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The fallout from the KFC logistics crisis

12 March 2018

HSS rounds up comment on KFC’s delivery crisis and the implications for its principal logistics partner, DHL.

In October 2017 DHL won KFC’s UK supply chain contract, along with specialist logistics operator QSL.

Problems started to arise in late February, and KFC was forced to close more than half of its 900 UK outlets because food was not being delivered.

By the second week in March, KFC had sufficiently lost patience with the new arrangement to re-appoint its old logistics provider Bidvest to take care of deliveries in the North to some 350 outlets.

To be fair to DHL, the logistics giant has not hidden.

It has apologised for the problems created, re-doubled its efforts to make the contract work, and accepted KFC’s decision to hand part of the work back to Bidvest.

Commentary:

John Perry, managing director of logistics consultancy SCALA

The decision by KFC to return part of its contract to its previous supplier, Bidvest, following the catastrophic issues it experienced when it switched to DHL, demonstrates the ongoing difficulties that the fast good giant is still battling with.

It also shows that there is a lack of confidence that the problems can be solved quickly.

It puts DHL in a difficult position, as it is effectively being bailed out by a competitor, but it is also potentially harmful to its reputation and the success of winning other business.

Splitting the operation between suppliers at this stage, after implementation, raises the question again as to why the transition from Bidvest to DHL wasn’t phased in and whether the proposed solution can be made to work.

To date, this will have been a very costly experience for all concerned parties. With logistics contracts typically being low margin affairs, large, unexpected costs or incurred penalties can rapidly erode the benefit of switching suppliers.

This highlights just how important it is to weigh up the risks before making changes to a contract.

The operational issues have been put down to the fact that KFC has switched its delivery contract to DHL and the complexities of integrating with new IT systems. When changing contract providers, companies have to be very careful.

Typically, logistic operations cost companies between four and 10% of their sales value. So, even if a 10% cost benefit is achieved by changing contractor, this only really represents 0.4-1.0% of sales.

KFC’s loss of sales will very quickly negate those benefits. We recently came across a company that had re-tendered its logistics operation and the current provider had bid significantly under its current contract price.

When asked why, the supplier said that it had responded to the tender brief as it had been written. It knew that there were many complexities that came with the job, which had not been included in the tender document.

But, the company also knew that its competitors, who didn’t know the business or how it worked, would only be bidding against what was included in the tender document.

If the decision is made to switch provider, then contingency planning is vital to ensure that possible issues can be identified and resolved at the earliest opportunity.

We would always insist on detailed planning, rigorous management of the preparation and operations set up, and of course, close communication between both parties well before the contract commences.

Thomas Cullen, consultant, Transport Intelligence

Only rarely does the importance of logistics procurement burst into the open.

It has done so for the fast food chain KFC and it has been horrible.

Bidvest had been operating six distribution facilities supplying food to the KFC retail sites.

It is suggested, not least by the GMB Trade Union, that DHL Supply Chain offered to reduce costs for KFC by concentrating operations on one national supply centre in Rugby in the Midlands.

The proposed concept behind the DHL offer was hardly new, indeed it reflects good practice by concentrating inventory, which ought to both increase stock availability and reduce costs. For some reason this has not happened.

There are clear indications of ‘whiplash’ inventory problems. Although KFC stores around the country had been running out of food (especially chicken) both last week and this week, KFC’s food suppliers have been attempting to offload excess stocks.

In addition, there have been strange reports of containers of chicken being offloaded at the roadside only to be picked up later by what appear to be KFC employees using their own private vehicles. It is reported that the company is faced with having to rid itself of a large quantity of chicken as it has been realised that the Rugby facility is not properly licensed to handle food products.

This episode is not just a problem for KFC. It is hard not to think that DHL Supply Chain emerges badly, although it is hard to know the precise details of the events that have led to the problems. However, handovers from one contract logistics provider to another must be a core competence for a large provider such as DHL and here, for whatever reason, they have got it badly wrong.

Dr Virginia Spiegler, senior lecturer in operations and supply chain management at the Kent Business School

In the past few years, many companies have taken steps to streamline supply chain processes by reducing holding inventory, outsourcing non-core activities and cutting the number of suppliers on the assumption that the market is relatively stable and predictable. KFC’s decision to switch their 3PL provider from Bidvest to DHL was a measure to reduce logistics service cost. However, having hundreds of restaurants closed could cost them millions in lost sales and low capacity utilisation. This problem could have been anticipated by comparing Bidvest and DHL capabilities.

Mick Rix, GMB national officer

Bidvest are specialists – a food distribution firm with years of experience. DHL are scratching around for any work they can get, and undercut them. It’s an absolute cock up.

 
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