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McDonald’s Supply Chain

SUPPLY CHAIN MANAGEMENT


FINAL PROJECT

Supply Chain Cycle


Of McDonald’s
Presented by:

Salman Malik 2093051


Saira Rehman 2093039
Sumra Nusrat 2093031
Reema Islam 2093222

Presented to:

Sir Sikanded Aziz

Date of Presentation: 21th April '11

National college of business administration &


economics

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McDonald’s Supply Chain

ACKNOWLEGEMENT

We feel great pleasure in expressing our


deep heartiest and sincere gratitude to our
respectable project advisor Sir Sikandar Aziz
for his encouraging attitude, kind dealing and
his keen interest in preparing this report.

Contents

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McDonald’s Supply Chain

Food service business sector.........................................................4


McDonald's..................................................................................4
McDonald’s in Pakistan.................................................................5
Supply Chain Management in Pakistan...........................................5
WHY THE PROJECT...............................................................................6
History......................................................................................... 6
Products.............................................................................................7
Types of restaurants............................................................................7
Respect for local culture of Pakistan.....................................................8
International Standards.......................................................................8
Basic concept of Supply Chain cycle view.......................................9
Process views of a supply chain.....................................................................................10
McDonald’s Global Supply Chain..................................................10
Supply Chain Management at McDonalds.....................................11
Big Mac's supply chain success....................................................12
Local Sourcing ..................................................................................13
Objective..........................................................................................14
Platter of Services.............................................................................14
Key Features:.................................................................................................................14
Fresh Rush – Features .......................................................................15
Food Park – Features.........................................................................15
Food Park – Capacity .........................................................................16
The McDonald’s System – the World’s Best QSR experience..........16
Purchasing........................................................................................17
Logistics...........................................................................................17
Logistics Standards...........................................................................18
“One-Stop-Shopping “Lean Logistics Solution..............................19
McDonald’s Supply Chain Challenges and problems......................19
Freshness.........................................................................................19
Innovation.........................................................................................19
Fluctuation in Demand.......................................................................20
Bull Whip effect ................................................................................20
Cannibalization..................................................................................20
Decentralized Structure.....................................................................21

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McDonald’s Supply Chain

Conclusions and suggestions.......................................................21


References
.................................................................................................21

Food service business sector


The business sector which we have selected for our supply chain
management project is FOOD SERVICE. The reason for choosing this
business sector is up growing and demanding nature of this business as
Asian people especially Pakistani people are very fond of food. The
increasing number of fast food lovers is noticeable and now people are more
knowledgeable about quality food. For this purpose we have selected
McDonald’s ‘the global leading food service retailer’.

McDonald's
Is the leading global foodservice retailer with more than 30,000 local
restaurants serving 52 million people in more than 100 countries each day.
More than 70% of McDonald's restaurants worldwide are owned and
operated by independent local men and women. Is one of the world's most
well-known and valuable brands and holds a leading share in the globally
branded quick service restaurant segment of the informal eating-out market
in virtually every country in which we do business. Serves the world some of
its favorite foods - World Famous French Fries, Big Mac, Quarter Pounder,
Chicken Nuggets and Egg McMuffin. Our rich history began with our founder,
Ray Kroc. The strong foundation that he built continues today with
McDonald's vision and the commitment of our talented executives to keep
the shine on McDonald's arches for years to come. To read more about

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McDonald’s Supply Chain

McDonald's history, vision and executives, click on their links in the left
menu.

McDonald’s in Pakistan
Aiming to be the world's best quick service restaurant experience,
McDonald's started its operations in Pakistan in September 1998 and is a
leading fast food service retailer for its valued customers. With a strong
belief in the phrase when it's green it's growing. McDonald's Pakistan is
growing with the focus to provide friendly and quick service experience to
our customers.
Today millions of Pakistanis place their trust in McDonald’s everyday to
provide them with food of a very high standard as well as good service. In
the past five years, the response to McDonalds coming to Pakistan has been
overwhelming. Today Lakson Group Companies has taken over McDonalds
Corporation, USA and a local partner making it a 100% owned and operated
Pakistani company. McDonalds located in Pakistan are currently employing
about 3,000 Pakistanis and each store is managed by Pakistani managers.
They have also contributed in other ways than food service. McDonalds has
investment of over Rs. 30 billion in the country and payment of taxes and
duties amounting to more than Rs 10 billion Since McDonalds is doing so well
in Pakistan they will continue to grow and add more stores in more cities in
the future.

