Supply chains for franchises are normally established by the franchisor.
A franchisee usually has little capacity to influence the franchise network’s supply arrangements.
There may be ‘core’ supply arrangements a franchisee must follow, and others that a franchisee may need to establish for themselves.
For example, a small fast food operation may buy all its packaging and drink supplies from designated suppliers, but source lettuce and other fresh produce from local markets or vendors.
The larger the franchise system becomes however, the more likely that it will have national supply arrangements in place for all its inputs.
It is occasionally the case that franchisees will find a better deal on the supply of goods or services than is currently provided by the national franchise supply arrangements.
It is often tempting for the franchisee to switch to the cheaper deal, however this is likely to lead to conflict with the franchisor for the following reasons:
- The substituted product does not meet the standards set down by the franchisor in relation to suitability for purpose, shelf-life, consistency, quality, etc and can result in an inferior end product or experience to consumers;
- The substituted product may not have any continuity of supply, leading to a future shortage and a further change of buying behaviour;
- The substituted product may be purchased in defiance of an existing franchisor-endorsed supply arrangement, which in turn reduces volume through the existing supplier and threatens volume discounts available to the rest of the network.
- The existing supplier may reallocate supply to other customers and this in turn jeopardises supply to the rest of the network.
The obligation of franchisees to adhere to established supply arrangements will be outlined by the franchise agreement, the franchise operations manual, or both.
Franchise supplies and the Competition & Consumer Act
A franchisor may make it compulsory for its franchisees to purchase certain goods or services from the franchisor.
This is known as full line forcing and is particularly common in distribution franchises where the franchisor’s income will largely derive from a mark-up on the items supplied to the franchisees.
Where the franchisor makes it compulsory for franchisees to purchase goods or services from a designated supplier, this is known as third line forcing.
Third line forcing is generally prohibited under the Competition and Consumer Act, except where the Australian Competition and Consumer Commission (ACCC) is notified of, and approves exclusive supply arrangements.
An approval will require a written notification to the ACCC, followed by a period in which the ACCC will receive submissions from affected parties (eg. franchisees) and then make a determination.
All third line forcing (also known as exclusive dealing) notifications can be revoked by the ACCC at any time it believes that the public interest in condoning anti-competitive behaviour is no longer served.
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You can find out more about managing supply chains in the Franchise Business Management Essentials eClasses – designed to equip franchisees with the business skills to enhance their success.