Inside Supply Management Magazine
Lessons From KFC's Supply "Fowl-Up"
By Kate Vitasek
It’s every supply management practitioner’s worst nightmare: You not only run out of supply of a key product — but the product that can shut you down.
So how did KFC run out of chicken? It’s one thing to excuse the fast-food giant when it ran out of its namesake product during last year’s avian flu outbreak. But this time, the reason is a bit harder to swallow. KFC’s chicken was delivered by Bidvest, a Johannesburg, South Africa-based distributor, until February 13, when the supply contract was switched to German logistics giant DHL. KFC began closing restaurants — including most of its locations in the United Kingdom — due to the chicken shortage on February 19.
Disappointed, angry, hungry
The supply chain slip-up was covered by BBC News, The New York Times, USA Today, Forbes and others, and KFC became the butt of many tweets and comedians’ jokes. The company itself tried to find some levity on a website page dedicated to the issue, stating, “The chicken crossed the road, just not to our restaurants.”
KFC cited “teething problems” with the new supplier. However, GMB, a general trade union in the U.K., was a bit more harsh, claiming the chicken shortage is due to a “bird-brained” contract decision. Whatever you want to call it, the decision has proven to be penny-wise and pound-foolish.
Of course, lost sales are one thing. But the biggest consequence is likely to be the loss of loyal customers left sad, angry, disappointed and, yes, hungry. KFC workers also suffered, according to BBC News: While KFC-owned outlets continued to pay employees, franchisee operators were left to make their own decisions.
One KFC worker told the BBC: “This problem isn’t our fault, but we are the ones who can’t work. I have got bills that come out of my account on Friday, and I feel terrible about the whole situation. I am looking for a new job.” Bidvest, the former supplier, and the GMB trade union have also been vocal about the situation. According to Mick Rix, GMB national officer, the supplier change led to 255 job losses and the closure of a Bidvest depot.
Then, in early March, KFC announced its plan to shift back to Bidvest.
The million-dollar (or, in this case, the multi-million-dollar question) is: Could this have been prevented?
While I am not an expert on the specifics of the KFC case, I can offer advice on how to prevent supply chain foul-ups when switching suppliers.
First, consider if you really need to bid out the supplier. If you have a trusted supplier relationship, perhaps the best approach is to harness the power of the supplier rather than use buying power to continually test the market and threaten competition. Some companies are challenging the conventional commodity-focused “bid and transition” thinking by working in a more strategic manner with their suppliers and shifting to a performance-based, or Vested, sourcing model.
If you decide to do a bid, consider rethinking your RFP approach. Move away from a classic “request for proposal” to a “request for solution” or “request for partner” to enable collaboration — and better solutions. These more collaborative approaches let a supplier dig into your existing operations, which can help it produce a more realistic bid. In addition, potential bidding suppliers and business stakeholders can collaborate on a risk assessment as part of the bid process.
Also, assess total cost of ownership (TCO). While some companies have moved beyond a simple price-based decision to a best-value supplier selection, organizations rarely take TCO into consideration when considering a bid process. As a result, what appears to be a great cost savings in the RFP could, in the long run, cost the same or result in less savings. So, before you decide to do the next bid, think about the costs of potential risk and factor in switching costs — you might determine the best approach is to invest in improving your existing supplier relationship.
The costs of transition
If you opt to make a supplier switch, don’t rush into a transition. Instead, spend the proper time to plan and test, and maybe even have your new and old supplier work in tandem as you address teething problems.
Finally, this cautionary note about transition costs: Far too many companies force a supplier to eat transition costs associated with moving from an old supplier to a new one. Transition costs, however, are real — pay them. If you don’t want to pay them, don’t switch. Forcing the supplier to absorb the transition costs creates a perverse incentive for the supplier to rush or cut corners during the transition. Yes, paying transition costs may cost you more in the short term — but think of it as an insurance policy. And if you can’t afford the insurance and don’t want to take the risk, then perhaps it’s best to not switch.
Kate Vitasek is an international authority on the Vested business model for highly collaborative relationships. She is the author of six books on Vested and a faculty member at the University of Tennessee in Knoxville, Tennessee.