Supply Chain Management in Pakistan


These strategies determine what is to be made and what is to be purchased.
So McDonalds follow these strategies and have a just-in-time inventory
system. Which means that the orders are placed as the raw material comes
to near finish. McDonalds maintain no inventory levels for perishable goods.
The major suppliers of McDonald’s in Pakistan are as follows:
• Dawn Breads for Buns

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McDonald’s Supply Chain

• Choudhry Dairy Limited for dairy products


• Walls Ice Cream
• Coca-Cola Ltd. for drinks
• Packages for packing

WHY THE PROJECT


• To strengthen our knowledge
• To develop practical approach
• To understand real supply chain practices

History
The business began in 1940, with a restaurant opened by siblings Dick and
Mac McDonald in San Bernardino, California. Their introduction of the
"Speedee Service System" in 1948 established the principles of the modern
fast-food restaurant. The present corporation dates its founding to the
opening of a franchised restaurant by Ray Kroc, in Des Plaines, Illinois on
April 15, 1955, the ninth McDonald's restaurant overall. Kroc later purchased
the McDonald brothers' equity in the company and led its worldwide
expansion.
With the successful expansion of McDonald's into many international
markets, the company has become a symbol of globalization and the spread
of the American way of life. Its prominence has also made it a frequent topic
of public debates about obesity, corporate ethics and consumer
responsibility.

199 McDonald's opens in Pushkin Square and Gorky Street, Moscow.


0
199 The first McDonald's at sea opens aboard the Silja Europa, the world's
3 largest ferry sailing between Stockholm and Helsinki.
199 Restaurants open in Bahrain, Bulgaria, Egypt, Kuwait, Latvia, Oman,
4 New Caledonia, Trinidad and United Arab Emirates, bringing the total

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McDonald’s Supply Chain

to over 15,000 in 79 countries on 6 continents.


199 McDonald's opens in Pakistan – the 95th country.
6

Products
McDonald's predominantly sells hamburgers, various types of chicken
sandwiches and products, French fries, soft drinks, breakfast items, and
desserts. In most markets, McDonald's offers salads and vegetarian items,
wraps and other localized fare. This local deviation from the standard menu
is a characteristic for which the chain is particularly known, and one which is
employed either to abide by regional food taboos or to make available foods
with which the regional market is more familiar.

Types of restaurants

Most standalone McDonald's restaurants offer both counter service and


drive-through service, with indoor and sometimes outdoor seating. Drive-
Thru, Auto-Mac, Pay and Drive, or McDrive as it is known in many countries,
often has separate stations for placing, paying for, and picking up orders,
though the latter two steps are frequently combined; it was first introduced
in Arizona in 1975, following the lead of other fast-food chains. In some
countries "McDrive" locations near highways offer no counter service or
seating. In contrast, locations in high-density city neighborhoods often omit
drive-through service. There are also a few locations, located mostly in
downtown districts that offer Walk-Thru service in place of Drive-Thru.
Especially themed restaurants also exist, such as the "Solid Gold
McDonald's," a 1950s rock-and-roll themed restaurant. In Victoria, British
Columbia, there is also a McDonald's with a 24 carat (100%) gold chandelier
and similar light fixtures.
The site of the first McDonald's to be franchised by Ray Kroc is now a
museum in Des Plaines, Illinois. The building is a replica of the original, which
was the ninth McDonald's restaurant opened.

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McDonald’s Supply Chain

To accommodate the current trend for high quality coffee and the popularity
of coffee shops in general, McDonald's introduced McCafés. The McCafé
concept is a café-style accompaniment to McDonald's restaurants. McCafé is
a concept of McDonald's Australia, starting with Melbourne in 1993. Today,
most McDonald's in Australia have McCafés located within the existing
McDonald's restaurant. In Tasmania there are McCafés in every store, with
the rest of the states quickly following suite. After upgrading to the new
McCafe look and feel, some Australian stores have noticed up to a 60%
increase in sales.
As of the end of 2003 there were over 600 McCafés worldwide.
Some locations are connected to BP gas stations/convenience stores, while
others called McDonald's Express have limited seating and/or menu or may
be located in a shopping mall. Other McDonald's are located in Wal-Mart
stores. McStop is a location targeted at truckers and travelers which may
have services found at truck stops.

Respect for local culture of Pakistan


McDonald's Pakistan has developed a special menu with vegetarian
selections to suit Pakistan tastes and preferences. McDonald's does not offer
any beef or pork items in Pakistan. Only the freshest chicken, fish and
vegetable products find their way into our Pakistan restaurants.
In addition, we've re-formulated some of our products using spices favored
by Pakistanis. Among these are McVeggie™ burger, McAloo Tikki™ burger,
Veg. Pizza McPuff™ and Chicken McGrill™ burger. We've also created
eggless sandwich sauces for our vegetarian customers. Even our soft serves
and McShakes™ are egg-less, offering a larger variety to our vegetarian
consumers.

