Franchise Suppliers: Economics 101

Ray Kroc and the McDonald's executives from the 1960's -1980's are rightly praised for their brilliance in selecting McDonald's managers, franchisees and suppliers.

But today, Kroc's vision about the importance of suppliers is overwhelmed with legal talk of franchisor's standards.

Franchise lawyers - who are not part of franchising business- misunderstand standards. They confuse standards with uniformity & draft agreements purporting to demand uniformity.

But the correct view is this: "McDonald's manages to mix conformity with creativity."

Kroc understood that the supplier community was not a source of rebates, but rather an active partner with the franchise system in bringing about rationalization and change to the supply chain for the betterment of the brand.

The best example of this is the "simple" french fry and Simplot Foods

For those of a certain age, the magic of McDonald's was its French Fry. Even the best home cooks could not match McDonald's. And I know - my mother who is an excellent cook would allow my father to buy the family "chips" from McDonalds.

But in the early 60's, McDonald's had consistency problems, in part because the supply chain consisted of several hundred local suppliers, some who shipped potatoes of lower quality than the specified Russets.

Simplot convinced Kroc that moving to frozen fries would allow better consistency and control over their potato supply.

And, in 1960, the usual method of creating frozen french fries, blanching, freezing, and finish frying, produced fries that were not crisp or flavorful.

So, Simplot invested $3.5 million for an experimental process to produce frozen french fries - all on a Ray Kroc handshake with no guarantee of success.

Yet, Simplot took the risk, and was richly rewarded for the success. (Even though today, McDonalds and Simplot are at odds about Simplot's new genetically modified potato.)

So, If you want to be a franchise supplier or consultant, you have to have the ability find solutions to the problems that the franchise system faces and implement them.

On a handshake.