In India, the ‘farm to fork’ chain is exceptionally long and sees too many hands-offs before the farm harvest lands in the end-consumer’s basket. With so much at stake and in an economy where pulling consumers to dine out is a challenge, the restaurant industry is under continuous pressure on improving its supply chain operations. Over the past few years, the industry has grown dramatically into a $48 billion industry and is projected to have an 11 percent CAGR over the next 5 years. Such an attractive market has attracted competition at all levels. However, it is also an industry that has been very effective in passing on costs to customers.
On a positive note, the food supply chain in India is an extremely promising sector, and has witnessed a speedy transformation over the past two decades. The sector is seeing substantial private and public investments for enhancing production, procurement, processing, distribution, and retailing efficiencies. Suppliers have expanded capacity with additional facilities in south and north India, moving closer to the raw material area in each case, and providing tremendous logistical and other benefits such as managing commodity costs better. What better example than McDonald’s, which has continued to strengthen its supply chain to address such issues by expanding the farm acreage and increase productivity in the supply chain and at its outlets.
Centralised kitchen and distribution
Delivering quick meals at reasonable prices in an ever-changing marketplace is challenging, especially as food chains fight soaring fuel costs, product quality concerns, nutritional mandates, etc. The shelf life of food requires a management strategy with more frequent inventory turns from supplier to food operator to minimise costs and deliver with speed and timelieness.
In a centralised and integrated set-up, foodservice outlets adopt a hub-and-spoke model of sourcing and distribution. Products are sourced from different locations and directed to a centralised location (the hub or distribution centre – DC), from where they are channeled to the sale outlets, aligned as spokes. DCs are at the core of McDonald’s supply chain where 4 DCs cater to its 300 outlets pan India with a multi-layered supply chain model with suppliers at two levels. Perishables are transported through refrigerated trucks that handle return logistics as well. In the QSR segment, Domino’s, which has close to 525 outlets in India, also follows a similar sourcing and distribution model. Other formats like Lazeez restaurant have a centralised purchase, kitchen and store. A deep link is established with adequate number of retail outlets that are fed from the base kitchen to reduce cost of operation, informs Ishtiaque Ahmed, owner of Lazeez.
Fine dining restaurant chain Specialty Restaurants Limited (SRL) has put in place a centralised supply system for perishables that are supplied directly to the nearest restaurants, which ensures consistency and timely delivery of raw materials. A restaurant chain like Chowman cannot function without a centralised system for purchase and inventory management. Says its spokesperson Debaditya Chaudhury, “Most of our grocery purchase is done within the first week of every month, and stored in our centralised dry store from where they are dispatched on a daily basis to different outlets as per their requirement. After the end of each day, a requisition slip for supplies is handed to the store manager and items are delivered the next day to the particular outlet.” Murali Parna, Chief Operating Officer at Sagar Ratna, informs that they too follow the hub and spoke model where key chefs prepare the dishes (maintaining consistency and standard), which are then supplied twice or thrice in a day to their adjacent 4 to 5 restaurants.
Should restaurants go for a centralised system?
Whether a restaurant should opt for a centralised kitchen or purchasing department, depends largely on what it is offering to the customer. The advantages of a centralised system is that it helps the brand cut down costs, gain competitive advantage, improve service standards, and make efficient use of technology. Also, it protects recipes and reduces chances of copycat outlets being set up.
For large chains, it becomes necessary to have everything centralised. If the offering allows for complete or partial preparation in advance, then centralisation is a big help in lowering total costs. Typically, a centralised kitchen should be located where space is affordable, has easy access, and is able to service the city and its suburbs. Finishing of products can be done locally to deliver freshness, taste and presentation. There can be different delivery mechanisms to the outlets depending on the shelf life and volume of the items being distributed. But in India, the restaurant industry is largely unorganised, and 90 percent restaurateurs are single outlet owners for whom local best-price sourcing is the only way.
According to Rajeev Nayar, food service expert, for chain QSR restaurants, it’s important to have a centralised purchase policy, but it would also depend on how big the operational set-up is. A centralised policy would help in giving uniformity to prices and in gauging market prices better, and in doing so, costs can be cut substantially as volumes would be big and the restaurateur would get negotiating leverage with vendors. The centralised system should be based on an average market price for the base products. A tender system or a contractual farming system would also be good. Of course, timely delivery to the outlets is of utmost importance.
