This is a process where KFC invites tenders to all the suppliers of food products out there in the market. Whichever supplier meets the product specifications, quality assurance and the cost set by KFC, gets the contract to supply raw materials to the KFC restaurants.

3.2 Renewal, Termination
Most KFC outlets are owned by the franchisees, which operate the restaurants in accordance with the license issued to them by the KFC.
The License Term shall expire on the 20th anniversary of the opening date subject to earlier termination pursuant to the Agreement. Upon termination or expiration of the License, the Franchisee shall immediately discontinue use of all KFC trademarks, service marks, trade names, trade secrets, and know-how and processes developed and owned by KFC and shall immediately and at no cost to KFC remove signs, menu board inserts, point-of-sale material, red and white stripes and any characteristically designed roof from the Outlet and otherwise change its exterior and interior appearance so that it is no longer confusingly similar to a Kentucky Fried Chicken outlet and no longer bears any KFC trademarks, service marks or trade names or designations or marks similar thereto.

Renewal of Agreement; at the expiration of the term here of, Franchisee may extend this Agreement for successive ten (10) year periods, provided that at the time of expiration of the term hereof or the then current extended term:

(a) Franchisee shall not have failed to remedy any breach specified by KFC.
(b) Franchisee shall agree to make such capital expenditures as may be reasonably required to renovate and modernize the Outlet and its signs and equipment so as to reflect the image of Kentucky Fried Chicken outlets.
(c) If renovation and modernization of the Outlet is not possible or feasible, Franchisee shall relocate the outlet.

(d) Franchisee shall execute a new license agreement on the form then being used by KFC, but without any increase in royalty fee or advertising

(e) Franchisee shall not have engaged breaches of The Agreement within the preceding twenty-four
24 Months prior to renewal.

In the contracting and franchising of KFC’s network the report has found that this is a efficient method of contracting and no economically feasible changes have been found that would be seen to improve or add value to business.

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5. Conclusion
This report found on its analysis of KFC’s supply and purchasing network that there Is potential to increase sales and brand name and value whilst increasing social responsibility, Though the increase in environmental practices and local producer investments. By raising the local purchasing this could increase quality, and has potential to decrease lead-time. By going for a more green approach KFC could minimize brand name implications and negative media attention whilst increasing social responsibility.

Reference

KFC. (2011). ‘Official Website’, Retrieved From http://www.kfc.com.au/index.asp