po KFC sogood KFC UK: Don't Count Your Chickens Before They Hatch How a food service...

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po KFC sogood KFC UK: Don't Count Your Chickens Before They Hatch How a food service supply chain redesign caused KFC UK to run out of chicken In February 2018, KFC was frontpage news in the UK as the fried chicken chain restaurant that had run out of chicken. With more than 80% of its UK restaurants closed due to the chicken shortage, thousands of KFC customers turned to social media platforms to express their dismay upon finding that KFC was unable to deliver their signature chicken products. #KFCcrisis became trending on Twitter. Many customers even contacted local police stations to report the chicken shortage problem. What was the source of the supply problem? Did KFC's chicken crisis result from switching their logistics services supplier? Strategic Transformation at Yum! and KFC On 11 October 2016, at the annual investor conference in New York, Greg Creed, CEO of Yum! Brands announced a strategic three-year transformation plan to drive growth of its KFC Pizza Hut and Taco Bell brands: Our mission is to build the world's most loved, trusted and fastest-growing restaurant brands. The transformation [...] is a significant investment in our future [...]. The transformed Yum! Brands will become more efficient and capital light with an optimised capital structure, improved cash-flow and laser- like focus on our key strategies to drive same-store sales and new unit growth worldwide. Creed made it also clear that the company would improve its cost structure and efficiency. An important aspect of the transformation plan was to reduce the number of company-owned restaurants and to rely more on franchising. This would also help in cutting back the annual capital expenditure from 500 to 100 million USD. In 2016, Yum! achieved a total revenue of 6.4 billion USD, and a profit of 1.6 billion USD, a 28% improvement compared to 2015. In 2016, Yum! also spun off its China operations. KFC KFC, the fast food restaurant chain with chicken as its main dish, was founded by Harland Sanders (aka Colonel Sanders). The first restaurant opened in 1952 under the name Kentucky Fried Chicken in Salt Lake City, Utah. KFC's international expansion helped it to become one of the most recognisable quick service restaurant brands with over 20,000 outlets in more than 125 countries across the globe. In the 1990s, the name was changed to KFC, to create a healthier brand image. KFC's most popular dishes are still based on fried chicken, such as the original recipe buckets and fried chicken wings. Following YUM!'s strategic transformation plan, KFC launched a new marketing campaign in 2017, which emphasised quality and provenance of its chicken. In 2017, KFC had a brand value of 13.5 billion USD, making it the fourth largest fast food brand in the world after Subway, McDonald's, and Starbucks (Exhibit 1). About half of YUM!'s revenues come from KFC (Exhibit 2). KFC UK and Ireland KFC first arrived in the UK in Preston, Lancashire, in May 1965. The first American fast food restaurant in the country, and the first KFC franchisee outside the USA, was owned by Ray Allen. With 900 outlets in total, the United Kingdom (UK) and Ireland are KFC's largest European market and its fifth biggest market overall (accounting for about 5% of KFC's total global sales). By March 2017, 670 of the 900 restaurants were franchise-owned and 230 company-owned, and KFC announced it would sell another 180 restaurants to franchisees. In 2017, the KFC operation in the UK and Ireland (KFC UK, for short) enjoyed 'finger licking' good' profits (Exhibit 2). Chicken is key KFC's UK restaurants get most of their fresh chicken from two suppliers. The first, 2 Sisters Food Group, is the UK's largest food manufacturer with a turnover of 3.3 billion GBP, more than 40 factories, and 23,000 employees. It has businesses in poultry, meat, ready meals, and frozen food. 2 Sisters Food Group produces one-third of the poultry products eaten in the UK, processing 6 million birds a week. The other supplier, Moy Park, is based in Northern Ireland. It is one of Europe's leading poultry producers with a turnover of about 1.6 billion GBP, with 12 processing and manufacturing units in Northern Ireland, England, France, and the Netherlands. The company processes over 280 million birds per year from more than 800 poultry farms. From these two suppliers, chicken meat is transported directly to the distribution centres (DCs) of Bidvest Logistics (KFC's distribution partner), and from there to the 900 KFC outlets. Fresh chicken has short shelf life; after slaughtering, the chicken has to be used in the restaurant within 5 days. Because fresh chicken is prone to contamination from Campylobacter and Salmonella, it is subject to strict governmental regulations on the conditions of transportation, which must be done in refrigerated trucks. As a result, most other fast- food chains use frozen chicken, which is easier to handle and has a much longer shelf life (12 months).8 All of KFC's Original Recipe chicken on the bone is sourced from Red Tractor certified farms in the UK and Ireland. Because demand often outstrips British poultry supply, other menu items may include frozen chicken from trusted and established overseas suppliers (e.g. from Europe, Brazil, Thailand). All these suppliers must meet (or exceed) independently assured animal welfare and food safety standards, in line with KFC's commitment to the quality of its products as well as to animal welfare. KFC became the first of their peers to sign up to the 'Better Chicken Commitment'.10 Furthermore, KFC requires its suppliers to adhere to international labour standards and has abandoned zero-hour contracts for its own employees. Finally, the brand focuses on becoming a caring actor in the local community: creating the Food Donation Scheme to donate unsold chicken to charity; setting up the KFC Add Hope Foundation to improve education and skills development for vulnerable children. Supply chain management and strategic procurement at KFC UK and Ireland KFC's revised strategic goals included driving growth and improving customer experience. KFC's supply chain is crucial for delivering outstanding and fresh products to its customers. Therefore, the company placed distribution and logistics at the heart 3 of its new strategy to deliver improved services to customers while concurrently reducing environmental impact and costs. Early 2017, after analysing various options, KFC UK decided that implementing this strategy required redesigning their logistical operations, which had been outsourced to Bidvest Logistics. Bidvest logistics Bidvest Logistics has been is a leading logistical and supply chain solutions provider to the UK hospitality and restaurant sector since 1999. The company is part of the South African Bidvest Group, the largest global foodservice supplier outside of North America.11 For KFC, a whole range of products (e.g. food, packaging, uniforms, and sundries) from over 200 suppliers is delivered to three DCs (i.e. in Greater Manchester, Oxfordshire, and Hertfordshire). These DCs include huge warehouses, used by several food service businesses. 