How Domino’s manages an excellent supply chain

HIGHLIGHTS OF THE ARTICLE

Dominos has largely managed its supply chain network internally. The company has established 21 regional dough manufacturing and supply chain centers, two thin-crust manufacturing facilities, and one vegetable processing center in the United States. Apart from it, the company has five dough manufacturing and supply chain centers in Canada. Its supply chain network also includes external suppliers with whom the company has formed long-term contracts and strong relationships.

Domino’s supply chain is a separate business segment and accounted for around 59% of the company’s revenue in 2020. A fleet of 900 leased tractors and trailers supports the company’s supply chain operations in the US and Canada. Having its own supply chain networks enables the company to minimize operating costs and maximize profits for its franchisees. Read a detailed analysis of Domino’s supply chain operations below.

A brief analysis of Domino’s supply chain management

Domino’s is one of the most successful QSR restaurant chains in the world. While its core market is the United States, followed by Canada the company has built an impressive presence in 90 markets worldwide. It is the leading brand in the QSR pizza category based on retail sales. The company was founded in 1960 and has achieved a lot of growth in its 60 years of existence.

Domino’s is a well-recognized brand name known for delicious pizza items, product quality, customer service, and great marketing. Its focus on technological innovation to serve customers better and streamline operations has resulted in higher growth. The company achieved more than half of its sales from digital channels during 2020. Worldwide, the popularity of Domino’s pizza has grown driven by the ease of placing orders, growth in brand awareness, and customer experience.

In 2020, the company had 17,644 stores operational worldwide of which more than 95% are run by franchisees. The franchising business model of Domino’s is highly successful. The company has achieved strong brand awareness and its business has proved profitable for both the franchisor and the franchisees.

Importance of Supply chain management in the QSR sector:

In the QSR industry, companies need to manage their supply chains efficiently to maintain their competitive position and market share. Their supply chains are critical to running the business smoothly and achieving higher sales and revenue. QSR companies that have highly resilient supply chains are also among the more successful. Timely availability of raw materials and proper inventory management is critical to maintaining sales and growth momentum. 

Market-leading brands like McDonald’s, KFC, Domino’s, and Subway have embedded safer and innovative supply chain management practices into their organizational cultures. The companies in the QSR sector that did not focus on supply chain management since the beginning failed to derive super growth. Managing product quality depends on a QSR brand’s supply chain’s efficiency. A QSr brand needs to focus on the entire supply chain, which is one of the most critical parts of its value chain. From sourcing to storage, and delivery to stores, every stage of supply chain management requires proper attention to maintain the system’s efficiency.

Domino’s supply chain management:

Domino’s Pizza Internal Supply Chain

Domino’s has achieved the leading position in the QSR pizza sector through a firm focus on managing its product quality and customer service. However, the growth of the company in its leading markets including the US and Canada is supported by its supply chain. The supply chain of Domino’s is a separate business segment that is also the leading source of revenue for the company and generated around 59% of the company’s revenue in 2020. The company has been building supply chain capabilities and fine-tuning its supply chain efficiency over the last four decades.

Domino’s business is run mainly by its franchisees worldwide. It operates only 363 company-owned stores in the US (as of 2020). In the Us and Canada, it supports the operations of the company-owned stores and franchised stores by supplying key ingredients for making pizzas. While on the one hand, this ensures that the required raw material for making pizzas is always available to the Domino’s stores in the US and Canada, on the other it also reduces the company’s dependence on external suppliers. This has helped the company manage operating expenses better and maximize profits for the company and its franchisees. 

Domino’s operates 21 regional dough manufacturing and supply chain centers in the U.S., two thin-crust manufacturing facilities and one vegetable processing center in the U.S., and five dough manufacturing and supply chain centers in Canada. While this has not totally eliminated the need for external suppliers, it has still reduced the company’s dependence on external suppliers and serves as critical strength for the company helping it manage its costs better and grow its profitability.

The company has leased a fleet of around 900 tractors and trailers to support its supply chain operations. Domino’s has established a strong supply chain and plans to continue to invest in supply chain operations to grow its supply chain capabilities. Growing its supply chain capabilities can help the company manage the growth of its business faster in future.

