Within your franchise business, typically one of the major expenses is the inventory. Inventory is defined as all the goods and materials that are held in stock and used by a business for the day to day operations. It may be the products you sell, as in a retail store. It may be the raw food products that you use to create meals, such as in a restaurant. Or it may be parts or materials you use to provide a service, such as in an automotive repair business.
The amount of inventory that franchisees are required to carry or stock will vary depending on the requirements set out by each franchise concept and this is usually clearly defined within the operations manual. There are some valid reasons why the franchisor requires franchisees to stock inventory. Sometimes it can take significant lead time for certain suppliers to fill franchisee’s orders and so it is imperative that the franchisee has inventory to keep the business going. There will be times when some products will be in demand more than others, such as during a promotion. By stocking inventory the franchisee is creating a safeguard to meet the demands of the customer. By having significant inventory a franchisee is allowing the customer to purchase what they need when they need it. If you don’t have the inventory, you will often loose a customer as they will simply go to your competition.
Costs of inventory will vary from a few thousand dollars, to hundreds of thousands of dollars, depending upon the business model. There is often a tendency for franchisees to gravitate towards getting inventory as cheaply as possible. However, this needs to be weighed against product quality, reliability and warranties. All of these variables will affect the overall brand. A franchisor will take all of these things into account when sourcing and pricing inventory.
Inventory that is stocked and used by the business is an integral representation of the entire franchisor’s brand. The franchisor will usually have clearly defined policies regarding what products can be carried. They will also define an approval process if you wish to add or remove specific items from the approved inventory list. An inventory purchase agreement or supplier agreement will address issues like shipping terms, product warranties, pricing, procedure for placing orders and return policies. The franchisor will provide a clearly defined supply chain, or approved suppliers, from which the franchisee is required to buy all product from. (The topic of approved suppliers is covered in more detail in the next tutorial.)
When reviewing a franchise opportunity, ask the franchisor to review inventory policies so that you can better understand that the operations of the business and what will typically be a substantial expense. Speak with franchisees and get their perspective. Are they happy with the product quality? What have been their challenges in inventory management and how have they resolved these challenges? Have the inventory suppliers delivered product in a timely fashion and provided adequate return policies?
As the cost of doing business is on the rise it is very simple but important to maintain inventory control. Shrinkage of inventory can be caused by theft, damage, spoilage and accounting errors. Within the operations manual the franchisor will typically provide details to assist franchisees on how to store the inventory, minimize loss from shrinkage and get the most use out of the products.
It is good business practice to make sure that the entire inventory is insured. It is possible that the inventory may be covered under a blanket policy for the whole operation. In some cases, depending upon the type of inventory, it may be a special coverage that you have to purchase from your local insurance broker. The policies regarding insurance are typically defined by the franchisor within the franchise agreement or operations manual.
Most businesses require inventory to run the business and service the customer. It often represents one of the biggest expense items of the business. Belonging to a franchise offers some distinct advantages when it comes to inventory. A strong franchise will often allow franchisees to purchase inventory and products at a lower cost than if they were an independent business, due to volume purchasing. The franchisor will also ensure product quality, good return policies and will be regularly researching for better inventory sources. While this is being done behind the scenes, it allows you, the franchisee, to focus on building your business and servicing the end customer.