12 Services offered to clients include purchasing, warehousing, picking, and distributing food products. Bidvest Logistics is the leading partner for many of the UK's retail food and beverages brands (e.g. Burger King, Pizza Hut, KFC) and can deliver to any location within the UK efficiently and with high service quality. Approximately 1,350 employees work for Bidvest Logistics UK, supported by innovative digital technology. For example, in the warehouse they pick by voice and all clients place orders fully electronically. Furthermore, Bidvest uses advanced telematics to monitor their vehicles, and Slimstock software to make forecasts, execute demand planning, and optimise inventory. Redesigning the Food Service Supply Chain In the months after Yum! Brands CEO Greg Creed announced his new 'Recipe for Growth', KFC had been exploring different ways to improve supply chain performance and reduce costs. Although the supply chain system and processes seemed to be working well, KFC wanted to challenge the status quo, to be more (cost) efficient, benefit more from innovation and advances in (digital) technology, and at the same time have a more sustainable impact on the lives of their employees, their customers, and on the environment. Managers and professionals from several areas of the company and the franchise network were involved in these discussions.13 In June 2017, KFC UK decided to end its relationship with Bidvest Logistics. The distribution contract was to expire in February 201814, and KFC decided to put out a tender in the market and negotiate a better offering.15 After several months of tender submissions, supplier pitches, and reviews by a cross- functional sourcing team, KFC decided to redesign its food service supply chain by setting up a three-way partnership with German specialist food service logistics provider Quick Service Logistics (QSL) and global logistics services provider DHL. QSL and DHL had submitted a joint proposal in which they promised a new benchmark for delivering fresh products to KFC in a more sustainable way. QSL had long been operating a similar model in various (continental) European countries for customers like Burger King and KFC. QSL would be responsible for operational procurement, and as such form the interface between the KFC restaurants and the suppliers of the goods (e.g. chicken, salads, packaging). It would receive restaurant orders and translate these 4 into picking-lists to be used in the warehouse. This brand new 180,000 square-foot DHL DC was located in Rugby, in the 'Golden Triangle' of UK warehousing activity and surrounded by various motorways. Products would be loaded by DHL into the frozen, chilled, and ambient compartments of trucks exclusively serving KFC restaurants. Finally, QSL would invoice each restaurant.16 One of the main attractions of the DHL/QSL proposal was that the actual distribution service (not the warehousing) would be provided solely for KFC. A non-shared service was very attractive for KFC as it would enable greater process consistency and higher efficiency. Additional commitments were made by DHL/QSL regarding quality, service innovation, and sustainability (e.g. zero net emissions from the logistics activities over the period of the contract). 17 Locations in Northern Ireland and the Republic of Ireland were not going to be affected due to different logistical arrangements. DHL and QSL DHL is a large global delivery company active in 220 countries, with a revenue of 60 billion EUR and a profit of 2.8 billion EUR (2017). It consists of five divisions: DHL Express, DHL Parcel & E-commerce, DHL Global Forwarding, DHL Freight, and DHL Supply Chain. This latter line of business was involved in the KFC partnership. It provides warehousing, transport, and value-added supply chain management services, mainly for the automotive, consumer, energy & chemicals, engineering & manufacturing, life science & healthcare, retail and technology sectors. Although DHL is an expert in physical distribution, it had no experience in the food service industry. QSL is a German food logistics group, with a consolidated turnover of over 600 million USD, providing tailored, complete supply chain solutions to its customers.18 QSL is involved in buying the products, storing and picking them in its temperature- controlled warehouses, and distributing them to the customer. QSL's customers are often involved in the strategic decision of determining at what price, and from which supplier goods are bought, while the operational processes are performed by QSL. QSL claims that one of its key success factors is its ERP solution, called CSB, which is completely geared to the quick service restaurant business concept. The Transition KFC's decision to switch its deliveries from Bidvest Logistics to DHL was followed by nine months of planning the transition and defining mutual responsibilities and commercial terms. The scale of the undertaking was huge, and complex at the same time. KFC UK consumes 19 million cases of over 200 different product lines a year. In addition, it insists on sourcing its chicken on the bone exclusively from British and Irish farms and having it delivered fresh into a network of 900 restaurants every day.19 It is unusual to use fresh rather than frozen chicken because there is very little margin for error. Raw chicken storage and transportation is heavily regulated, and KFC imposes even tougher standards than mandated by UK law. KFC placed confidence in the fact that DHL was a large global logistics company with a strong track record, and that QSL was familiar with KFC. 5 In a DHL press release (November 2017) KFC's move was referred to as 'ground- breaking'.20 The director Procurement and Supply Chain Management for KFC UK at the time, explained: To date there has been little variation in foodservice logistics, but we have specifically chosen DHL and QSL for their reputation for innovation in logistics across other industries. The Managing Director of Retail, DHL Supply Chain UK & Ireland, noted: We're delighted to be delivering a truly unique proposition for KFC, geared to the specific needs of the business. We intend to re-write the rule book and create a stock management, distribution and reverse logistics model based on best practice from a range of sectors including foodservice logistics. This model will support KFC in its ambition to be market-leading in all that it does, while improving service levels to its restaurants and customers. The Managing Director of QSL added: For our customers we are genuine partners because we take their needs to heart and make them our own. We are very proud that KFC has decided to use our tailored QSR solutions for its biggest market in Europe. With DHL, we are confident of establishing a new benchmark for quick service restaurants in the UK. DHL's main responsibility was to manage the physical warehouse and distribution services, where they aimed at increasing quality and customer service performance through innovation. Thus, the focus was on optimising delivery schedules to provide a faster turnaround of orders, on reaching net zero emissions over the life of the contract, and on greater integrity of food during transportation to enable the delivery of even fresher products to KFC UK restaurants. DHL had built a new distribution centre, which had more than enough capacity to take on the contract of KFC UK. Using a single DC in the 'Golden Rectangle' between Milton Keynes and Rugby is a well-established means of getting products to a network of outlets anywhere in the UK. A delivery truck loaded by 7 pm in the evening could deliver supplies anywhere in the UK by the following morning. Big-name supermarkets had already been working this way for many years.21 The large DHL DC in Rugby was not just built for KFC. DHL had an aggressive strategy to fill the DC with other fast food products for other customers as well. In the distribution industry, you cannot run food distribution with a single product and/or customer and make a profit.22 A few months before Valentine's Day 2018, the planned changeover date, a pilot test was conducted. KFC's sister brand, Taco Bell (with 23 restaurants in the UK), was selected by the project team to conduct the trial and test the new DHL/QSL approach. Until then, Taco Bell had been working with Bidvest Logistics as well. There were some concerns during the pilot but as issues arose, the project team flagged and discussed them, and agreed on a fix or workaround. 23 Now that the agreement was in place and the pilot testing done, the only thing left was the actual changeover from Bidvest Logistics to DHL and QSL. Initial hiccups would be inevitable, but all parties were confident that all would be well. 6 Disaster Strikes On Valentine's Day (Wednesday, 14 February 2018) KFC switched its delivery operations from Bidvest Logistics to DHL and QSL. Right from the start, deliveries were either slow or incomplete, eventually resulting in a major disruption in the supply chain. On Friday, February 16, KFC was forced to temporarily close most of its UK outlets. Chicken on the bone can be stored in the chillers for a maximum of five days from delivery, although it is generally used within 48 hours. Bidvest's last deliveries to restaurants were made on Monday 12 and Tuesday 13 February. Three days after the changeover, the restaurants were fast running out of chicken. Without being able to prepare and cook the Original Recipe chicken on the bone, the restaurants were not permitted to open. 24 A total of 562 KFC outlets remained shut following a weekend of disruption that peaked on Sunday night (18 February) with 646 outlet closures. 