Readers of this blog know how skeptical I can be about the ability of managers in big organizations to cooperate across functions, departments or job descriptions. But I love to be proved wrong.
And David R. Parsley is happy to oblige. He's president and CEO of Centralized Supply Chain Services, LLC, a cooperative that serves the two big restaurant chains owned by DineEquity, Inc. - Applebee's and IHOP (that's the International House of Pancakes, for those who hate acronyms as much as I do). CSCS is a unique animal, the first member-owned co-op to support casual dining or family restaurants. But it wouldn't exist without the full participation of two very different supply chains.
CSCS didn't start out as an experiment in corporate togetherness. Parsley originally was hired in April 2000 as senior vice president of supply chain for Applebee's International. His mission was to cut costs while improving service to the restaurants. But with 75 percent of the stores owned by franchisees, he didn't have a lot of leverage. So he started thinking about the co-op model, already successful in the fast-food and quick-service sector, as a way to go for the entire group.
The idea percolated for a few years. Parsley got some support from Mike Leikam, who joined the team in 2003 and today serves as chief administrative officer of CSCS. Then, in 2007, came DineEquity, owner of IHOP, which acquired Applebee's and created the world's largest full-service dining company.
Both chains were franchise operations, but the similarities pretty much stopped there. Applebee's 2,000-plus restaurants were owned by less than four dozen franchisees, with an average of 30 stores per operator. (Some had more than 100). They were big enterprises, with formal corporate structures and teams of employees running the stores, for the most part. IHOP, by contrast, counted some 380 franchisees among its 1,400 stores, averaging three stores apiece. These were mostly mom-and-pop operators, working in their own restaurants every day. At Applebee's, franchisees tend to focus on particular regions or states, with little overlap among them. IHOP owners are all over the place; four or five compete in the Kansas City, Mo., area alone.
The initial focus of DineEquity, which transformed itself into a holding company with the two operating units, was on rationalizing the business and streamlining corporate functions. The goal, says Parsley, was to create "a smaller company but a larger system. The company was going to essentially downsize its supply chain."
The idea didn't sit well with an executive who had been brought in to improve service to the restaurants. But Julia A. Stewart, who had been chairman and CEO of Applebee's before taking on that title at DineEquity, wanted Parsley and his team to present her with Plans A and B: the first for taking cost out of the supply chain in the short term, and the second for the long run.
Parsley and Leikam responded with Plan C: a resurrection of the co-op concept. Why not create one organization, owned by the two business units of DineEquity, that could serve all of their needs? Instead of shrinking their supply chains, the companies could draw on the expertise and leverage of one powerful entity.
Stewart was open to the idea, and following an assessment by an outside party, gave it the green light. Now it was up to Parsley and Leikam to sell it to the franchisees.
The Applebee's operators had been educated about the concept; Parsley and his group were already managing their supply chain to a great extent. Not so for the entrepreneurial IHOP owners, who had their own procurement committee for negotiating deals with suppliers. So Parsley and Leikam hit the road, holding more than a dozen meetings from Florida to Hawaii over a year's time. They explained in detail the benefits of the co-op model, promising complete transparency into the IHOP and Applebee's supply chains. Sometimes that meant taking IHOP owners through a day in the life of a category manager, "so they would understand what these guys do." They were puzzled, says Parsley, by the existence of an individual on the Applebee's side whose sole job was managing beef and pork purchases. "They asked, 'is that a full-time job?'"
Following some fairly intense negotiations, Parsley convinced individuals from both camps to sign on. Today, CSCS comprises 100 percent of Applebee's operators and around 96 percent of those from IHOP. Everyone with more than 10 stores is a member. The venture manages around $1.8bn in combined spend.
CSCS is owned directly by the member operators. Oversight is achieved through two separate co-op boards - dubbed "Apple" and "Pancake" - as well as a joint board. Parsley and his staff provide a full range of supply-chain services to both, leveraging their combined buying power with common suppliers wherever possible.
The scope of CSCS's mission is vast. It executes procurement for all food products, disposables and restaurant smallwares. It negotiates with suppliers and manages commodities. It handles distribution, including freight and inventory management. It works with carriers and third-party logistics providers, as well as with outside providers of human resources, accounting, data management and IT support. It even oversees brand management, including product testing, promotions and menu conversions for new products, out of facilities in Glendale, Calif. and Lenexa, Kan. (The headquarters of IHOP and Applebee's, respectively.) And it does it all with a staff of around 45.
In the process of merging resources on behalf of both chains, CSCS ended up realizing some of the cost savings that DineEquity was demanding in the first place. The company just added inventory for 25 IHOPs to a New York distribution center that was already serving more than 200 Applebee's stores in the greater New England area. Parsley says the two groups share manufacturers about 75 percent of the time, and can combine outbound product on the same trucks in many cases.
There's more work to be done - CSCS plans to take over responsibility for equipment and produce this year - but the hard work of melding disparate personalities and business practices appears to have been accomplished. "We just went through the first end-of-year performance process," says Parsley. "The programs are in place and the boards are very happy."
And, in the words of John Mellenkamp, the walls come tumblin' down. Who knew?
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