Logistics and Supply Chain Management at McDonalds

“Logistics management is an integrating function which coordinates and optimizes all logistics activities, as well as integrates logistics activities with other functions, including marketing, sales, manufacturing, finance, and information technology.”(Jonsson, 2008, p 4)

Logistics Management or Supply Chain Solutions, both play a major role in determining the overall success of a company. Major consequences are found in supply chain if there is even small variance in inventory; to overcome such consequences an effective logistics is necessary for any organisation. Logistics management involves high level of competences and expert knowledge. Managing from raw material to final stage at right place on right time is handled by logistics management. To leverage opportunity in emerging markets, companies are focusing on consolidating and aligning their supply chain management infrastructure, processes and procedures to reduce costs and improve efficiency.

A Supply chain consists of the series of activities and organisations that materials move through on their journey from initial suppliers to final customers. Every product has its own unique supply chain and these can be both long and complicated. (Waters; 2003; p.7) There is a series of steps involved from the origin of services or product and its consumption. The steps involved in this are known as supply chains. The report will provide operations of McDonalds in UK and will emphasis on its supply chain management.

Company Background and Introduction:

McDonald’s Corporation is the world’s leading food service organization. The corporation started out as a small drive-through in 1948 by two brothers, Dick and Mac McDonald. In addition, McDonald’s opens a new restaurant every three hours. ‘Big Mac’ is the biggest attraction and backbone of the corporation. Moreover, McDonald’s maintains its competitive advantage by constantly creating new items to add onto its menu. This shows us that McDonald’s practices an analyzer type of strategy, introducing new items and defending its existing ones. (McDonalds Website)

McDonald’s opened its first UK restaurant October 1974. In December 2004, there were over 1330 McDonald’s restaurants operating in the UK. Around 60% of these are owned and operated by the company. The remainders are operated by franchisees. Each McDonald’s restaurant is structured as an independent business, with restaurant management responsible for accounting, operations, inventory control, community relations, training and human resources. (The Times Website)

Nature and Operation of Organisation:

McDonalds Corporation is the world largest chain of fast food restaurant, serving more that 58millions customer every day. A McDonald’s restaurant is operated by either franchisee or the corporate itself. The corporation revenue generates from rent, royalties and fees paid by franchisees and also from sales in company operated McDonalds. The menu is consists hamburgers , cheeseburgers , chicken and fish products , French fries , breakfast menu , soft drinks ,shakes and desserts. The quick-service-restaurant (QSR) giant has built an entire process over the years for managing a sophisticated delivery system, starting on the live-animal production side and running all along the supply chain until products reach their final destination as McDonald’s customers’ favourite. (McDonalds Website n.d.)

Supply chain management strategy:

Supplier Relationship Management – Service Provider Relationship Management – Customer Relationship Management

Source: Tompkinsinc Website N.D.

The model explains Supply chain strategy is an integral part of a business: It really supports and feeds the overall company business strategy. The supply chain strategy must include plans for all elements of the chain: Buy, Make, Move, Store, Sell and Return. Partnerships can develop, and may even be required, between companies and individuals across the entire supply chain, or they can be focused in specific areas depending on a company’s competencies and philosophy. (Tompkins Associate Website N.D.)

Supply chain management encompasses the planning and management of all activities involved in sourcing and procurement, conversion and all logistics management activities. Companies adopt supply chain management to ensure that supply chain is operating efficiently and providing high level of customer satisfaction with low cost. SCM integrates the demand and supply management within and across companies. (Jonsson; 2008; p .5)

The objective is to meet customers demand while keeping prices low and McDonalds works on lean strategy to serve its customers as McDonald’s doesn’t begin to cook its orders until a customer has placed a specific order. They stay on JIT (just in time) strategy which helps them to reduce or sometimes eliminate waste and efficiency within purpose of minimum cost. Benefit associated with this is the higher quality customer service; even placing special order does not bring McDonalds into panic situation that can cause delays. Also holding cost of burgers is fairly high so JIT strategy helps them to reduce the spoilage cost. JIT helps McDonalds to keep eye on Economic Order Quantity which determines how much to be ordered and there are two factors that drive economic order quantities down: low ordering costs and high holding costs. (Inventory Management Review Website: 8th.Nov.2005)