Maintaining tight inventories
In general, the inventory planning takes into account demand and demand variation, shelf life of the product, storage facilities and finally it has to account for supplier capacity, reliability and transportation certainty. Inventory planning varies depending on the type of food being served and the level of local processing that happens. “Some categories of food products with extremely short shelf life, like dairy products, are often best managed by not meeting the full demand. So, outlets should prefer to not serve rather than hold excess stock that can’t be sold. Interestingly, this can lead to customers actually placing a premium on getting hold of the product! However, this has to be carefully balanced. If an outlet gets a reputation of getting stocked out, customers will start factoring that into their selection of where to go and the franchise might suffer,” says Alagu Balaraman, CGN.
In some cases, excess inventory is returnable or can be moved to another outlet nearby. In other cases, it has to be disposed of at a lowered cost. Throwing it away is increasingly not an option. A ‘pull-supply chain’ best exemplifies the efficiency of the supply chain for the food services industry. At Radhakrishna Foodland, the distribution partner of McDonald’s India, the fill rate is 99.8 percent. Inventory levels are micro-controlled based on each supply item and it is difficult to ascertain a generic level. But, for each location, every outlet gets into a well-defined sales pattern within the first 7 months. Thereafter, these data are used to decide on inventory levels.
In the absence of a fully integrated common Indian market, inter-state movement of goods is quite tedious as there are various national, state and local taxes to be adhered to. While work is being done to speed up the processing at check points, such as e-tax payments, there are still delays. For example, using refrigerated trucks to preserve shelf life, can have a huge impact on cost, but may not be avoidable if quality is an issue. There is no other way than to be aware of these obstacles and plan for them in the supply schedule. Not accounting for them is a recipe for disaster.
Bangs India maintains par stock for 9 days while maintaining a 15-day inventory. “Any excess inventory leads to additional capex. Excess inventory also reduces the residual life of ingredients below 75 percent, which shoot up overheads. This largely applies to frozen ingredients,” says Asvin Simon, Managing Director, Bangs India. At Chowman, stock is normally kept for a month. This is for grocery items like rice, wheat, sugar, salt, etc, which last for more than a month. Perishables like meat and sea food are purchased on a daily basis and their freshness and quality are monitored very closely.
As a policy, Laseez avoids carrying inventory of perishable items, but for products like rice, flour, etc. a 7-day inventory is maintained. “Inventory holding level needs to be carefully assessed considering factors like sales, lead time for procurement of materials, in-house storage capacity as well as storage facility like deep freeze, etc. However, it is most prudent to carry ‘zero’ inventory of perishable items,” says Ahmed. He adds, “We assess quantity of different items likely to be sold over the counters every day – during weekends, festive seasons, winter season and other occasion. Usually, excess food is prepared during festivals, so leftover cooked items are sent to orphanages.”
“For groceries, the inventory is maintained for about a week and daily for the livestock. Mostly we try to operate on zero wastage. We prepare food almost twice or thrice and if necessary more, depending on perishability and volume required. We dispose off leftover food at the end of the day, and the same is tracked for improvements in ordering. As we don’t penalise for wastages, our team ensures that only fresh food is served to customers. Wastages are tracked separately (manually and through the ERP system),” says Murali.
Says Nayar, “Maintaining inventories involves keeping a record of how many skus you have, what is the storage capacity at the outlets and at the cold storage units/warehouses, and factors like add-ons like sauces and other ingredients that are sourced locally. Each outlet should maintain at all times a fixed sku of each product, and according to the sales replace the stock again to the fixed number. In doing so, the stock at each outlet can be calculated and a sum total can be taken on a daily basis. Inventory management for QSR is quite spread out: it can be state-wise, city-wise, and if there are a number of outlets in the city, then, each outlet-wise. Thus, you can come to a conclusion of numbers and sales. With each outlet keeping an inventory, the outlets in the particular city will give you collective city numbers, and cities will give you the state numbers. This is an easy way of managing inventory for multiple number of outlets in different states.