International Standards
McDonald's Pakistan's local suppliers provide us with the highest quality,
freshest ingredients. Complete adherence to the Pakistan Government

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McDonald’s Supply Chain

regulations on food, health and hygiene is ensured, while maintaining our


own recognized international standards. Fast, friendly service - the hallmark
of McDonald's restaurants the world over is the mantra we abide by.
Stringent cleaning standards ensure that all tables, chairs, highchairs and
trays are sanitized several times each hour. Such meticulous attention to
cleanliness extends beyond the lobby and kitchen to even the pavement and
immediate areas outside the restaurant.

Basic concept of Supply Chain cycle view

We can think of the supply chain as a series of cycles of communication


occuring between each two consecutive stages. The cycles share the same
type of communication, since there will always be a buyer and a supplier.

The further we go from the customer, the bigger the scale of the
transactions.

Supply Chain Management: cycle view -

The cycle that surely presents uncertainty to the supply chain is the
customer cycle, since it contains an external buyer agent(the customer).

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McDonald’s Supply Chain

Other risks are present when the supply chain includes several
organizations, and are strictly related with the supplier strategies. Such, for
example, in the case of bottleneck products, the risk of not being able to
fullfill a demand must be countered by securing supply sources.

Process views of a supply chain

The processes in a supply chain are divided into a series of cycles each
performed at the interface between two successive stages of a supply chain.

Cycle View of Supply Chain

There are five stages in a supply chain (Supplier Manufacturer Distributor


Retailer Customer) and four supply chain process cycles (customer order,
replenishment, manufacturing, procurement cycle).

Supplie Manufactur Distribut Custom


Retailer
r er or er

McDonald’s Global Supply Chain


Having a clear safety and quality policy in place and connecting all facets of
our Supply Chain partners regardless of
• Country
• Culture
• Language

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McDonald’s Supply Chain

Transferring this message to all involved parties (Vendors, Transport


companies, Marketing Agencies, Supply Chain departments, Restaurants)
around the globe requires an extremely effective and complex safety
process. Support and involvement of Senior Management in all phases of the
Supply Chain is crucial for McDonald.

Supply Chain Management at McDonalds


McDonald's is committed to providing quality products while supporting
other Pakistan businesses. And so, we spent a few years setting up a unique
Supply Chain, even before we opened our first restaurant in Pakistan.
A Supply Chain is a network of facilities including - material flow from
suppliers and their "upstream" suppliers at all levels, transformation of
materials into semi-finished and finished products, and distribution of
products to customers and their "downstream" customers at all levels. So,
raw material flows as follows: supplier - manufacturer – distributor – retailer –
consumer. Information and money flows in the reverse direction. The
balance between these 3 flows is what a Supply Chain is all about.
When there is a balance in the finished product ordering, the Supply Chain
operates at its best. Any major fluctuation in the product ordering pattern
causes excess / fluctuating inventories, shortages / stock outs, longer lead
times, higher transportation and manufacturing costs, and mistrust between
supply chain partners. This is called the Bullwhip Effect.
Depending on the situation, the Supply Chain may include major product
elements, various suppliers, geographically dispersed activities, and both
upstream and downstream activities. It is critical to go beyond one’s
immediate suppliers and customers to encompass the entire chain, since
hidden value often emerges once the entire chain is visualized. For example,
a diesel engine manufacturer may be able to integrate a GPS locator system
into its engine control system. Its immediate customer, a heavy truck
manufacturer, may see no need for this functionality. However, the

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McDonald’s Supply Chain

downstream customer, a trucking company with a large fleet, may be very


interested in a locator system. Understanding the value to the downstream
customer is part of the supply chain management process.
Synchronization delivers significant business benefits to both the customer
and the supply chain
Enablers
One stop shopping concept
Central file management
Inventory management
Restaurant simplification
Synchronizing the perishable Supply Chain
1. Demand forecasting
• Promotional + Continuous Supply
• Restaurant and DC level
2. Supply Planning
• Restaurant and DC level
3. Visibility and Collaboration across the chain

Big Mac's supply chain success


The seed of McDonald's success was sown in 1990 - six years before it
started its actual operations. Traces its supply chain management played a
vital role in its growth. About two decades ago, the QSR wouldn't have meant
much to the F&B segment. Today, the acronym has been seamlessly
absorbed in the industry lingo. McDonald's, arguably, one of the first brands
that left a strong imprint on the Pakistan QSR history, has much to do with
this. And its success is credited to its well-established supply management
chain.
According to managing director and joint venture partner of McDonald's the
company invested about Rs 40 crore even before its first restaurant

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McDonald’s Supply Chain

commenced operations in October 1996. "We had to ensure that we had the
back-end linked up to the farm level for delivery commitment."
The company also deployed the latest state-of-the-art food processing
technology for having a sound supply chain. The transition towards the latest
technology, which has been subsequently noticed in other QSRs as well,
changed the Pakistan fast food scenario to match international standards.