The Domino’s supply chain centers in the US and Canada apart from producing fresh dough and supplying to stores in the US and Canada also work as sourcing centers.  Domino’s purchases, receives, stores and supplies with fresh food and complementary items to substantially all of its stores in the US and majority of stores in Canada from its supply chain centers. The company supplies more than 6800 stores in the US and Canada with fresh foods and other supplies. 

Domino’s franchisees are not bound by any agreement to purchase raw materials from the company. If they choose they can purchase foods and other supplies from external suppliers. The key reason behind purchasing from Domino’s is that it supplies good quality raw materials at competitive prices. Domino’s offers both quality and consistency. It offers the most convenient, efficient and cost effective alternative which makes the franchisees choose Domino’s as their core supplier.

 The company has also entered into profit sharing arrangements with the stores that buy all of their food from its supply chain centers. As a part of these profit sharing arrangements, the participating stores receive 50% of the pretax profits from Domino’s supply chain operations. This arrangement has also helped the company strengthen its ties with the franchisees.

External suppliers of Domino’s Pizza:

The company has also maintained long standing partnerships with external suppliers. A large part of Domino’s annual food spend goes to external suppliers. The company has set strict quality standards for its third party suppliers. It is done to ensure food quality and product safety. Its external supply chain partners are a part of a quality assurance program that ensures systemwide quality. The company carries out on site visits, third party audits and product evaluations to ensure that its supply chain partners are complying with its quality standards.

Maintaining  long term and solid partnerships with its third party supply chain partners enables the company to source good quality products at competitive prices.

Cheese comprises the largest food cost of the brand in the United States. The company currently sources all its US pizza cheese from a single supplier. It entered into an agreement with its US cheese supplier in 2017 to ensure an uninterrupted supply of cheese. As a part of this agreement, the company has agreed to a seven-year pricing schedule to buy all of the suppliers’ cheese.

The company also sources the majority of its meat toppings from a single supplier in the US. The contract between the company and its leading meat supplier will remain in place till June 2022. However, the company can also terminate these agreements in case of quality failures and other breaches.

Another leading third-party supplier for Domino’s is Coca-Cola. The company has renegotiated its existing agreement with Coca-Cola in 2019. As a part of this agreement, Coca-Cola will continue to remain the sole beverage supplier of the company till 2023. While the agreement expires in 2023, Coca-Cola can continue to remain its sole beverages supplier even after the term of the agreement is over. In the Indian market, however, the beverage partner of Domino’s is Pepsico.

Domino’s continues to evaluate its sourcing strategy to make improvements and implement the most optimal strategy that can support faster growth. It has alternative suppliers for the above-discussed products as well. However, the company will continue to maintain strong relationships with its existing suppliers, who supply good quality products at competitive prices. The company has not experienced any significant supply shortages or delays in the past. While the prices charged by Domino’s supply chain partners can fluctuate, the company has been able to pass on the increased costs to the stores in the past.

A few last words:

Winning in a hyper-competitive market environment requires companies to focus on supply chain management. Supply chain excellence can be the most critical step to winning even for the QSR brands. Industrywide all the leading brands whether in retail or in automobile segment, have maintained their leadership positions through supply chain excellence. Walmart is the most shining example of how retail brands can rule if they focus on supply chain management. What the best brands do is to make it a core part of their DNA.

Domino’s is a leading pizza brand and popular worldwide because of its product quality. However, maintain excellent quality could not be possible if Domino’s had not focused on managing its supply chain. Throughout the QSR sector, most brands have outsourced their supply chains. On the other hand, Domino’s in both its leading markets including the US and Canada has taken charge of supply chain management itself.

This has helped the company strengthen its position in both the main markets and build a superior sales network that benefits from a centrally managed supply chain network. The company owned stores as well as the franchised stores in both the US and Canada benefit from the supply chain. Apart from helping the company and its franchisees manage costs with efficiency, the supply chain has helped them maintain their popularity and demand.

Supply chain efficiency and excellence are critical to success in the QSR industry whether you are managing its yourself or outsourced your supply chain to external partners. In both the cases, QSR brands can rely on digital technology to grow the efficiency of their supply chains. Domino’s has a highly resilient supply chain, which was proved during the pandemic. Domino’s experienced excellent growth in sales and mostly through digital channels. However, its supply chain played a very critical role in helping the company survive the impact of the pandemic with ease.