How Businesses in China Can Prepare for Supply Disruptions Before Franchising

When a company-owned outlet runs short of stock, the founder may be able to arrange an emergency delivery. Once the business expands into franchising, an approach that relies on personal contacts is difficult to replicate. If head office requires consistent standards while restricting outlets’ freedom to source their own supplies, it needs to answer a question in advance: how can outlets keep trading when a designated supplier cannot deliver? Procedures for supply disruptions and alternative purchasing should be tested before franchisees are recruited, rather than negotiated after an outlet has been forced to close.

1. Define supply commitments: purchasing restrictions are not a guarantee

China has specific regulations governing commercial franchising. Article 7 of the Regulations on the Administration of Commercial Franchises requires franchisors to have a mature business model and the capacity to provide ongoing support. Article 11 requires written contracts to cover service provision, quality standards and measures to ensure compliance with those standards. Article 14 requires franchisors to provide continuing support as agreed. Establishing supply disruption procedures is a practical way to implement these operational arrangements, but the regulations do not prescribe a single standard format for doing so.

Start by distinguishing three supply arrangements: head office sells to outlets; designated suppliers sell directly to outlets; or outlets source their own supplies to specified standards. For each arrangement, identify who accepts orders, receives payment, handles delivery and deals with shortages. Do not assume that head office bears all supply responsibilities simply because it designated the supplier. Equally, describing an arrangement as ‘third-party supply’ does not override support commitments that head office has already made.

The Measures for the Administration of Information Disclosure in Commercial Franchising set disclosure requirements for the prices and terms of products, services and equipment, as well as designated suppliers and purchasing restrictions. Purchasing arrangements should be included in pre-contract disclosures and be consistent with the contract. Sales staff should not promise verbally that supplies will ‘never run out’ while the contract says nothing about how shortages will be handled.

2. Build an alternative purchasing list based on the risk of interrupted trading

Do not rank materials solely by purchasing spend. Inexpensive bespoke packaging or essential consumables can also prevent an outlet from completing sales. For each item, record the normal replenishment lead time, available stock, impact of a shortage, conditions for substitution and the person responsible. Divide items into three categories:

• No direct substitution: For materials involving core recipes, safety requirements or compatibility with essential equipment, suspend the affected products or services if supplies run out.
• Substitution after validation: Alternative sources exist, but specifications, supplier credentials and performance in use must first be checked.
• Independent purchasing within defined standards: Outlets may purchase general-purpose materials themselves against clear standards, retaining supporting records and accepting checks.

A list of backup suppliers is not the same as reliable backup capacity. Head office should verify suppliers’ actual production capacity, delivery coverage, minimum order requirements and ability to deliver during peak periods. It should also check whether two suppliers depend on the same manufacturer. An untested source should not be presented as a guaranteed, readily available alternative.

Substitution must not compromise statutory requirements. Article 15 of the Regulations on the Administration of Commercial Franchises requires the quality and standards of products or services to comply with laws, administrative regulations and relevant national provisions. Head office approval for emergency purchasing does not remove the applicable quality and safety responsibilities.

3. Rehearse the full disruption response at company-owned outlets

Choose one critical material and simulate a failure by the usual supplier to deliver on time. Have the company-owned outlet team follow the procedure intended for franchisees, rather than allowing a manager to resolve the issue through private contacts. The exercise need not create a real operational risk: simulated orders and validated alternative samples can be used.

The process should include at least four stages: the outlet submits stock levels and the expected time of depletion; head office confirms the shortfall and assesses stock transfers; purchasing and quality leads decide whether to approve a substitute or suspend sales; and the outlet records the batches used and the return to normal supply. Each stage should have a designated responsible role, a response deadline and an escalation contact if no one responds.

Approval documents should specify the substitute material, the outlets covered, the quantity or period of use, and the conditions for ending the arrangement. A message in a group chat saying ‘buy it for now’ can easily turn temporary permission into long-term independent purchasing and make subsequent traceability more difficult.

The purpose of the exercise is not to prove that stock can always be found. It is to check whether the team can reach a decision before existing stock runs out. Record approval delays, additional freight costs, the suitability of substitutes and changes to outlet operations. If the problem can only be resolved by the founder stepping in, improve the process before expanding the franchise network further.

4. Put authority, costs and conditions for returning to normal supply into the contract

The contract or purchasing schedule should define what triggers the supply disruption procedure, such as a confirmed order not being delivered as agreed or a supplier notifying the business that it cannot supply. Shortages caused by sales exceeding an outlet’s own forecast or by late ordering should be treated separately from those caused by a supplier’s breach of contract. This avoids treating every shortage as head office’s responsibility.

Cost arrangements should cover, at a minimum, price differences for alternative purchases, expedited freight, transfers between outlets, and returns or exchanges of unsuitable materials. Costs can be allocated according to the cause and responsibility, but the terms should explain who pays initially, what supporting evidence is required and how disputes will be handled. Internal arrangements for recovering costs from suppliers should not leave outlets unsure whom to approach with a claim.

Also specify who may approve temporary purchasing, whether outlets may act first in an emergency, the limits of that discretion and how unauthorised purchases will be handled. Keep written notices and acknowledgements for decisions involving suspended sales or significant cost changes.

Returning to normal supply also requires rules. Head office should confirm that deliveries are stable before ending temporary purchasing permission, and clarify whether remaining substitute stock may still be used. This helps prevent outlets from bearing the cost of holding two sets of stock at once. Where supply terms change materially, check whether disclosure and contract update obligations apply.

Practical takeaway: before opening the business to franchisees, complete a critical materials register, run a supply disruption exercise and prepare a purchasing responsibilities schedule. An effective safeguard is not a promise that supply will never fail. It is a system that ensures every outlet knows how to make decisions, whom to ask for help and who will bear the costs when a problem occurs.