Planning Your Supply Chain Before Franchising in Indonesia

A business that runs smoothly at one location may not have a supply chain ready to serve franchisee-owned outlets. Reliance on a single producer, unaccounted-for delivery costs or unclear purchasing rules can erode profits. Before building a franchise network, establish supply arrangements that protect quality and give prospective franchisees certainty.

1. Separate mandatory supplies from flexible purchasing

Start with a list of the goods and services each outlet needs, including raw materials, packaging, equipment and maintenance services. Do not immediately require everything to be purchased from head office. First, identify what genuinely defines the business and ensures consistency.

Use the following three procurement categories as an internal framework:

• Proprietary supplies: goods with a distinctive formula or characteristics, such as a signature spice blend, whose sourcing needs to be tightly controlled.
• Specification-based supplies: goods that may be purchased from approved suppliers, provided they meet the specified dimensions, quality, safety and other requirements.
• Local purchases: standard goods that franchisees may source themselves, provided they meet minimum standards.

Record the operational reason for each restriction. Protecting a recipe is different from seeking a margin on goods sold. Being transparent about this distinction helps build trust across the franchise network.

For example, a drinks outlet might need a proprietary concentrate supplied by head office but be able to buy fresh fruit from vetted local suppliers. This preserves the brand’s distinctive offering without shipping everything from a single warehouse.

2. Calculate the full cost of supplies delivered to each outlet

A supplier’s list price is not the franchisee’s final cost. Calculate the total cost of getting goods to the outlet ready for use, including delivery, storage, handling, potential damage and applicable taxes. Itemise these costs so prospective franchisees can understand the assumptions behind the figures.

Also examine the relationship between minimum order quantities, shelf life and storage capacity. Bulk discounts do not always save money if goods expire before they can be sold. Use consumption records from the existing business to develop ordering patterns, then adapt them to conditions at the intended location.

Before offering franchises, ask suppliers to confirm the following in writing:

• production capacity and delivery coverage;
• order processing times and ordering cut-offs;
• minimum purchase quantities and payment terms;
• procedures for rejecting goods or replacing damaged products;
• arrangements for notifying buyers of price changes.

If the franchisor earns a sales margin, commission or rebate from a supplier, explain the relevant arrangements to prospective franchisees. Do not present prices as pure procurement costs if head office makes a profit on them. Also test how increases in raw material prices affect outlet cash flow, rather than looking only at head office revenue.

3. Align procurement rules with legal documents

Indonesia specifically regulates franchising through Government Regulation No. 35 of 2024 on Franchising, which replaced Government Regulation No. 42 of 2007. This framework requires a business system, a business that has already generated profits, recorded or registered intellectual property, and ongoing support.

The regulation also requires a franchise offering prospectus to be provided to prospective franchisees at least 14 calendar days before the agreement is signed. As mandatory purchasing affects how an outlet operates and how much funding it needs, explain material supply arrangements during the offering process. Do not wait until prospective franchisees have committed to the investment.

In the agreement and procurement schedules, set out which goods must be purchased through specified channels, the basis for pricing, payment terms, delivery responsibilities and complaint resolution procedures. Also establish how supplier lists and product specifications may be changed. Avoid granting unilateral powers to make changes without clear notice requirements and arrangements for adapting to those changes.

Government Regulation No. 35 of 2024 also requires priority to be given to domestically produced goods and/or services, provided they meet the quality standards set out in writing by the franchisor. Use objective standards to assess local suppliers. Ask legal advisers to review purchasing restrictions under franchise and competition law; do not assume that every restriction is automatically justified simply because it appears in the contract.

4. Prepare emergency procurement arrangements before shortages occur

Create contingency procedures for delays, production disruptions, defective goods or the loss of a supplier. Specify who can approve substitutes, what evidence of quality is required and how quickly head office must respond. Franchisees should not be forced to choose between closing with no certainty about reopening and breaching purchasing rules.

For critical ingredients or materials, identify alternatives that have already been assessed. If substitution is not possible, decide which products will be temporarily withdrawn and how to communicate this to customers. Record batch numbers, receipt dates and receiving outlets so that problem goods can be traced.

Review supplier performance with franchisees, considering delivery punctuality, compliance with quality standards and complaint resolution. Use the findings to improve procurement, rather than simply assigning blame.

Practical step: before offering franchises, complete a procurement matrix listing goods, suppliers, total costs delivered to each outlet, responsible parties and emergency alternatives. Make sure it is consistent with both the information given to prospective franchisees and the agreement.