25 Many remaining outlets were offering a limited menu with restricted opening hours. On 17 February, KFC's Marketing Department tried lightening the mood, with a variation on an old joke: Why did the chicken cross the road? in the following tweet: The chicken crossed the road, just not to our restaurants... We've brought a new delivery partner on board, but they've had a couple of teething problems - getting fresh chicken out to 900 restaurants across the country is pretty complex....We won't compromise on quality, so 'no deliveries' has meant some of our restaurants are closed and others are operating a limited menu, or shortened hours. This tweet did not go down well. After the disastrous weekend, DHL admitted on Monday (19 February) that a number of deliveries had been incomplete or delayed because of operational issues 26, that they were working on rectifying this high priority situation with both KFC and QSL, and they apologised for any inconvenience this may have caused.27 DHL apologised again on Tuesday (20 February) and issued the following statement: The reasons for this unforeseen interruption of this complex service are being worked on with a goal to return to normal service levels as soon as possible. With the help of our partner QSL, we are committed to step by step improvements to allow KFC to reopen its restaurants over the coming days. Whilst we are not the only party responsible for the supply chain to KFC, we do apologise for the inconvenience and disappointment caused to KFC and their customers by this incident. A warehouse in gridlock Deliveries from KFC's chicken suppliers (i.e. 2 Sisters Food Group and Moy Park) were arriving daily at the depot in large trucks. Other deliveries arrived as well, ranging from fresh salad to packaging. With some 40 trucks arriving daily, and 40 pallets to be offloaded from each, the warehousing processes should function flawlessly. From 14 February onwards, however, things were not going smoothly at the Rugby depot, as later described by the KFC European Legal Director: 7 Available space was disappearing quickly under hundreds of pallets and crates left alone for 'just a minute', because the newly hired DHL operators did not know where to put the goods. The routes from unloading bays to chiller and freezer were impassable, finding the right products was getting more difficult. Many trucks were arriving fully loaded with fresh products, but neither the space nor the operators were available to enable safe and efficient unloading. Drivers were waiting for hours. Because they could not head out to the restaurants directly, truck drivers were forced to rest and sleep first before they could drive again.28 Apparently, the new ordering system of DHL, developed together with QSL, had collapsed. It seemed that DHL and QSL had failed to properly match up data from KFC's ordering process to its new distribution system. KFC restaurants were accustomed to putting their replenishment orders into the system and receiving delivery within 24 hours, but DHL and QSL were unable to provide this just-in-time ordering.29 The ordering system collapsed, resulting in a malfunction of the on-board computers of drivers. This malfunctioning of the IT systems upset DHL's entire delivery schedule, since it was not clear which chicken had to go where. Furthermore, many trucks got stuck in traffic because of two major highway accidents around Rugby, which only made the disaster bigger. DHL's DC in Rugby was in a state of complete chaos.30 One driver claimed he had to destroy a full load of fresh chicken because his vehicle's temperature had been set wrongly at the understaffed DHL depot. Another driver was forced to wait for 36 hours because he had fries, but not chicken and noted: "This place isn't big enough for the number of trucks and gates going out." It also became clear that DHL did not yet have the required authorisations needed to operate as a cold storage facility and was struggling to get their act together. 31 As one driver described it, there were still toilets without handwash and sinks without soap. 32 Fighting the crisis The chicken delivery problem was so severe that KFC could not say when operations would be back to normal. In the meantime, it was working 'flat out' to resolve the crisis, as described by an insider: One of the first steps KFC took was to create a crisis hub at their HQ to coordinate all initiatives to solve the crisis and manage communication towards restaurants, customers, employees, and suppliers. Next, KFC sent about 45 of their most experienced operators to the DHL DC in Rugby. The KFC operators worked day and night together with DHL-QSL teams on site to move and unpack thousands of cases to solve the crisis. In two days, 20,000 square feet concrete flooring reappeared. After a few days, all stock was finally stored where it should be, and all waste removed. Further, instead of bespoke deliveries, a core 'rescue pack' was devised that could be delivered as a standard package to each restaurant. It would enable KFC to serve a limited core menu. This new strategy removed the complexity of the bespoke orders, which made operations in the depot significantly easier. Also, with DHL's vehicle tracking systems not yet up and running, the crisis team at KFC's head office manually tracked all DHL trucks as they left the depot and arrived at each restaurant, calling ahead to let the next restaurant know 8 when their delivery could be expected. The walls were papered with charts, lists, and maps. New drivers were drafted in from other parts of DHL and via agencies. However, the new drivers were unfamiliar with the routes and the vehicles and struggled with the complexities of the orders being delivered.33 On 20 February, KFC brought some hope to the hearts of their customers by issuing a press release stating: "Each day more deliveries are being made, however, we expect the disruption to some restaurants to continue over the remainder of the week, meaning some will be closed and others operating with a reduced menu or shortened hours." Still, the reduced menu upset a lot of customers since the fries, coleslaw - and particularly the popular gravy - were not available in many restaurants. KFC sought a new home for non-perishable stock consisting of non-food items such as mops, brushes, and gloves. This would free up space at the DHL depot that needed filling with fresh chicken. KFC contacted Stowga, a warehousing startup4. A month- long rolling contract was drawn up and signed, with operations at the first warehouse location, near Bristol, commencing from 8 am on Friday, 23 February. 35 Stowga has since provided eight different warehouse spaces to KFC UK.36 A more complicated issue was that DHL's huge 50-foot trucks were simply taking too long to go to each of the restaurants on their routes: By the time they returned to the depot, the backlog of stock awaiting them was already mounting up, and the schedules of planned deliveries were slipping hours behind, leaving some restaurants without stock for yet another day. The supply of these large trucks equipped to take chilled, frozen and ambient products in the format necessary to meet KFC's needs was finite. One of KFC's directors suggested dispatching the 50-foot trucks to a cross-dock, where smaller vans would take the load and deliver it on to the restaurants. This would allow the trucks to return more swiftly to the Rugby depot to be loaded and dispatched to another cross-dock. The supply of the smaller vans was easier to come by than the 50-foot trucks. Now all they needed were the cross-docks. Within 24 hours, contracts had been exchanged for the short- term lease of two such premises, with offers on the table for four more. Meanwhile, KFC's IT team developed a new vehicle tracking system to track vehicles, where the original service promised by DHL-QSL had failed, to keep restaurants up to speed with details of deliveries that would be heading their way.37 Early engagement of KFC with suppliers meant that potential solutions