Local Sourcing
McDonald's has always been committed to sourcing its requirements from
local suppliers and farmers. This assurance is rooted in the philosophy of our
company's founder, Ray Kroc. He firmly believed in mutual benefits arising
from a partnership between McDonald's and the local businesses, thus
ensuring that McDonald's commitment to growth was mirrored by that of its
partners.
In keeping with this belief, we have carefully identified local Pakistani
businesses that take pride in satisfying customers by presenting them with
the highest quality products. Adherence to Pakistan Government regulations
on food, health and hygiene were a top priority.
McDonald's Pakistan today purchases more than 96% of its products and
supplies from Pakistan suppliers. Even our restaurants are constructed using
local architects, contractors, labour and maximum local content in materials.
The relationship between McDonald's and its Pakistan suppliers is mutually
beneficial. As McDonald's expands in Pakistan, the supplier gets the

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opportunity to expand his business, have access to the latest in food


technology, get exposure to advanced agricultural practices and the ability
to grow or to export. There are many cases of local suppliers operating out of
small towns who have benefited from their association with McDonald's
Paksitan.
All suppliers adhere to Pakistani government regulations on food, health and
hygiene while continuously maintaining McDonald's recognised standards. As
the ingredients move from farms to processing plants to the restaurant,
McDonald's Quality Inspection Programme (QIP) carries out quality checks at
over 20 different points in the Cold Chain system. Setting up of the Cold
Chain has also enabled us to cut down on operational wastage

Objective
The objective at McDonald is to provide a cost effective solution to
customers ensuring product integrity throughout the supply chain.

Platter of Services

• Supply Chain Structuring


• Inventory Planning & Replenishment Management
• Warehouse Management
• Customer Order Fulfillment
• Logistics – Temperature Controlled

It handles bulk transportation of temperature sensitive products.

Key Features:

1. Dedicated to ‘cold chain’ movement


2. The only logistics solution provider with expertise in handling agri –
produce
3. Total kilometer run per month is – 7,00,000 km
4. Perishable tonnage handled per month – 7,000 tons

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5. Robust quality systems & processes


6. First in the country to use multi temperature vehicles
7. Use of innovative methods to ensure temperature integrity during
transit
8. Experienced staff – The BEST in the industry.

Fresh Rush – Features


• Multi temperature products, such as Frozen (below –18ºC) and Chilled
(1ºC to 4ºC) can be transported
• Flexibility of load movement - A minimum of 500 kgs to maximum of
5000 kgs can be transported
• In transit temperature tracking
• Fixed schedule of pickup and delivery
• Well trained and experienced manpower
• Adherence to strict hygiene standards
• Consignment can be tracked through GPS system

Food Park – Features

• Spread over 33,000 sq meters


• Multi Temperature Zones
• Integrated Facility – Storage and Value Addition capabilities under one
roof
• Ensured / Guaranteed Food Safety
• Paradigm shift in the way food is handled in the supply chain in India
• First of its kind in the region
• Benchmarked against global standards
• Codex / USDA / PFA compliant
• Scalable
• Dedicated storage for specific categories
• Sanitation / Hygiene standards – Trash handling

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• Air / Water Quality – Treatment Plant / ETP


• Ripening Rooms, Crate Wash Facilities, Blast Freezer, Flake Ice
Machine
• Value Added Services – Processing of Vegetables & Fruits, Meat, Sea
Food and Poultry
• Controls – Building Management System (BMS)
• 100 % Power Back Up

Food Park – Capacity

• Capacity to manage over 6000 SKUs


• Can store 70,000 cases with 1,700 pallet positions and over 4,000 pick
faces
• Processing
o Vegetable & Fruits – 21 tonnes per day
o Meat – 3 tonnes per day
o Fish – 3 tonnes per day
• Blast Freezing – 6 tonnes – per day
• Ice Machine – 2.4 tonnes per day

