Franchise Supply: Policies to Set Before Offering Franchises

Before franchising your existing business, make sure you can replicate the reliable supply of ingredients, stock and packaging—not just the product or service. A system that works because you personally chase suppliers may fail when someone else runs an outlet. Across a franchise network, clear supply policies help prevent stock shortages, unexpected costs and disputes over responsibility when problems arise.

1. Identify which supplies genuinely need to be controlled

List everything an outlet needs to buy. Separate items that are essential to product identity and safety from everyday supplies that are readily available from several sources.

For example, a signature sauce or packaging that comes into direct contact with food may require strict standards. But that does not mean franchisees should have to buy every cleaning product or office item from you. For each item, record:

• the required quality, dimensions, ingredients or materials;
• how it should be checked before acceptance;
• suitable storage conditions and shelf life;
• why a particular source is required, if applicable.

Prioritise measurable standards rather than simply naming a supplier. Alternatives are easier to assess when the qualities that must be maintained are clear. Also specify who will pay to test a new product or material and when a decision will be given.

2. Check the legality of compulsory purchasing requirements

The Philippines has no single comprehensive franchise law, but that does not mean there are no specific rules. The Civil Code governs contractual obligations. Executive Order No. 169, series of 2022, also provides protections for micro, small and medium-sized enterprises that take on franchises, including minimum requirements for franchise agreements and their registration with the Department of Trade and Industry (DTI).

Republic Act No. 8293, or the Intellectual Property Code, is particularly relevant to supply policies. Franchise agreements may fall within the rules on technology transfer arrangements. Under Section 87.1, provisions considered detrimental to competition and trade include obligations to acquire capital equipment, intermediate products, raw materials and other technologies from a specified source.

Do not assume that saying a restriction is ‘for quality reasons’ is enough to make any compulsory purchasing requirement acceptable. Ask a lawyer to review the precise scope of the restriction and its justification. Failure to comply with the rules on prohibited and mandatory provisions in Sections 87 and 88 may render an agreement unenforceable unless the relevant exemption and registration are approved by the Intellectual Property Office of the Philippines (IPOPHL).

Also disclose clearly whether you or a related business sells the supplies. Itemise product prices, delivery costs and any other charges so franchisees can see the true cost.

3. Set out a clear process from ordering to returns

A list of approved suppliers is not enough. Responsibility must be clear at every stage of the transaction. Put the following in place before offering franchises:

• Ordering: order cut-off times, minimum quantities, confirmation and cancellation procedures.
• Payment: when payment is due, accepted payment methods and the process for disputed amounts.
• Delivery: expected lead times, transport costs and whom to contact if a delivery is late.
• Receipt of goods: checks on quantity, condition, temperature where necessary, and remaining shelf life.
• Returns: evidence required, reporting deadlines and the process for replacements or refunds.

Clarify who bears responsibility if products are damaged in transit. Do not leave this to a verbal understanding between the driver and the outlet manager.

Test the entire process in your own operations. Record actual order-to-delivery times, not just the promised schedule. Use this information to plan stock levels and make realistic commitments to prospective franchisees.

4. Arrange alternatives before shortages occur

Establish a process for when the usual supplier cannot deliver. Who will approve a temporary substitute? What evidence of quality is required? How long may the substitute be used, and how will the return to the usual supply be communicated?

If there is no safe, acceptable alternative, identify which products will temporarily be withdrawn from sale. An agreed notification procedure is better than resorting to materials that do not meet the required standards.

Also establish a fair method for allocating limited supplies among outlets. Explain the basis for allocation in advance to avoid suspicions that company-owned shops are being prioritised over franchisees.

Practical reminder: Before taking on your first franchisee, make sure you have tested ordering, receipt of goods, returns and the approval of substitutes. Have a lawyer review compulsory purchasing requirements and make all associated costs clear.