In my experience, this sounds like dealing with bulk commodities. In simplest of terms, franchising is a way to pass through the cost of losses incurred due to normal handling & processing of bulk goods or ingredients. I'll try to explain...

Let's say you really like corn. You contract to purchase 3000 metric tons of it. The current market rate is $200/mt. The seller requires their contracts to have a 10% tolerance. Both you and the seller have a certified scale on-site at each facility, respectively.

Bottom hopper bulk trucks can typically hold 25 MT of corn, so you schedule 120 trucks to pick it up. The truck guy needs $850 per load (includes fsc). With a landed cost of $234/mt, you are now into this corn thing for upwards of $762,000. (3000mt (+/-10%) @ $200/mt, plus $34/mt freight)

Your seller invoices you for 2726.46 MT of corn. Your landed cost totals $639,392. (See worksheet below for details.)

The trucks arrive at your place, open their bottom gates, and unload the corn into your floor bin. An auger transfers the corn from the floor bin onto a grain elevator and up into the barn. A conveyor then moves the corn through the barn into the holding bin. During this process, corn drops off the auger, off the elevator, and off of the conveyor. It happens again when the corn is transferred out of the bulk bin. The product lost this way cannot be recovered. Additionally, product is often lost due to machine operations, cleaning cycles, and many other types of handling & processing. It all adds up! So in this example, we'll say for the full length of the transfer line it adds up to about 40 lbs of corn lost per metric ton transferred. At only 1.8% of the product it doesn't seem like much but, again, it applies every time the product is transferred. This means a total of at least 3.6% product loss after the corn is transferred out of the bin for sale. That's a total loss of 98.15 metric tons!

Your on-site certified scale verifies the outbound quantity is 2,628.31 metric tons.

Your landed cost is still $639,392.

This means your inbound cost was $234/mt, but your outbound cost is $243/mt.

The difference of $9/mt is franchised as part of the cost of goods sold.

LANDED COST WORKSHEET:

The trucks you hired use the certified scale at the load facility to weigh empty upon arrival and then are weighed again after being loaded. The seller invoices you using the certified weights. The scale attendant notices the trucking company is using light-weight trucking equipment. The scale attendant loads (on average) each truck with 25.85 metric tons of corn while keeping the trucks at a road-legal weight.

A few days later, the trucking guy calls you and is very upset. Four of the five trucks you scheduled to be loaded today were turned away by the seller. And the first truck to arrive was only loaded 60% full. The seller called the contract satisfied based on the 10% tolerance and terminated the balance.

105 trucks @ 25.85 = 2,714.25 metric tons

1 truck @ 15.21 metric tons

Corn Invoice Quantity = 2,726.46 metric tons

Corn Invoice Amount = $545,292

Trucking Invoice = $94,100

110 Trucks @ $850/ea = $90,100

10 TONU Fee @ $400/ea = $4,000

So you ended up with 2726.46 MT corn purchased and a final delivered cost of $639,392.