could be quickly explored. Some suppliers were informing KFC that their drivers were returning with their deliveries still on board, having been unable to get to the DC to unload. Where possible, suppliers would deliver directly to the KFC restaurants. Other suppliers withheld deliveries, at KFC's request, until the system was stable again. The supplier relationships that KFC had developed over the years were important in ensuring that everyone collaborated to get the restaurants serving again; other issues could wait.38 9 Some ten days into the crisis, on 23 February, KFC published a full-page apology ad in the Sun and Metro newspapers featuring an empty KFC bucket. Instead of having the normal KFC logo, the bucket said "FCK". The accompanying text read: A chicken restaurant without any chicken. It's not ideal. Huge apologies to our customers, especially those who travelled out of their way to find we were closed. And endless thanks to our KFC team members and our franchise partners for working tirelessly to improve the situation. It's been a hell of a week, but we're making progress, and every day more and more fresh chicken is being delivered to our restaurants. Thank you for bearing with us. However, KFC had to admit that it still did not know the root cause of the fiasco, while acknowledging that despite immediate cancellation of orders, an unspecified volume of chicken had been scrapped.39 Finding a Structural Solution After more than a week of chicken shortages and the concomitant loss of big money and customer loyalty with each passing day, KFC faced the thorny choice of hoping the deal with DHL and QSL would eventually work out, or 'chickening out' and going back to its old supplier, or finding another solution. The service being delivered by DHL/SQL was clearly not in line with the service levels agreed in the contract. Therefore, senior YUM! and KFC leaders (e.g. Board members (CEO, CFO), Legal and Global Supply chain leaders) gathered in a London hotel to decide how to move forward, with DHL and QSL teams available on demand for meetings. Everybody worked around the clock to find a way forward for the relationship and a sensible resolution to the losses caused by the disruption. Reaching a swift solution was imperative, and in the best interests of all parties.40 In the end, to get their restaurants back to normal as quickly as possible, KFC decided to move more than one third of the total value of the DHL/QSL contract back to its previous logistic services provider Bidvest Logistics. 41 The decision was taken, in conjunction with DHL and QSL, to sign a new long-term agreement to revert the distribution contract for approximately 350 stores in the northern part of the UK back to Bidvest Logistics. Bidvest Logistics Director Paul Whyte said: We are delighted to welcome KFC back to Bidvest Logistics. As the UK's leading food service logistics specialist, we understand the complexities of delivering fresh chicken. KFC is a valued customer and we will provide them with a seamless return to our network. 42 Whyte further explained that although KFC had previously been one of Bidvest's biggest loss-making customers, they had now been able to negotiate better prices and collaborate with KFC on more profitable terms. All these initiatives did not immediately solve the chicken crisis, but by early March, the situation had improved slightly. Only 3% of KFC's restaurants remained closed, although some of the open affiliates could still only offer a limited menu. Customers 10 were still complaining on social media about missing hash browns, gravy, and even cardboard food containers at KFC stores. 43 This was partly because Bidvest Logistics also needed some time to restart their operations for KFC. They were fully operational by 26 March.44 KFC continued to operate with DHL and QSL for the remainder of its 500 restaurants: We've been working hard to resolve the present situation with QSL and DHL. This decision will ease pressure at DHL's Rugby depot, to help get our restaurants back to normal as quickly as possible. As it stands, over 97% of our 900 restaurants are now open for business, although there will be some limited menus before we are back to business as usual. DHL acknowledged KFC's move and said that, together with its partners, DHL would remain fully committed to delivering excellent service to KFC across the UK.45 KFC UK & Ireland's Supply Chain Director left KFC shortly after the chicken supply disruption at the end of April 2018. In June, his successor commented: We are delighted with how Bidvest Logistics seamlessly transitioned our Northern supply chain operations into their shared user network. From day one our deliveries have arrived on time in full and Bidvest Logistics continue to provide an excellent service to KFC UK & Ireland.46 The Aftermath It was estimated that the supply chain disruption had resulted in a financial loss for KFC UK of about 1 million GBP a day, while at the same time brand reputation was seriously damaged. 47 David Gibbs (CFO of Yum!) said the company had reached a settlement with the parties that were responsible, to help minimise cost and get everybody back to a healthy situation. The financial impact appeared to be marginal. According to Gibbs, the 2% impact in the first quarter dropped to a 0.5% estimated impact on a full-year basis. A diligent marketing strategy also played a strong role in minimising the impact of the supply disruption. Yum! Brands CEO Greg Creed stated: "We ran, I thought, a rather clever ad when we were in the middle of the crisis but, obviously, we stopped advertising while we didn't have supply." 48 On 13 March 2019, KFC UK confirmed that Best Food Logistics (the new name of Bidvest Logistics) would also take over the southern UK part of DHL's contract. DHL did not tender for the southern portion of the distribution contract, that reportedly now also involves Taco Bell restaurants. 49 KFC's decision to terminate its partnership with DHL and QSL is understood to have affected as many as 100 staff at DHL Supply Chain's Rugby DC.50 DHL stated that it was ending its relationship with KFC for strategic reasons. A DHL spokesperson said: In accordance with its contractual arrangements, DHL Supply Chain has advised that it is ending its current relationship with KFC, with the business transitioning to the new provider over a defined period to ensure a seamless service to customers. 11 Both DHL and KFC thanked staff for their understanding and stressed that the decision had been made entirely for strategic reasons and in no way reflected the performance of the Rugby DC operation which had achieved excellent results in recent months: DHL remains fully committed to Rugby as a strategic location and will make every effort in the coming months to secure a new customer for the warehouse. Affected staff have been informed of the situation and will shortly enter into consultation to discuss their options, including transferring to the new provider or redeploying to other DHL operations as appropriate. However, not only strategic reasons may have played a role for DHL. According to some sources, DHL decided to pull out when Best Food Logistics said it could undercut their price, delivering a case of chicken for 22 GBP compared to 24.50 GBP. Some experts challenged Best Food's plans for fulfilling the contract. 51 One source even said: "KFC fans should rightly be worried. More disruption awaits. "52 12 Exhibit 1: The World's Largest Fast Food Restaurant Chains Rank Name Number of Locations 1 Subway 42,998 2 McDonald's 37,200 3 Starbucks 30,000 4 KFC 20,404 5 Burger King 16,859 Source: WordAtlas.com, accessed July 2019. Exhibit 2: Revenues and Profits Yum! and KFC 2018 2017 Yum! system revenues 49.2 B USD 46.7 B USD 2016 44.4 B USD (KFC, Pizza Hut, Taco Bell) KFC worldwide system 26.2 B USD 24.5 B USD 23.0 B USD revenues KFC UK + Ireland Not available 1.2 B GBP Not available system revenues Yum! company revenues 5.7 B USD 5.9 B USD 6.4 B USD Yum! company net income 1.5 B USD 1.3 B USD 1.6 B USD KFC company revenues 2.6 B USD 3.1 B USD 3.2 B USD KFC UK + Ireland company Not available 580.8 M GBP* 480 M GBP revenues KFC UK + Ireland net Not available 27.8 M GBP* 25.3 M GBP income Source: Annual reports Yum! Brands, macrotrends.net. System revenues: includes the revenues of the respective franchised restaurants. *: estimates. 