3.06 – Getting the Goods: Merchandise & Supplies
Acquiring the right merchandise and supplies is crucial for maintaining the quality and consistency of your franchise. Different franchisors have various approaches to this process. Some will specify one or a few approved suppliers, while others may allow you to choose your own vendors as long as they meet the franchisor’s required standards and specifications. Many franchisors use a combination of these methods.
Using the Franchisor as the Sole Supplier
For certain goods or services, your franchisor may be your sole or exclusive source. This usually applies to items that are proprietary, contain key ingredients, or are branded with the franchisor’s trademark. These products may be ordered directly from the company, or the franchisor may provide them to distributors or license another company to produce and oversee distribution. Because these items are proprietary, don’t expect the franchisor to share the specifications with you or any supplier you recommend.
Working with Suppliers Approved by the Franchisor
Some franchisors provide a list of approved suppliers from whom you can or must buy items directly. The franchisor and the suppliers will have agreed on specific products that can be supplied to the system and alternatives for when those products are out of stock. Trusting the supplier to meet system standards is crucial. Franchisees should report any issues with approved suppliers to the franchisor.
Most franchisors allow franchisees to request approval for new or alternative suppliers. If you find a supplier that meets the franchisor’s criteria and is less expensive, pass the information to the franchisor. If the supplier is acceptable, the franchisor may add them to the list of approved suppliers after vetting. However, the costs for vetting new suppliers are often passed back to the requesting franchisee, so be discerning in your requests.
Understanding Rebates and Upcharges
It’s not unusual for franchisors to receive money based on franchisees’ purchases of required goods and services. This happens through upcharges or rebates. Upcharges occur when the franchisor sells products directly to franchisees at a markup. Rebates are payments from designated suppliers to the franchisor based on franchisee purchases.
Franchisors frequently apply upcharges to cover product development, manufacturing, sourcing, and distribution expenses, and to earn revenue. Some franchisors receive upfront or annual payments from suppliers in exchange for access to the system’s franchisees, exclusivity, or long-term purchasing arrangements. These arrangements are common and help maintain the franchisor’s revenue model.
Review rebate information in the Franchise Disclosure Document (FDD) carefully to understand whether the franchisor derives significant revenue from your purchases. The supply chain revenue received by the franchisor is generally factored into their revenue model. Without this revenue, the franchisor may require higher royalties or additional fees.
Finding Your Own Suppliers and Requesting Approval
Many franchisors allow franchisees to find and choose their own vendors, provided the products meet franchisor standards. This practice is common in small franchise systems but also occurs in larger ones, especially where items are commodities or where local sourcing is emphasized. If your franchisor doesn’t provide a list of authorized suppliers, you may need to choose your own vendors.
Work with your field consultant and franchisor’s purchasing department to identify suitable suppliers in your market. Your local chamber of commerce may also have a list of suppliers. When reviewing bids, ensure you understand the total charges, including hidden fees. Price should not be the sole consideration; product quality, order accuracy, and timely delivery are also important factors.
Conclusion
Following your franchisor’s guidelines for merchandise and supplies is essential for maintaining the quality and consistency of your franchise. Understanding the supply chain policies, including approved suppliers, rebates, and upcharges, will help you make informed decisions and ensure your business runs smoothly. Always communicate with your franchisor and other franchisees to stay informed and address any issues promptly.
