Win-Win-Win, The Importance of Collaborative Procurement During the Restaurant Industry's Digital Metamorphosis

Eric Dulin, Global Director of Procurement, Yum Digital and Technology

A recent Forbes article from February 2022 highlighted that a major global restaurant brand had set an industry development record and doubled digital sales in two years. The company mentioned had their sales reach $22 billion in fiscal 2021, an increase of 25 percent over 2020. This was not a small company. To suddenly drive 50 percent of revenue through digital channels in less than two years, is too fast and too dramatic to be a transformation. That's beyond transformation, that is a metamorphosis.

The pace of innovation has increased dramatically. The speed of technological advancement and the ability to expand new concepts using cloud infrastructure and the availability of capital have created a vortex of new technology companies. Tech startup companies are being created every day, companies are being acquired at an unprecedented rate, and many businesses that can’t keep up with the pace of change are falling by the wayside. Another interesting consequence of this new digital metamorphosis is the fact that a start-up’s strategic advantages decrease rapidly over time as other companies copy their business model and leverage improved technology infrastructure to launch competing firms.

The impact of Covid on the Industry coupled with the acceleration of Digital Metamorphosis have created a change in how restaurants collaborate with their technology partners.

As we look at the major technology advancements sweeping the industry from Automation, Kiosks, Back of House, Front of House, Point of Sale and Drive Thru technology as well as Loyalty, Customer Data Platforms and the ability to better understand and market to the customer have created a even greater need to collaborate effectively with critical suppliers to create competitive advantage.

When negotiating with vendors, it’s a good idea to take a Win-Win-Win approach to the overall negotiation. The first Win is to understand the critical business requirements that the business must meet and negotiate a successful result for the business. From a Procurement standpoint, I define a Win for the business as “right requirements, right supplier, right price and right timeframe to meet the business needs”. This is especially critical when Procurement is running an RFP on behalf of the business, the goal of the RFP is to provide the stakeholders with the information required to make the right decision. A key callout on price is that “right” price is not always the best price but instead a market competitive price. If price parity can be obtained through negotiation, then price no longer becomes a factor in the decision making.

The next Win is for the supplier or strategic partner. Their Win is defined initially as being selected by the business to meet their specific need but ideally “starbursting” that initial opportunity and creating advocates that can present their solution to their peers and grow their relationship. In some instances the goal is to grow the relationship with other business units in the company, in other instances it is to grow the relationship with other businesses in the industry. This can be through increased spend on the original product, increased use of other products, competitive displacement and co-development of new products.

The third Win is for Procurement, the goal of developing strategic relationships is that as the relationship between the companies grow and the volume of spend increases, the overall unit cost of products should decrease over time. This is incredibly important in diverse global organizations due to the difference in market dynamics and price sensitivity. A solution that is competitively priced in the US may be too expensive for price sensitive international markets. As the relationship grows, spend volume increases and unit costs decrease, the decrease in unit costs may “unlock” other more price sensitive markets. This creates what I call the Vicious Circle of Happiness which essentially repeats this cycle to unlock more and more global markets.

" Today’s market leader may not exist tomorrow and tomorrow’s market leader may not exist today. "

One other thing to consider is if the business is the ultimate buyer or is using the supplier’s product to create an offering for other end users. This is common in the restaurant industry if the company is creating a product to market to franchisees. The franchisee relationship creates an inability to “commit spend” at the time of purchase. This can prevent leveraging and growing the Win-Win-Win unless the appropriate contract structure is created that allows pricing decreases over time. I call this the “Field of Dreams”. Like the movie of the same name, by structuring a tiered pricing contract that allows increased spend volume to reduce over time, once the field is “built” and more and more franchisees “play ball” by purchasing the solution, the price decreases and ideally more franchisees can adopt. These Field of Dream contracts must be structured properly to prevent “overcharging” the early adopters and to mitigate potential revenue recognition for the suppliers when pricing tiers are met, however they are a great tool to accomplish the Win- Win-Win.

If this makes sense but leaves you wondering how to develop strategic Supplier relationships, there are several things to consider. The first is which who are the strategic suppliers that you want to establish these relationships with? To answer that question, look at the suppliers you work with today. Which of those suppliers is providing a key capability that creates a critical competitive advantage in the marketplace? Which supplier would be irreplaceable if they were no longer there? What are the current and future state capabilities that make them critical, and could those be provided by another supplier? If the answer is no, then those are the suppliers that you want to build this Win-Win-Win relationship with.

Once you identify the strategic suppliers, determine if you have an existing relationship or if you are in the process of establishing one. Even if there is an existing relationship, you can implement the Win-Win-Win strategy by looking for opportunities to expand that relationship. The easiest way is to look to expand the current products and services to other business units, however, if that is not possible, there are other options. Look for opportunities to codevelop or purchase new products or services that expand upon the relationship, look to expand the product mix, and look for opportunities for competitive displacement.

By establishing the Win-Win-Win approach, you become a strategic client to your suppliers and mutually benefit from growing your strategic relationship.