13 po KFC sogood KFC UK: Don't Count Your Chickens Before They Hatch How a food service supply chain redesign caused KFC UK to run out of chicken In February 2018, KFC was frontpage news in the UK as the fried chicken chain restaurant that had run out of chicken. With more than 80% of its UK restaurants closed due to the chicken shortage, thousands of KFC customers turned to social media platforms to express their dismay upon finding that KFC was unable to deliver their signature chicken products. #KFCcrisis became trending on Twitter. Many customers even contacted local police stations to report the chicken shortage problem. What was the source of the supply problem? Did KFC's chicken crisis result from switching their logistics services supplier? Strategic Transformation at Yum! and KFC On 11 October 2016, at the annual investor conference in New York, Greg Creed, CEO of Yum! Brands announced a strategic three-year transformation plan to drive growth of its KFC Pizza Hut and Taco Bell brands: Our mission is to build the world's most loved, trusted and fastest-growing restaurant brands. The transformation [...] is a significant investment in our future [...]. The transformed Yum! Brands will become more efficient and capital light with an optimised capital structure, improved cash-flow and laser- like focus on our key strategies to drive same-store sales and new unit growth worldwide. Creed made it also clear that the company would improve its cost structure and efficiency. An important aspect of the transformation plan was to reduce the number of company-owned restaurants and to rely more on franchising. This would also help in cutting back the annual capital expenditure from 500 to 100 million USD. In 2016, Yum! achieved a total revenue of 6.4 billion USD, and a profit of 1.6 billion USD, a 28% improvement compared to 2015. In 2016, Yum! also spun off its China operations. KFC KFC, the fast food restaurant chain with chicken as its main dish, was founded by Harland Sanders (aka Colonel Sanders). The first restaurant opened in 1952 under the name Kentucky Fried Chicken in Salt Lake City, Utah. KFC's international expansion helped it to become one of the most recognisable quick service restaurant brands with over 20,000 outlets in more than 125 countries across the globe. In the 1990s, the name was changed to KFC, to create a healthier brand image. KFC's most popular dishes are still based on fried chicken, such as the original recipe buckets and fried chicken wings. Following YUM!'s strategic transformation plan, KFC launched a new marketing campaign in 2017, which emphasised quality and provenance of its chicken. In 2017, KFC had a brand value of 13.5 billion USD, making it the fourth largest fast food brand in the world after Subway, McDonald's, and Starbucks (Exhibit 1). About half of YUM!'s revenues come from KFC (Exhibit 2). KFC UK and Ireland KFC first arrived in the UK in Preston, Lancashire, in May 1965. The first American fast food restaurant in the country, and the first KFC franchisee outside the USA, was owned by Ray Allen. With 900 outlets in total, the United Kingdom (UK) and Ireland are KFC's largest European market and its fifth biggest market overall (accounting for about 5% of KFC's total global sales). By March 2017, 670 of the 900 restaurants were franchise-owned and 230 company-owned, and KFC announced it would sell another 180 restaurants to franchisees. In 2017, the KFC operation in the UK and Ireland (KFC UK, for short) enjoyed 'finger licking' good' profits (Exhibit 2). Chicken is key KFC's UK restaurants get most of their fresh chicken from two suppliers. The first, 2 Sisters Food Group, is the UK's largest food manufacturer with a turnover of 3.3 billion GBP, more than 40 factories, and 23,000 employees. It has businesses in poultry, meat, ready meals, and frozen food. 2 Sisters Food Group produces one-third of the poultry products eaten in the UK, processing 6 million birds a week. The other supplier, Moy Park, is based in Northern Ireland. It is one of Europe's leading poultry producers with a turnover of about 1.6 billion GBP, with 12 processing and manufacturing units in Northern Ireland, England, France, and the Netherlands. The company processes over 280 million birds per year from more than 800 poultry farms. From these two suppliers, chicken meat is transported directly to the distribution centres (DCs) of Bidvest Logistics (KFC's distribution partner), and from there to the 900 KFC outlets. Fresh chicken has short shelf life; after slaughtering, the chicken has to be used in the restaurant within 5 days. Because fresh chicken is prone to contamination from Campylobacter and Salmonella, it is subject to strict governmental regulations on the conditions of transportation, which must be done in refrigerated trucks. As a result, most other fast- food chains use frozen chicken, which is easier to handle and has a much longer shelf life (12 months).8 All of KFC's Original Recipe chicken on the bone is sourced from Red Tractor certified farms in the UK and Ireland. Because demand often outstrips British poultry supply, other menu items may include frozen chicken from trusted and established overseas suppliers (e.g. from Europe, Brazil, Thailand). All these suppliers must meet (or exceed) independently assured animal welfare and food safety standards, in line with KFC's commitment to the quality of its products as well as to animal welfare. KFC became the first of their peers to sign up to the 'Better Chicken Commitment'.10 Furthermore, KFC requires its suppliers to adhere to international labour standards and has abandoned zero-hour contracts for its own employees. Finally, the brand focuses on becoming a caring actor in the local community: creating the Food Donation Scheme to donate unsold chicken to charity; setting up the KFC Add Hope Foundation to improve education and skills development for vulnerable children. Supply chain management and strategic procurement at KFC UK and Ireland KFC's revised strategic goals included driving growth and improving customer experience. KFC's supply chain is crucial for delivering outstanding and fresh products to its customers. Therefore, the company placed distribution and logistics at the heart 3 of its new strategy to deliver improved services to customers while concurrently reducing environmental impact and costs. Early 2017, after analysing various options, KFC UK decided that implementing this strategy required redesigning their logistical operations, which had been outsourced to Bidvest Logistics. Bidvest logistics Bidvest Logistics has been is a leading logistical and supply chain solutions provider to the UK hospitality and restaurant sector since 1999. The company is part of the South African Bidvest Group, the largest global foodservice supplier outside of North America.11 For KFC, a whole range of products (e.g. food, packaging, uniforms, and sundries) from over 200 suppliers is delivered to three DCs (i.e. in Greater Manchester, Oxfordshire, and Hertfordshire). These DCs include huge warehouses, used by several food service businesses. 