He adds, “Time taken for delivery is directly proportional to the distance between the processing unit and where the outlets are based. Most companies have cold storage facilities in and around the cities they operate from, and they maintain stock levels to avoid shortage, plus an extra surplus stock of 20 percent is kept in case of festivals or strikes in transport, etc. Inventory and demand have to be in sync. Once the process is in place, the system works on its own and the time of supply delivery to the cold storage and then to the outlet is nominal. But inter-state transport is still time consuming. In my experience, 600-700 kms are covered in a time span of 10 to 11 hours on highways these days. But you must follow the re-order policy; that is, when the stocks are 50 percent left, an order should be placed immediately so that by the time the remaining 50 percent stock is running, fresh stock would have arrived. But it’s important to understand the demand and create a supply cycle that is related to the number of outlets and the number of skus being sold.”
Cost of food production in restaurants has gone up by 20-22 percent in the last few months, which is making survival of small restaurants (especially) very challenging. From the perspective of a buyer of farm produce (processors, marketing firms, food service industry, end-consumer), any slack in the supply chain means higher costs, uncertainty of supply, threat of stock-out, and poor quality. “Managing inventory is a key to control overheads in a restaurant,” says Simon.
According to Deepak Nighoskar, Managing Partner at Avizare Solutions, “Excessively long and inefficient supply chain like in India, means that farm-gate price is a relatively small portion of the price paid by the end-consumer (it ranges between 20 and 30 percent for India). Rest of the margin is eaten up by intermediaries and high losses in-between.”
Careful inventory management helps keep overhead costs under control. At Pico’s, slow moving items are quickly identified and an innovative chef team creates special off-the-menu dishes to use up the inventory before products expire. “Also, as volumes increase, prices come down, and with seven outlets, our volumes are now sufficient to attract bulk pricing,” says Arjun Gadkari, co-Founder and President of Nilgai Foods that owns the Pico brand. “Even scale assists in reducing unit pricing, and larger establishments certainly get the advantage of lower input costs. With the exception of fresh produce (fruits, vegetables, milk, etc) we typically maintain par stock for about a week at our outlets and for an additional 10 days at our central stores,” informs Aditya Parikh, co-Director, Pronto.
However, keeping inventory to a minimum is always good for businesses since less money is blocked and spoilage remains low. But low inventory has to be balanced while ensuring that the restaurant is not stocked-out, so an additional week’s supply could be necessary. “Fixed overheads can be apportioned between more numbers of units,” feels Ahmed, “and therefore, price variation due to bulk purchase will be available.” Agreeing to the practice of volume buying, Murali of Sagar Ratna believes that “the entire concept works on freshness and hence our supply chain also is based on our requirement for the day or the next couple of days depending on the perishability and volume.”
Advising vendors to build inventory as per requirements (30 days maximum) so as to have an uninterrupted supply, extensive training for planning right inventory, and hence cut off additional delivery costs, avoiding inter-stock transfer, allocation of staff to pick and drop stock from warehouse/outlet, are some measures for managing cost overheads. Chaudhury reveals that they purchase dry stocks on a monthly basis, which saves on transportation and labour to a certain extent.
Handling price fluctuations
The foodservice industry in India is predominantly unorganised. Suppliers are not easy to identify and negotiate with as many smaller suppliers are not on trade sites like Indiamart or Alibaba. Pricing is opaque and there is little attempt made to ensure transparency. Most restaurants just absorb price spikes, though this is becoming an increasing concern as price spikes that were extremely rare in the past, have been happening with increasing frequency of late.The annual rate agreement (ARA) with suppliers too, has a dynamic pricing structure.
“We normally follow an annual cycle for price changes as it has an impact on other collaterals like printed menus and other communication media. Price changes in the interim are absorbed as part of higher expenses. To avoid hike hits, most of our supplies have contracted prices and the duration for the contract at times changes depending on the volatility of the product pricing and sensitivity of the ingredient cost in the overall cost of the finished product,” says Murali.
“We are in a buyers’ market, hence there is no monopoly. As stated earlier, due to abnormal price rise we have increased our procurement prices, but usually such increase is not passed on immediately to our customers. We first watch rates charged by our competitors, the market conditions, etc, before prices are increased,” justifies Ahmed. He adds, “We usually enter into yearly rate contract with our vendors and rates are usually revised annually. However, in case of wide fluctuation in price of raw materials due to government policies, we revise rates on a case to case basis.”
