Franchise procurement: building a sustainable supplier model

When you expand your existing business into a franchise network, procurement needs to work for independent business owners in other locations too. Supplier relationships based on personal contacts and verbal promises are rarely enough. A well-designed procurement model protects the customer experience without creating unnecessary costs or dependencies for franchisees. Start by deciding what must be standardised, who is responsible for deliveries and how departures from agreed requirements will be handled.

1. Separate concept-critical purchases from free choices

Review what your business buys during a normal operating period: raw materials, consumables, equipment, workwear, software and external services. Assess each purchase according to its importance for quality, safety and brand recognition among customers.

Then divide purchases into three groups:

• Mandatory across the network: products or services where consistency is essential to making the concept work.
• Specified requirements, free choice of supplier: purchases where a clear specification can ensure the right result without everyone buying from the same company.
• Local discretion: purchases franchisees can make independently without affecting the core features of the concept.

For every mandatory purchase, you should be able to explain why the restriction is necessary. A particular ingredient may be crucial to a product’s characteristics, whereas ordinary cleaning materials may simply need to meet specified quality standards.

Avoid making your current supplier list mandatory out of habit. What works for your own outlet may be expensive or impractical elsewhere. Instead, describe the desired result and choose the least restrictive solution that will reliably deliver it.

Also document how a franchisee can propose an equivalent alternative. Specify what supporting information is required, who will assess the proposal and how the decision will be communicated.

2. Check that suppliers can support more businesses

A good price for your own business does not mean a supplier can serve a growing franchise network. Check delivery coverage, capacity, minimum order quantities, lead times and procedures for back orders. Also find out whether each franchisee can have their own customer account and what credit requirements would apply.

Decide which contractual model to use. A central framework agreement under which franchisees place their own orders differs from a model in which the franchisor buys goods and resells them. In the latter case, you also need to plan for stockholding, financing, invoicing and handling claims.

Make the allocation of responsibilities specific:

• Who places orders and is liable for payment?
• Who checks deliveries and raises claims for faults?
• Who pays for express deliveries or substitute products?
• Who informs affected outlets about quality issues?

Calculate the total cost up to the point of use, not just the unit price. Freight, packaging, wastage, storage requirements and capital tied up in stock can make an apparently cheap solution expensive for a smaller outlet.

Ask the supplier to demonstrate how a typical order for a proposed new location would be handled. Use realistic order quantities from your existing business, adjusted to the new outlet’s circumstances. In particular, check whether terms based on your current volumes will actually apply to new businesses.

3. Put purchasing requirements on a sound legal and financial footing

Sweden has no comprehensive legislation specifically governing franchising, but the Act (2006:484) on Franchisors’ Duty to Disclose Information applies. It requires franchisors to provide clear, comprehensible written information in good time before a franchise agreement is concluded. Among other things, this must identify the goods or services the franchisee is obliged to buy or hire.

For your procurement model, this means mandatory purchases must not come as a surprise after the agreement has been signed. Describe the obligations and their financial implications so that prospective franchisees can assess the business proposition. Distinguish clearly between binding requirements, recommendations and current prices that may change.

The purchasing terms themselves also need to be assessed under general contract law and competition law. Sweden’s Competition Act (2008:579) and, where applicable, EU competition rules may affect how exclusive purchasing requirements can be structured. Do not assume that every restriction is permissible simply because it appears in the franchise agreement. Have a lawyer review the requirements and their scope.

Also be transparent about how centrally negotiated discounts, rebates and any mark-ups are handled. Does a supplier rebate go to the franchisor, the franchisees or a joint initiative? Explain the model, and avoid describing purchases as being supplied at cost if payments or margins make that misleading.

4. Plan for shortages and changes

A procurement model needs to work even when the regular supplier fails to deliver. Identify critical products and decide which fallback options can be used without compromising quality. If substitute products require specific checks, responsibilities and the approval process must be clear.

Also decide how supplier changes will be managed. Franchisees may still hold stock, have binding orders in place or own equipment that only works with certain products. Any change therefore needs to be assessed in terms of transition costs and practical consequences, not just the new price list.

Monitor delivery performance, faults, claims and actual purchasing costs. Give franchisees a straightforward channel for feedback and use their experience when renegotiating terms. This makes the network’s collective purchasing a practical source of support for day-to-day operations.

Practical takeaway: Create a procurement matrix setting out the requirements, supplier, total cost, responsible party and fallback option for each critical purchase. Confirm the arrangements with suppliers and have them legally reviewed before committing your first franchisee to the model.