12 Services offered to clients include purchasing, warehousing, picking, and distributing food products. Bidvest Logistics is the leading partner for many of the UK's retail food and beverages brands (e.g. Burger King, Pizza Hut, KFC) and can deliver to any location within the UK efficiently and with high service quality. Approximately 1,350 employees work for Bidvest Logistics UK, supported by innovative digital technology. For example, in the warehouse they pick by voice and all clients place orders fully electronically. Furthermore, Bidvest uses advanced telematics to monitor their vehicles, and Slimstock software to make forecasts, execute demand planning, and optimise inventory. Redesigning the Food Service Supply Chain In the months after Yum! Brands CEO Greg Creed announced his new 'Recipe for Growth', KFC had been exploring different ways to improve supply chain performance and reduce costs. Although the supply chain system and processes seemed to be working well, KFC wanted to challenge the status quo, to be more (cost) efficient, benefit more from innovation and advances in (digital) technology, and at the same time have a more sustainable impact on the lives of their employees, their customers, and on the environment. Managers and professionals from several areas of the company and the franchise network were involved in these discussions.13 In June 2017, KFC UK decided to end its relationship with Bidvest Logistics. The distribution contract was to expire in February 201814, and KFC decided to put out a tender in the market and negotiate a better offering.15 After several months of tender submissions, supplier pitches, and reviews by a cross- functional sourcing team, KFC decided to redesign its food service supply chain by setting up a three-way partnership with German specialist food service logistics provider Quick Service Logistics (QSL) and global logistics services provider DHL. QSL and DHL had submitted a joint proposal in which they promised a new benchmark for delivering fresh products to KFC in a more sustainable way. QSL had long been operating a similar model in various (continental) European countries for customers like Burger King and KFC. QSL would be responsible for operational procurement, and as such form the interface between the KFC restaurants and the suppliers of the goods (e.g. chicken, salads, packaging). It would receive restaurant orders and translate these 4 into picking-lists to be used in the warehouse. This brand new 180,000 square-foot DHL DC was located in Rugby, in the 'Golden Triangle' of UK warehousing activity and surrounded by various motorways. Products would be loaded by DHL into the frozen, chilled, and ambient compartments of trucks exclusively serving KFC restaurants. Finally, QSL would invoice each restaurant.16 One of the main attractions of the DHL/QSL proposal was that the actual distribution service (not the warehousing) would be provided solely for KFC. A non-shared service was very attractive for KFC as it would enable greater process consistency and higher efficiency. Additional commitments were made by DHL/QSL regarding quality, service innovation, and sustainability (e.g. zero net emissions from the logistics activities over the period of the contract). 17 Locations in Northern Ireland and the Republic of Ireland were not going to be affected due to different logistical arrangements. DHL and QSL DHL is a large global delivery company active in 220 countries, with a revenue of 60 billion EUR and a profit of 2.8 billion EUR (2017). It consists of five divisions: DHL Express, DHL Parcel & E-commerce, DHL Global Forwarding, DHL Freight, and DHL Supply Chain. This latter line of business was involved in the KFC partnership. It provides warehousing, transport, and value-added supply chain management services, mainly for the automotive, consumer, energy & chemicals, engineering & manufacturing, life science & healthcare, retail and technology sectors. Although DHL is an expert in physical distribution, it had no experience in the food service industry. QSL is a German food logistics group, with a consolidated turnover of over 600 million USD, providing tailored, complete supply chain solutions to its customers.18 QSL is involved in buying the products, storing and picking them in its temperature- controlled warehouses, and distributing them to the customer. QSL's customers are often involved in the strategic decision of determining at what price, and from which supplier goods are bought, while the operational processes are performed by QSL. QSL claims that one of its key success factors is its ERP solution, called CSB, which is completely geared to the quick service restaurant business concept. The Transition KFC's decision to switch its deliveries from Bidvest Logistics to DHL was followed by nine months of planning the transition and defining mutual responsibilities and commercial terms. The scale of the undertaking was huge, and complex at the same time. KFC UK consumes 19 million cases of over 200 different product lines a year. In addition, it insists on sourcing its chicken on the bone exclusively from British and Irish farms and having it delivered fresh into a network of 900 restaurants every day.19 It is unusual to use fresh rather than frozen chicken because there is very little margin for error. Raw chicken storage and transportation is heavily regulated, and KFC imposes even tougher standards than mandated by UK law. KFC placed confidence in the fact that DHL was a large global logistics company with a strong track record, and that QSL was familiar with KFC. 5 In a DHL press release (November 2017) KFC's move was referred to as 'ground- breaking'.20 The director Procurement and Supply Chain Management for KFC UK at the time, explained: To date there has been little variation in foodservice logistics, but we have specifically chosen DHL and QSL for their reputation for innovation in logistics across other industries. The Managing Director of Retail, DHL Supply Chain UK & Ireland, noted: We're delighted to be delivering a truly unique proposition for KFC, geared to the specific needs of the business. We intend to re-write the rule book and create a stock management, distribution and reverse logistics model based on best practice from a range of sectors including foodservice logistics. This model will support KFC in its ambition to be market-leading in all that it does, while improving service levels to its restaurants and customers. The Managing Director of QSL added: For our customers we are genuine partners because we take their needs to heart and make them our own. We are very proud that KFC has decided to use our tailored QSR solutions for its biggest market in Europe. With DHL, we are confident of establishing a new benchmark for quick service restaurants in the UK. DHL's main responsibility was to manage the physical warehouse and distribution services, where they aimed at increasing quality and customer service performance through innovation. Thus, the focus was on optimising delivery schedules to provide a faster turnaround of orders, on reaching net zero emissions over the life of the contract, and on greater integrity of food during transportation to enable the delivery of even fresher products to KFC UK restaurants. DHL had built a new distribution centre, which had more than enough capacity to take on the contract of KFC UK. Using a single DC in the 'Golden Rectangle' between Milton Keynes and Rugby is a well-established means of getting products to a network of outlets anywhere in the UK. A delivery truck loaded by 7 pm in the evening could deliver supplies anywhere in the UK by the following morning. Big-name supermarkets had already been working this way for many years.21 The large DHL DC in Rugby was not just built for KFC. DHL had an aggressive strategy to fill the DC with other fast food products for other customers as well. In the distribution industry, you cannot run food distribution with a single product and/or customer and make a profit.22 A few months before Valentine's Day 2018, the planned changeover date, a pilot test was conducted. KFC's sister brand, Taco Bell (with 23 restaurants in the UK), was selected by the project team to conduct the trial and test the new DHL/QSL approach. Until then, Taco Bell had been working with Bidvest Logistics as well. There were some concerns during the pilot but as issues arose, the project team flagged and discussed them, and agreed on a fix or workaround. 23 Now that the agreement was in place and the pilot testing done, the only thing left was the actual changeover from Bidvest Logistics to DHL and QSL. Initial hiccups would be inevitable, but all parties were confident that all would be well. 6 Disaster Strikes On Valentine's Day (Wednesday, 14 February 2018) KFC switched its delivery operations from Bidvest Logistics to DHL and QSL. Right from the start, deliveries were either slow or incomplete, eventually resulting in a major disruption in the supply chain. On Friday, February 16, KFC was forced to temporarily close most of its UK outlets. Chicken on the bone can be stored in the chillers for a maximum of five days from delivery, although it is generally used within 48 hours. Bidvest's last deliveries to restaurants were made on Monday 12 and Tuesday 13 February. Three days after the changeover, the restaurants were fast running out of chicken. Without being able to prepare and cook the Original Recipe chicken on the bone, the restaurants were not permitted to open. 24 A total of 562 KFC outlets remained shut following a weekend of disruption that peaked on Sunday night (18 February) with 646 outlet closures. 