The McDonald’s System – the World’s Best QSR


experience
McDonald is the world Market Leader in the QSR area (Quick Service
Restaurant). They have Franchise System which accounts to about 72% of
their total franchises. They have about 1.6 million employees in their system.
Their Customers Per Day account to 47 million. They have strong focus on
Corporate Strategies
• QSC&V: Quality, Service, Cleanliness and Value
• Ray Kroc: “None of us is as good as all of us”
• Plan To Win -> Successful business revitalization

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McDonald’s Supply Chain

• Growth by getting better

Purchasing
The McDonalds has the motto of “The 3 legged stool”: Corporation –
Franchisees – Suppliers. Moreover they have the most exclusive,
certified facilities. McDonald also concentrates on the Handshake
agreements, Trust with their suppliers. Long term win partnership is
developed between all the suppliers and franchises which increase the
risk sharing. They deliver Rigorous product and service specifications
with strong focus on quality, product specification and environmental
audits. McDonalds have decentralized supplier structure, zone
consolidation for multinational suppliers There distributor is wholesaler
for Restaurants.

Logistics
• ~100 sales items in the restaurant
• ~400 SKUs in the warehouse (Hubs: up to 1,500)
• ~200 restaurants per DC (~180 DCs globally)

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• Delivery frequency: ~3/wk, higher in urban areas


• 2-3 stops per route
• Exclusive distributors (3PL)
• Freight consolidation (via freight forwarders)
• Long term partnerships with service providers, risk sharing
• Strong quality focus (Cold Chain, HACCP, QIP)

Logistics Standards
• DQMP (Distributor Quality Management Process)
• Operations and Customer Relations (Operations Manual)
• Quality Control (HACCP / QIP)
• Cold Chain standards
• Hygiene regulations
• Product handling standards
• Emergency and contingency plans
• Risk & Crisis management
• Continuous unannounced internal and 3rd party audits for DCs result in
superior quality scores regularly.

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McDonald’s Supply Chain

“One-Stop-Shopping “Lean Logistics Solution

McDonald’s Supply Chain Challenges and problems

Freshness
McDonalds have even stronger focus on freshness and quality. Because of
the nature of the product they are offering the focus on quality is a key
factor in the success of their business. So the supply chain plays an
important role in their business because without the proper supply chain
they can’t deliver the fresh items required in making the items being offered
at McDonalds.

Innovation
On-going product innovations are also a big challenge for the supply chain of
McDonald. The continue innovation of the products at McDonald require
them to continuously alter the supply chain and manage it accordingly. With
the ongoing introduction of new products like new burgers and items require

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them to continuously update the supply chain which requires supply chain
management to be much more extensively used.

Fluctuation in Demand
Strong customer demand fluctuations based on promotions make difficult to
manage the supply of the items. They have to continuously change the
supply of their items as per the seasons. Like in Ramadan they have to
totally drop the supply in the day and are much focused on limited items.
The high fluctuations make the forecasting difficult and supply chain
management to be very active.

Bull Whip effect


Because customer demand is rarely perfectly stable, McDonalds must
forecast demand to properly position inventory and other resources.
Forecasts are based on statistics, and they are rarely perfectly accurate.
Because forecast errors are a given, McDonalds often carry an inventory
buffer called "safety stock". Moving up the supply chain from end-consumer
to raw materials supplier, each supply chain participant has greater observed
variation in demand and thus greater need for safety stock. In periods of
rising demand, down-stream participants increase orders. In periods of
falling demand, orders fall or stop to reduce inventory. The effect is that
variations are amplified as one move upstream in the supply chain (further
from the customer).

Cannibalization
Cannibalization occurs when a McDonalds discounts a particular product. The
tendency of consumers is to buy the discounted product rather than
competing products with higher prices. When the promotion event is over
and prices return to normal, however, the effect will tend to disappear.

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Decentralized Structure
McDonalds has Change Management in almost every franchise because of
de-centralized structure. This again leads the supply of the McDonalds to be
altered as per the every franchise which again creates new challenges for
the supply chain management.

Conclusions and suggestions


Through effective Supply Chain McDonald’s operates in a famously
competitive market and delivers good value for consumers.
• Not by searching on the commodity market for the lowest cost
suppliers. It sources only from dedicated suppliers.
• Not at the expense of safety or quality. It operates an extremely strict
auditing regime.
• Not by pressurizing suppliers. It believes in a policy of paying for
performance and long term sustainability for suppliers.
• The secret is a Lean and efficient chain via rigorous measurement, the
spreading of knowledge and a real sense of teamwork.

References

• www.mcdonalds.com
• www.mcdonalds.com.pk
• www.answers.com/whatisTQM
• http://www.docstoc.com/docs/
• http://www.scribd.com

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