“The regular fuel hike as a result of changing government policies has definitely had an impact on the rates. Majority of the sauces used in food are imported, and sometimes it becomes very difficult to maintain the bottom line,” says Chaudhury at Chowman. The chain normally goes for a quarterly agreement with its suppliers so that “it is a win-win situation for both.”
“We sign ARAs with our vendors; it protects us from day to day fluctuations and helps us forecast and plan our pricing accordingly. However, it only holds within a certain range of variation. If prices of products (like onions) rocket, the vendor is able to adjust the prices up to a certain point,” says Gadkari.
At Pronto, most of the agreements and understandings with suppliers are on an annual or semi-annual rate agreement in order to maintain pricing stability. “However, most suppliers are loathe to provide perishables on rate contracts and understandably so. With prices rising, suppliers start cutting corners, refuse delivery, and supply inferior quality if a restaurant tries to enforce their rate contract. We’ve found that perishables are better purchased at market rate so that while the price may fluctuate, the quality remains consistent,” says Parikh.
The payment cycle differs from business to business. Says Nayar, “For restaurants, fresh vegetables are paid for on a monthly basis, meat/poultry on a monthly basis, commodities like masalas, sauce, breads, and flour can be paid bi-monthly. Following a pattern will help you keep track of your inventory and wastage, and figure out the business cycle/process more closely. Some small set-ups do it on a weekly or monthly basis, but for QSR chains, if you have 30 days as your basic business period, it helps to strategise the business well, cost-wise.”
Contract farming as a strategy adopted by food processors is gaining prominence in India due to steady progress in the economy, rising food demand, organised retail boom, and an increasing shift towards branded food consumption. However, contracting agreements are often verbal or informal in nature, and in case of a breach, neither party will be keen to contest in court where litigations can be an extremely slow process.
Says Vineet Agarwal, MD, TCI, “Contract farming is beneficial for companies as they stand to gain stable, steady supplies, risk-free price fluctuations, non-investment in huge resources like land, product risk-sharing, etc, and is considered to reduce costs of cultivation as it can provide access to better inputs and more efficient production methods. It lowers transaction costs for farmers as many of the transactions are internalised by the procuring firm.”
Sourcing and vetting suppliers
Over the years, government regulation of the food industry has been continuously increasing. This has been good for the industry in protecting the health of the consumer and helping to weed out fly by night operators whose short cuts can damage the industry’s reputation. There are several regulations that govern the movement, storage and serving of food products. ISO 9001:2008 is the primary certification in India. Along with this, HACCP certification is a policy for most large organisations. This approach has significant benefits to organisations operating within the food supply chain as it enables them to determine key controls over processes and concentrate resources on activities that are critical to ensuring safe food and other quality control measures. The food business also requires acquiring a license and meeting the inspection standards of local agencies on a periodic basis. These regulations can change over time or how they are implemented can be tightened. The recent Hauz Khas restaurant closures are good examples of law enforcers clamping down on erring restaurants.
Some companies place higher internal standards than those laid down by regulatory bodies. For example, there could be internal processes on cleaning and hygiene of vehicles used for transporting food items. There could be an internal certification process for suppliers. According toBalaraman, “Logistics and storage are significantly affected by the location, space available at the outlet, and capabilities of the suppliers. Certain locations have restrictions on truck movement at certain hours. If outlet space is small, more frequent deliveries are required.”
Existing models of sourcing act as a guide to setting up a supply chain and identifying suppliers for any new entrant. Suppliers should be identified and selected centrally to ensure consistency of the product. Many established players source and process perishables centrally, and then dispatch them to different outlets, while other items are procured locally but from a centrally vetted pool of suppliers who are identified and vetted in terms of quality and reliability. “The temptation to source locally for fresh produce has to be tempered with the need to maintain consistency. With several organised players having made their mark in the QSR format, specialty and full dining segments, there is no dearth of reliable and quality-conscious suppliers,” says Nighoskar.
Vendor identification process should start at a very early stage. Companies should follow a structured and rigorous process to identify, shortlist and finally select appropriate vendors. As with most other industries, sourcing a perfect vendor is an unlikely reality. Agrees Balaraman, “Sourcing of vendors is critical. You can’t serve great offerings with poor quality inputs, and you can’t serve offerings at all if your vendor fails to deliver! Apart from quality and reliability, it is important to look at the scale and growth plans of the restaurant.”