25 Many remaining outlets were offering a limited menu with restricted opening hours. On 17 February, KFC's Marketing Department tried lightening the mood, with a variation on an old joke: Why did the chicken cross the road? in the following tweet: The chicken crossed the road, just not to our restaurants... We've brought a new delivery partner on board, but they've had a couple of teething problems - getting fresh chicken out to 900 restaurants across the country is pretty complex....We won't compromise on quality, so 'no deliveries' has meant some of our restaurants are closed and others are operating a limited menu, or shortened hours. This tweet did not go down well. After the disastrous weekend, DHL admitted on Monday (19 February) that a number of deliveries had been incomplete or delayed because of operational issues 26, that they were working on rectifying this high priority situation with both KFC and QSL, and they apologised for any inconvenience this may have caused.27 DHL apologised again on Tuesday (20 February) and issued the following statement: The reasons for this unforeseen interruption of this complex service are being worked on with a goal to return to normal service levels as soon as possible. With the help of our partner QSL, we are committed to step by step improvements to allow KFC to reopen its restaurants over the coming days. Whilst we are not the only party responsible for the supply chain to KFC, we do apologise for the inconvenience and disappointment caused to KFC and their customers by this incident. A warehouse in gridlock Deliveries from KFC's chicken suppliers (i.e. 2 Sisters Food Group and Moy Park) were arriving daily at the depot in large trucks. Other deliveries arrived as well, ranging from fresh salad to packaging. With some 40 trucks arriving daily, and 40 pallets to be offloaded from each, the warehousing processes should function flawlessly. From 14 February onwards, however, things were not going smoothly at the Rugby depot, as later described by the KFC European Legal Director: 7 Available space was disappearing quickly under hundreds of pallets and crates left alone for 'just a minute', because the newly hired DHL operators did not know where to put the goods. The routes from unloading bays to chiller and freezer were impassable, finding the right products was getting more difficult. Many trucks were arriving fully loaded with fresh products, but neither the space nor the operators were available to enable safe and efficient unloading. Drivers were waiting for hours. Because they could not head out to the restaurants directly, truck drivers were forced to rest and sleep first before they could drive again.28 Apparently, the new ordering system of DHL, developed together with QSL, had collapsed. It seemed that DHL and QSL had failed to properly match up data from KFC's ordering process to its new distribution system. KFC restaurants were accustomed to putting their replenishment orders into the system and receiving delivery within 24 hours, but DHL and QSL were unable to provide this just-in-time ordering.29 The ordering system collapsed, resulting in a malfunction of the on-board computers of drivers. This malfunctioning of the IT systems upset DHL's entire delivery schedule, since it was not clear which chicken had to go where. Furthermore, many trucks got stuck in traffic because of two major highway accidents around Rugby, which only made the disaster bigger. DHL's DC in Rugby was in a state of complete chaos.30 One driver claimed he had to destroy a full load of fresh chicken because his vehicle's temperature had been set wrongly at the understaffed DHL depot. Another driver was forced to wait for 36 hours because he had fries, but not chicken and noted: "This place isn't big enough for the number of trucks and gates going out." It also became clear that DHL did not yet have the required authorisations needed to operate as a cold storage facility and was struggling to get their act together. 31 As one driver described it, there were still toilets without handwash and sinks without soap. 32 Fighting the crisis The chicken delivery problem was so severe that KFC could not say when operations would be back to normal. In the meantime, it was working 'flat out' to resolve the crisis, as described by an insider: One of the first steps KFC took was to create a crisis hub at their HQ to coordinate all initiatives to solve the crisis and manage communication towards restaurants, customers, employees, and suppliers. Next, KFC sent about 45 of their most experienced operators to the DHL DC in Rugby. The KFC operators worked day and night together with DHL-QSL teams on site to move and unpack thousands of cases to solve the crisis. In two days, 20,000 square feet concrete flooring reappeared. After a few days, all stock was finally stored where it should be, and all waste removed. Further, instead of bespoke deliveries, a core 'rescue pack' was devised that could be delivered as a standard package to each restaurant. It would enable KFC to serve a limited core menu. This new strategy removed the complexity of the bespoke orders, which made operations in the depot significantly easier. Also, with DHL's vehicle tracking systems not yet up and running, the crisis team at KFC's head office manually tracked all DHL trucks as they left the depot and arrived at each restaurant, calling ahead to let the next restaurant know 8 when their delivery could be expected. The walls were papered with charts, lists, and maps. New drivers were drafted in from other parts of DHL and via agencies. However, the new drivers were unfamiliar with the routes and the vehicles and struggled with the complexities of the orders being delivered.33 On 20 February, KFC brought some hope to the hearts of their customers by issuing a press release stating: "Each day more deliveries are being made, however, we expect the disruption to some restaurants to continue over the remainder of the week, meaning some will be closed and others operating with a reduced menu or shortened hours." Still, the reduced menu upset a lot of customers since the fries, coleslaw - and particularly the popular gravy - were not available in many restaurants. KFC sought a new home for non-perishable stock consisting of non-food items such as mops, brushes, and gloves. This would free up space at the DHL depot that needed filling with fresh chicken. KFC contacted Stowga, a warehousing startup4. A month- long rolling contract was drawn up and signed, with operations at the first warehouse location, near Bristol, commencing from 8 am on Friday, 23 February. 35 Stowga has since provided eight different warehouse spaces to KFC UK.36 A more complicated issue was that DHL's huge 50-foot trucks were simply taking too long to go to each of the restaurants on their routes: By the time they returned to the depot, the backlog of stock awaiting them was already mounting up, and the schedules of planned deliveries were slipping hours behind, leaving some restaurants without stock for yet another day. The supply of these large trucks equipped to take chilled, frozen and ambient products in the format necessary to meet KFC's needs was finite. One of KFC's directors suggested dispatching the 50-foot trucks to a cross-dock, where smaller vans would take the load and deliver it on to the restaurants. This would allow the trucks to return more swiftly to the Rugby depot to be loaded and dispatched to another cross-dock. The supply of the smaller vans was easier to come by than the 50-foot trucks. Now all they needed were the cross-docks. Within 24 hours, contracts had been exchanged for the short- term lease of two such premises, with offers on the table for four more. Meanwhile, KFC's IT team developed a new vehicle tracking system to track vehicles, where the original service promised by DHL-QSL had failed, to keep restaurants up to speed with details of deliveries that would be heading their way.37 Early engagement of KFC with suppliers meant that potential solutions could be quickly explored. Some suppliers were informing KFC that