It would be fair to say that, over the last 10 days, KFC and DHL have not had the best time. Implementation problems on new logistics contracts are not uncommon, in fact, every new contract without exception will have unexpected implementation issues. Whatever the issues have been for DHL (they have not been disclosed so far) their impact has been considerable for the KFC restaurants. However, let’s not be too negative, there’s a lot of fallacy being reported.
The new KFC depot at Rugby, operated by DHL, went live on the 14th February and, almost immediately, the supply of chicken to restaurants ran into problems with the first restaurants closing on the 15th February. The closures then peaked last week with over 600 restaurants either closed or operating with reduced menus. One trigger point for the supply failure could well have been the closure of the M6 following a serious accident which delayed both inbound and outbound supply. This trigger may have rippled through the new operation, where processes did not have the maturity and new staff did not have the experience to cope, leading to a bullwhip effect.
Almost immediately, social media and news channels leapt on the story with the typical doom scenarios. Commentators have made statements that the DHL solution is fundamentally flawed and that KFC will have irreparable damage to their brand image and revenues. It seems that many people are enjoying picking over this high-profile failure, but some things being reported are simply fallacy. Here we try to separate those fallacies from reality.
‘The solution proposed by DHL is fundamentally wrong’. It isn’t.
The DHL solution is a radical change, operating from a brand new single distribution centre, with a new transport fleet and a new system provided by QSL – although the QSL system has been used for KFC in Germany since 2011. DHL’s solution potentially offers KFC a reduced depot footprint, less inventory, reduced staffing numbers and more regular restaurant deliveries.
Admittedly, the previous solution of six distribution centres, managed by Bidvest, had more inherent protection in case of failure, but we don’t know that DHL have not replicated this protection through existing, shared capacity, in their network.
Commentators have speculated that the logistics solution itself is flawed – delivering fresh food nationwide from a single distribution centre. However, there is no reason why a single national distribution centre, provided it has the right capacity, would not work. As Professor Richard Wilding, in his article on the topic for the Chartered Institute of Purchasing and Supply, stated:
“Using a single distribution centre in the ‘Golden Rectangle’ between Milton Keynes and Rugby on the M1/M6 is a well-established and proven means of getting products to a network of outlets anywhere in the UK… Big name supermarkets have been working this way from warehouses in Daventry for many years.”
There are many issues that could have triggered the implementation problems experienced by DHL: systems integration failures, staff shortages, skills shortages or transport delays. However, operating from a single depot, whilst it may have exacerbated problems, is not a flawed logistics network design. There is no reason why the DHL solution will not work long term.
‘The KFC share price will take a massive hit’. Highly improbable.
There were reports in the Guardian this weekend that there could be a shareholder value impact of 20%. This seems highly improbable. KFC is owned by Yum! Brands Inc., who are listed on the NYSE and also own Taco Bell and Pizza Hut. In 2017 the company reported system sales revenues of $46bn across 45,000 restaurants in 135 territories and countries. Less than half of the restaurants in the company’s portfolio are KFC (21,487) and of those only 870 are in the UK. Whilst the revenue figures specific to the UK KFC market aren’t reported, based on apportionment, we can assume them to be around $890m, less than 2% of total sales revenue.
The logistics issues that KFC currently have are not an endemic problem with Yum! Brands, they’re not even an endemic problem with KFC. They are an isolated incident in one relatively small market. It is highly unlikely that the share price will even register the incident.
‘KFC will lose millions in profit’. Possibly not.
If, for the sake of argument, we equally assign the estimated UK revenue of $890m across a year, then that’s $17.1m revenue per week. With the worst-case assumption that 60% of stores were closed for a full week, then that represents $10.2m revenue. Yum! Brands Inc. as an entity reports an operating profit around 6%, so we can assume that, on $10.2m of lost sales, KFC will see a $612k operating profit impact. Of course, we don’t know how much stock write-off has occurred.
The media exposure KFC has had over the last 10 days, in major broadsheets, tabloids, television news and social media could simply not be bought for $612k. We should remember that this incident has not been scandalous – there has been no food integrity issue, customers have not been put at risk. In fact, there is a very real possibility, based on the recent brand exposure, that KFC will now see a marked increase in revenues over the next few weeks – quite possibly outstripping the lost revenues due to restaurant closures.
What will happen next
In the history of the two companies, this is merely a blip and we should now be cheering them on. DHL, in the space of little more than week, have rapidly moved towards a stable state. As of this writing, 819 restaurants are now fully reopened. KFC themselves have deployed outstanding PR management through keeping customers fully informed, taking full responsibility and their inspired ‘FCK’ apology in newspapers this weekend. It is likely that KFC will come out of this completely unscathed.
Of course, the results for DHL may not be so bright. As they move the contract towards improved stability, the whole issue will fall off the news radar and when the issues that triggered the implementation problems do come to light, they will be a footnote. What people are likely to remember is the name DHL along with the problems caused.
However, what all supply chain professionals should be looking at now is how DHL took a situation of more than 600 stores being closed and got almost 100 stores back in operation per day across a week. We don’t doubt that, somewhere in this implementation failure, there is a masterclass from DHL in what to do when the proverbial hits the fan.