“As the checklist criteria would include host of parameters and would differ from company to company, two key aspects that companies should never compromise are strategic fit and values/ethics alignment,” adds Nighoskar.
Says Nayar, “Selecting the vendor can be time-consuming. Important factors are source of the vendor, reliability, and the price factor. Prices must negotiated hard for different supplies and services; for transport, have a national average, for commodities have local rates to compare with market rates, but keep them a little lower because you will be giving year-round business to the vendor. The processor should be chosen with the help of a food technologist – one who would totally understand your end product and be able to improvise. A vendor should understand your business needs, the end-product you are selling, and the quality you are providing for him to tango with the business. If he is giving sub-standard supply or service, it will affect your business. If he is providing you with the best, he can ensure long-term business for himself as well. This is an important point for people in the supply chain to make their vendors realise – be it the logistics guy who has to be prompt with delivery, or the chicken and greens supplier who knows what you are selling and your final product.”
According to Nayar, “There are a number of vendors who are involved when you run a chain of restaurants. These include the base material supplier, farmers, stockists, the logistics company, the cold storage unit, and the daily supply vendor. When all of them work in tandem, the business cycle is complete, so choosing a vendor is very important. To cite an example, Goli Vada Paav franchise, which started selling vada pavs in Mumbai, today has 400 units all over India, and was voted the best homogeneously developed brand by the HRD Ministry. It is supported by dedicated potato and onion farmers in Maharashtra, and the vada ‘tikki’ processing is done by Vistas which make the Mcdee burger tikkis. The tikkis are transported all over India in cold storage trucks to nodal cold storages and then supplied to cities, where their franchisees (who are trained by the principal on storage, assembly, etc) are based. The paavs are produced by a local vendor in every city. So when all these vendors rhyme together you get the perfect processes to operate your business smoothly.”
The selection criteria should also take into account references and the scale at which the vendors operate. The general perception in the industry is skewed towards larger vendors because they seem to be more committed. Payment terms and cycles are decided at the initial stages of the contractual agreement, and the standard payment cycle in restaurants usually works on a decent credit period of 30 to 45 days. In most cases, vendors have to be developed to provide just what you need, when you need it, and how you need it. This implies a partnership that must be allowed to become a source of future negotiating for some critical vendors at least.
Collaborating with suppliers to improve the total offering to the customer is very important for gaining advantage over competition. The modern food service industry follows a supply chain model where the key elements of the supply chain are outsourced and a very lean staff is maintained to monitor the chain from within the company. This is as good as having an in sourced supply model. Key Performance Indicators (KPIs) are set to monitor the performance of the distribution partner. A distribution partner can be monitored on the following parameters: administration efficiency, warehouse efficiency, truck utilisation, overtime as a percentage of the total number of hours worked, number of cases handled per trip, etc. “Sourcing of the food supply is very important as it’s the taste and quality of the ingredients used in the food preparation that will sustain the business. Once the business model is ready, and the taste of the end-product is final, food technologists should be hired to check quality of the supply before finalising from where they should be sourced,” advises Nayar.
Maintaining consistent quality
Local produce will always be more cost-efficient, particularly if one considers the rupee’s depreciation, not just the drop over the past few months, but even its trend over the past few years. The problem is that local produce often doesn’t meet the quality standards and hence restaurants keep certain imported products to ensure constituency in quality and taste. But high taxes and shipping costs lead to even mainstream mass market brands from abroad being priced at the highest end of the market. Products from out of Mumbai get affected most when there are strikes, natural disasters, or political unrest. Typically, supplies get disrupted a few times a year, although one can normally find alternatives.
“As a company, we believe in ‘eating global, sourcing local’. Though there are certain products like olive oil that have to be imported, still 95 percent of our raw materials are locally sourced,” informs Gadkari. Even Pronto tries to use local produce as much as possible, barring certain products like pasta, pepperoni and parmesan cheese, etc, that have to be imported as there are no suitable Indian substitutes. “From the total supplies, about 20 percent are imported products from various distributors,” informs Parikh.