their drivers were returning with their deliveries still on board, having been unable to get to the DC to unload. Where possible, suppliers would deliver directly to the KFC restaurants. Other suppliers withheld deliveries, at KFC's request, until the system was stable again. The supplier relationships that KFC had developed over the years were important in ensuring that everyone collaborated to get the restaurants serving again; other issues could wait.38 9 Some ten days into the crisis, on 23 February, KFC published a full-page apology ad in the Sun and Metro newspapers featuring an empty KFC bucket. Instead of having the normal KFC logo, the bucket said "FCK". The accompanying text read: A chicken restaurant without any chicken. It's not ideal. Huge apologies to our customers, especially those who travelled out of their way to find we were closed. And endless thanks to our KFC team members and our franchise partners for working tirelessly to improve the situation. It's been a hell of a week, but we're making progress, and every day more and more fresh chicken is being delivered to our restaurants. Thank you for bearing with us. However, KFC had to admit that it still did not know the root cause of the fiasco, while acknowledging that despite immediate cancellation of orders, an unspecified volume of chicken had been scrapped.39 Finding a Structural Solution After more than a week of chicken shortages and the concomitant loss of big money and customer loyalty with each passing day, KFC faced the thorny choice of hoping the deal with DHL and QSL would eventually work out, or 'chickening out' and going back to its old supplier, or finding another solution. The service being delivered by DHL/SQL was clearly not in line with the service levels agreed in the contract. Therefore, senior YUM! and KFC leaders (e.g. Board members (CEO, CFO), Legal and Global Supply chain leaders) gathered in a London hotel to decide how to move forward, with DHL and QSL teams available on demand for meetings. Everybody worked around the clock to find a way forward for the relationship and a sensible resolution to the losses caused by the disruption. Reaching a swift solution was imperative, and in the best interests of all parties.40 In the end, to get their restaurants back to normal as quickly as possible, KFC decided to move more than one third of the total value of the DHL/QSL contract back to its previous logistic services provider Bidvest Logistics. 41 The decision was taken, in conjunction with DHL and QSL, to sign a new long-term agreement to revert the distribution contract for approximately 350 stores in the northern part of the UK back to Bidvest Logistics. Bidvest Logistics Director Paul Whyte said: We are delighted to welcome KFC back to Bidvest Logistics. As the UK's leading food service logistics specialist, we understand the complexities of delivering fresh chicken. KFC is a valued customer and we will provide them with a seamless return to our network. 42 Whyte further explained that although KFC had previously been one of Bidvest's biggest loss-making customers, they had now been able to negotiate better prices and collaborate with KFC on more profitable terms. All these initiatives did not immediately solve the chicken crisis, but by early March, the situation had improved slightly. Only 3% of KFC's restaurants remained closed, although some of the open affiliates could still only offer a limited menu. Customers 10 were still complaining on social media about missing hash browns, gravy, and even cardboard food containers at KFC stores. 43 This was partly because Bidvest Logistics also needed some time to restart their operations for KFC. They were fully operational by 26 March.44 KFC continued to operate with DHL and QSL for the remainder of its 500 restaurants: We've been working hard to resolve the present situation with QSL and DHL. This decision will ease pressure at DHL's Rugby depot, to help get our restaurants back to normal as quickly as possible. As it stands, over 97% of our 900 restaurants are now open for business, although there will be some limited menus before we are back to business as usual. DHL acknowledged KFC's move and said that, together with its partners, DHL would remain fully committed to delivering excellent service to KFC across the UK.45 KFC UK & Ireland's Supply Chain Director left KFC shortly after the chicken supply disruption at the end of April 2018. In June, his successor commented: We are delighted with how Bidvest Logistics seamlessly transitioned our Northern supply chain operations into their shared user network. From day one our deliveries have arrived on time in full and Bidvest Logistics continue to provide an excellent service to KFC UK & Ireland.46 The Aftermath It was estimated that the supply chain disruption had resulted in a financial loss for KFC UK of about 1 million GBP a day, while at the same time brand reputation was seriously damaged. 47 David Gibbs (CFO of Yum!) said the company had reached a settlement with the parties that were responsible, to help minimise cost and get everybody back to a healthy situation. The financial impact appeared to be marginal. According to Gibbs, the 2% impact in the first quarter dropped to a 0.5% estimated impact on a full-year basis. A diligent marketing strategy also played a strong role in minimising the impact of the supply disruption. Yum! Brands CEO Greg Creed stated: "We ran, I thought, a rather clever ad when we were in the middle of the crisis but, obviously, we stopped advertising while we didn't have supply." 48 On 13 March 2019, KFC UK confirmed that Best Food Logistics (the new name of Bidvest Logistics) would also take over the southern UK part of DHL's contract. DHL did not tender for the southern portion of the distribution contract, that reportedly now also involves Taco Bell restaurants. 49 KFC's decision to terminate its partnership with DHL and QSL is understood to have affected as many as 100 staff at DHL Supply Chain's Rugby DC.50 DHL stated that it was ending its relationship with KFC for strategic reasons. A DHL spokesperson said: In accordance with its contractual arrangements, DHL Supply Chain has advised that it is ending its current relationship with KFC, with the business transitioning to the new provider over a defined period to ensure a seamless service to customers. 11 Both DHL and KFC thanked staff for their understanding and stressed that the decision had been made entirely for strategic reasons and in no way reflected the performance of the Rugby DC operation which had achieved excellent results in recent months: DHL remains fully committed to Rugby as a strategic location and will make every effort in the coming months to secure a new customer for the warehouse. Affected staff have been informed of the situation and will shortly enter into consultation to discuss their options, including transferring to the new provider or redeploying to other DHL operations as appropriate. However, not only strategic reasons may have played a role for DHL. According to some sources, DHL decided to pull out when Best Food Logistics said it could undercut their price, delivering a case of chicken for 22 GBP compared to 24.50 GBP. Some experts challenged Best Food's plans for fulfilling the contract. 51 One source even said: "KFC fans should rightly be worried. More disruption awaits. "52 12 Exhibit 1: The World's Largest Fast Food Restaurant Chains Rank Name Number of Locations 1 Subway 42,998 2 McDonald's 37,200 3 Starbucks 30,000 4 KFC 20,404 5 Burger King 16,859 Source: WordAtlas.com, accessed July 2019. Exhibit 2: Revenues and Profits Yum! and KFC 2018 2017 Yum! system revenues 49.2 B USD 46.7 B USD 2016 44.4 B USD (KFC, Pizza Hut, Taco Bell) KFC worldwide system 26.2 B USD 24.5 B USD 23.0 B USD revenues KFC UK + Ireland Not available 1.2 B GBP Not available system revenues Yum! company revenues 5.7 B USD 5.9 B USD 6.4 B USD Yum! company net income 1.5 B USD 1.3 B USD 1.6 B USD KFC company revenues 2.6 B USD 3.1 B USD 3.2 B USD KFC UK + Ireland company Not available 580.8 M GBP* 480 M GBP revenues KFC UK + Ireland net Not available 27.8 M GBP* 25.3 M GBP income Source: Annual reports Yum! Brands, macrotrends.net. System revenues: includes the revenues of the respective franchised restaurants. *: estimates. 13