Chowman imports its primary spices and sauces from Thailand and China, but the regular poultry and vegetables are local. “Owing to the volatile nature of the markets, we do not enter into any agreements with our vendors,” says Chaudhury. Oudh restaurant sources most of its ingredients locally from Kolkata and Lucknow where it has a contractual arrangement with the vendors. Supplies at Sagar Ratna are bought locally and centrally but the deliveries by the vendors are to the hubs and in some cases to all restaurants depending on the perishability of the product.
At Lazeez, Ahmed informs, “Since we deal mostly in perishable items, we have to depend on local vendors, but we procure non-perishables like rice, flour, ghee, edible oil, masalas, etc, from the best producers in the country. Our rice, for instance, is of the Kohinoor brand, which is supplied to all our units across the country.”
Many restaurateurs keep a ready stock of branded products as substitutes in case of delays in supplies. Usually, such scenarios are pre-planned at the time of menu planning. “Because we are extremely particular to use the same quality ingredient, we do face higher purchase costs from time to time. This is something we have to absorb if we want to ensure consistent quality, but we are willing because the payoff in the long run is our reputation for quality,” says Gadkari at Pico.
“At the end, how your food product tastes is all that matters. All processes and systems aim to achieve the main goal, that is Taste, Texture, Smell and Presentation (TTSP), says Nayar. “Whatever be the product, do a thorough R&D and develop a perfect balance of TTSP with the aid of a food technologist, who will break down the ingredients, their proportions, and figure out how all the ingredients will work together to achieve the TTSP. Once, that is achieved, all the personnel, vendors and processors must be trained to perfection and bound by an agreement of non-disclosure. Then train the staff at the outlets as to how to achieve the required result.”
“Follow the principle of KAIZEN (continuous improvement of processes),” he advises, “and find ways to improve the system. Implement cost-effective ways and rules across all dimensions of the business, the people and structure of the company; invest in small stalls at festivals, do a feedback check on the product, improvise and introduce a new product that meets consumer demand.”
But should it be KAIZEN, FIFO, or LIFO? Says Nayar, “Different products have different shelf /storage life and you have to take a practical approach. For frozen products, it’s best to follow FIFO. For marinated meat, after marination time, treat all stock as ready for use, and just hold 20 percent as stock, and constantly rotate this 20 percent. Some products are to be used as ‘just in time’ such as items that are to be steamed, perishable accompaniments, soups, pizza flour, pasta flour, etc, as they tend to change colour, aroma and taste when stored. So the kitchen staff has to be trained in these aspects. Always find ways to improve the system, products, delivery, presentation, quality and taste, and adjust according to the demography where the outlet is located. KAIZEN should always be the motto, and the work ethics should be such that every person at the outlet should be able to contribute in making the end-product perfect by never disrupting the cycle of the business.”
Perishability of food supplies is a major challenge for all food formats as it leads to rejections and wastage. All perishable items are usually taken fresh, day to day. Most sophisticated chains and kitchens store perishable items in a proper refrigerated environment. Suppliers are under contract to replace lower quality supplies, at times even with penalties as it is a breach of contract to supply material that does not meet agreed standards. Orders from restaurants are routed to the Distribution Center, which, in turn, routes the order to the supplier and only then does the supplier produce it. The supplier thus barely maintains any extra stocks.
Rejection or wastage happens at two stages: first, when items arrive at the kitchen in a poor state and in most cases, due to transportation or storage conditions at the middle distributor. Next, rejection or wastage happens when the kitchen is not able to consume perishable items within the stipulated time. This is as per the policy put in place by the restaurant. However, rejection due to shelf life expiry can also happen for a variety of reasons viz, the item may not move because demand is low or the outlet may have over stocked or the supplier may have pushed additional stock. The latter can even happen from a central kitchen. But how each case is handled will vary. Underlying it are two principles: The first is whose mistake was it? Has the supplier provided ‘near to expire’ stock? Or has the outlet over ordered? The second principle is who is in a stronger bargaining position? It is difficult to argue with a sole supplier, just as it is difficult for a supplier who has one major customer to justify through arguments. Based on all these points, solutions can be reached for a fair method of compensation or replacement.
Says Balaraman, “There can also be variation in local customs, for example, bread supplied in Delhi and Mumbai have very different return characteristics, with Mumbai outlets returning a much higher percentage. Similarly, customs may have evolved in different markets and changing those, though it sounds possible, is not an easy task.”
Urban restaurant centres have been struggling with solid waste management and sewage treatment. The recent regulations will seemingly place a high overhead on outlets that seek to throw away excess. According to Jayanta Chatterjee, CEO, Serafina Restaurants India, “Wastage is part and parcel of the restaurant industry; it can be controlled to a large extent but cannot be eliminated.”
Says Nayar, “Wastage of 3 to 4 percent has to be factored into the inventory as products sometimes get damaged during transport, change of colour due to cooling, etc. Excess inventory at the cold storage can be used for promotional activity. Franchisees have to be involved in putting up stalls in festival grounds, or at cultural activity centres, and places where people gather. This will help in sales at a rebate, and customers can get the taste of the food product which can convert to sales at the outlets in future.”
Food Safety & Law
The food service industry’s top priorities are quality and safety other than managing costs. Ensuring food safety is a perennial challenge with frequent incidences of adulteration, food poisoning and food-borne illnesses. Companies are constantly exploring ways to create better hygiene standards throughout the supply chain. All eateries in the country (there are 50 to 60 lakh) from QSRs and Fine Dine to school canteens and corporate cafeterias need a food business operator (FBO) license from the Food Safety and Standards Authority of India to operate.
“At Nilgai Foods, we are in the process of applying for some internationally recognised certifications as well, but the process is long, but we do everything we can to conform to the safety standards. The BMC has guidelines and issues a storage license depending on what you are storing and the storage method used. Maintaining the correct temperature is extremely important, else food will spoil quickly,” says Gadkari.
Lazeez has deep freezers and storage for ingredients that are kept in appropriate temperature-controlled environments. “We avoid roll over and inventory stocking of perishable items and hence they are purchased as per average daily consumption. We have the Food Safety license from the local authority as it is a must to operate the business of cooked food, but our products are subject to periodical (surprise) inspections from the authorities,” says Ahmed.
Says Nayar, “The key factors taken into consideration while setting up a supply chain for a restaurant are quality, quantity, source, vendor reliability, experience, set-up, tie-ups and contingency plans, and the costs. Rules for storage of supplies are mentioned in the standard food storage manual of the food licencing department of States, and most of the cold storages have food certification licences. As for storage in the outlets, most of the equipments are standardised. Individual businesses have their own storage technology and the particular food product is stored in the conditions they deem right for it. Perishable food supplies are stored in special set-ups. Rejected supplies are generally replaced by the vendor if they have not been stored at the outlet for more than a day. But this depends on your terms and conditions with the vendor. Training staff on how to store and save perishable food products is important as spoilage can cause quite a drain in the revenue.”
He advises, “Each state has its own set of laws. Once the business plan is ready to launch your food outlet in a particular state, it’s best to have a meeting with the authorities and understand the rules and regulations, which must be strictly followed by your vendors. You need dedicated staff for matters like this, though the logistic vendor will also figure out the way to deal with the laws in the state(s) the product travels to.”
The cold chain
The supply chain has three key elements: Sourcing, Inventory Management and Transportation. While the supply chain is dominated by the traditional set up of traders and intermediaries, the sector is witnessing high inflow of investments from venture capitalists and private equity funds for developing a robust food service supply chain with modern cold storage and transportation. India has 37 million tonne opportunity for developing cold storage. The Indian Government has asked help from New Zealand, which is a major producer of fruits and dairy products and has expertise in setting up cold storages based on modern technologies. The Agriculture and Food Processing Industries minister, Sharad Pawar, had recently said that the value of annual wastage of fruits and vegetables was estimated at Rs 13,309 crore. However, if the wastage value of rice, wheat, cereals and others were taken into account, it would go up to Rs 44,000 crore a year. As per estimates, there is a requirement for about 60 million tonnes of cold storage in the country against the present capacity of around 29 million tonnes.
McDonald’s unique ‘cold chain’, which took more than six years of setting up in India, has brought about a veritable revolution, immensely benefiting the farmers at one end and enabling customers at retail counters to get the highest quality food products, absolutely crisp, fresh and at great value. This system also ensures that there is minimal food wastage at every level right from sourcing, to processing and to transportation. Setting up this extensive cold chain distribution system has involved transfer of McDonald’s state-of-the-art food processing technology by the brand and its international suppliers to pioneering Indian enterprises who, today, are an integral part of the McDonald’s cold chain.
“The Government is encouraging the PPP model for cold chain infrastructure development. This is because they too feel that it is important to establish world class cold storage logistics, which play a crucial role in reducing the global food shortage by eliminating wastage, which would provide enough scope to feed many parts of the world,” says Agarwal of TCI. As a logistics service provider, TCI sees the importance of cold chain in the coming years. The company provides state-of-the-art vehicles with imported reefer units for temperature-controlled products, and the vehicles are equipped with GPS base tracking system and temperature data loggers to log the temperature throughout the journey.
Supply chain considerations
The supply chain is at the heart of the economics of a restaurant and must be designed depending upon the product, the targeted customer experience, and the location of the restaurant. The supply chain links sourcing of raw commodities through their processing, until the goods reach the restaurant and the guest’s table. According to Deepak Nighoskar, restaurateurs must take into account the economic and strategic advantage (build, outsource, partner or buy) while setting up their supply chain, besides fragmented or concentrated buyers and suppliers, market size (opportunity, growth and potential), contractual agreement and compliance with suppliers and/or third party logistics players. The overall network design should integrate well with the operations of the restaurant, technology and advanced techniques, and also the cultural and social diversity of the country.
“While setting up the purchase department for any restaurant, two things are of utmost importance which in turn, looks into the steady and unchallenged line of supplies. One is the cuisine the restaurant will be serving and second is the city where it will be located. There may or may not be vendors for every supply in the city and if the restaurant requires imported ingredients, then a high import cost may hit its bottomlines. However, lower food cost concepts, especially liquor oriented concepts, are safer,” says Chatterjee.
It’s not just the large restaurants and international chains sailing the rough sea of economy in India; small foodservice formats are also trying to cope by finding ways to deal with rising commodity and transport costs, rising food inflation, and decreased consumer spending. Purchasing is only part of the equation. According to Alagu Balaraman, “The most important factor is clarity on positioning. Everyone wants to keep costs down, but a fast food restaurant that has a less differentiated product range will have a greater need to ensure competitive pricing.”
Budget to be allocated
Efficiency of the supply chain would not necessarily depend upon the investment made in the infrastructure, but also in correctly identifying the elements of supply chain to be outsourced or retained in-house. Normally, back-end budgets such as the purchase department usually range between 10 to 12 percent of any venture, thereafter, it is integrated into the fixed costs of the organisation. A model supply chain for a restaurant chain would mean a maximum of the activities outsourced with minimum back-up staff. McDonald’s manages its intricate supply chain network with a handful of staff (~10) including Quality Assurance people. On the other hand, it spent Rs 450 crore and six years before it even set up its first outlet in India. This resulted in an extremely effective supply-chain in a place like India which has an otherwise weak infrastructure.
It really depends on how a company views its supply chain structure – is it just another operational expenditure or is it something that creates strategic advantage for the company. Accordingly, the company would allocate resources to various parts of the supply chain. These are factors that need to be taken into account along with many others in designing the supply chain for an outlet. The result of a well-designed supply chain will be to improve quality, reduce inventory (at the outlet and in transit) and reduce cost.
Says Nayar, “For your own set-up including storage, logistics, operations costs, etc, the budget should be 45 percent. This would vary according to the products. In case of a vendor-based arrangement wherein you source the base materials and the vendor processes it while you run the operations, then the budget should be around 40-50 percent. This would leave you more monetary freedom to invest more in your outlet(s) and increase your presence across more states.”
Supply chain solutions that drive down costs are unique to individual restaurants. What may fit a casual dining concept—which has room for more inventory and fewer weekly deliveries—won’t fit at a QSR that drives volume and has less cooler and freezer space. It’s no surprise that supply chain management is the means for enhancing quality and safety while reducing costs—two seemingly opposed ends. It’s why food service companies have been fast adopters compared to other industries. But the developments have been slow, yet progressive. But what is unique is that some restaurant chains are also leveraging their supply chain (as a marketing tool) to attract customers, especially a younger generation who is more sensitive to sustainability issues.