Variability in demand and variability in lead times from suppliers put pressure on organisation to maintain certain safety stock in case of McDonalds; the supplier is internal production process but problem associated with JIT is it reduces your safety stock which can actually be a big problem, also with lean strategy organisation lack in capacity to respond to fluctuation in consumer demand. (Inventory Management Review Website: 8th.Nov.2005)

Ordering Process:

The ordering process involves holding a small buffer stock. This is extra amount of inventory held to meet any unexpected higher demand. Inventory manager uses a web based communication software called ‘Weblog’ to view and amend store order proposals. Each time of ordering weblog creates a proposed order to analyse and amend if necessary. Weblog helps managers to view what quantity have been ordered, how much is the current stock level and how much stock is due to be delivered at a particular time. The system automatically generates a delivery note that gives the exact quantities and descriptions of the delivery. The manager has to click confirm on weblog when they finishes selecting amount of inventory they needed to use. (McDonalds Website: December 2009) Without safety stock customer will suffer. Other reasons for maintaining safety stock include providing safeguard against issues such as poor quality, production problem and transportation, delivery charges. Also, if organisation maintains too much inventory would incur significant holding cost. This is because they will need more staff, equipment and storage space to handle high inventory levels. However, holding small stock can be dangerous as it may cause problem in some uncertain demand and lead business to stop its operation. (Mangan; 2008; p.5-6)

Logistics Service Providers:

Many organisations do not perform many of their own logistics activities. They arrange logistics service providers to take advantage of efficient and experienced specialists to look after the transport, while the organisation can concentrate on its core operations. An organisation mainly forms a partnership with other company to look after warehousing, purchase of material, material handling and many of the other functions of logistics. When one company uses other companies to run its logistics are known as third party or 3PL or contract logistics. For McDonalds Keystone distribution works as a 3PL. (Waters; 2003; p.90) However, responsibilities of 3PL is discussed in Appendix B under Supply chain frameworks.

Keystone Distribution UK is a subsidiary of Keystone Foods LLC, which provides food manufacturing and distribution services to quite a large amount of customers in America, Asia, and Europe. Keystone distribution was formed in 1977 in partnership with McDonalds for its UK baker of hamburger bun and since then company is progressing along with McDonalds. Keystone distributor has been efficiently supplying everything to its existing client need to run the business successfully. Keystones manages a large part of McDonalds UK supply chain and replenishing its 1200 UK stores from mops and ketchup to the essential ambient , fresh , frozen foods that makes up the McDonalds menu. (Logistic Business IT Website; 09.Nov.2009) A big organisation like McDonalds need some partner to work with them to look after sourcing, warehousing, procurement, and distribution to run its business but there can be certain issues associated with this that by hiring 3PL, that company can loss control over its logistics activities, difference of opinion and perception can bring problem in service level, also it increase dependency at certain time and end up disturbing operations of business.

Structure of Supply Chain:

Structuring the supply chain requires an understanding of the demand patterns, service level requirements, distance considerations, cost elements and other related factors. (Rock ford Consulting Website N.D.) Moving of material inward is upstream and outward is downward. The upward activities are divided into tiers of suppliers. A supplier that sends materials directly to the operations is first tier supplier; one that send materials to a first tier supplier is a second tier supplier; one that sends material to a second tier supplier is a third tier supplier and so on to the original source. Customers are also divided into tier. One that gets product directly from the operations is first tier customer and so on to final customers. (Waters; 2003; p.8)

McDonalds deals with different suppliers for its different products and ultimately which aims to provide customers great taste and on affordable price. McDonalds has been working in partnership with household brand such as with Coca cola, Tropicana and Buxton who act as second tier supplier because they supply its products to keystone distribution who works for McDonalds as first tier supplier. Also there are number of other suppliers such as Sun Valley and Moy Park who supply McDonalds with Chicken product all these works as second tier supplier for McDonalds. Also Ecsa, the makers of the beef patties who are key for success of supply chain also supplies its product to McDonalds first tier supplier (i.e…Keystone Distributors). All the different supplier deals with Keystone Distributor, who then sends material directly to McDonalds to run the business smoothly by providing on affordable prices, delivering products on time and helps in outward movement of orders and receiving payments from customers. Overall, keystone is a important player in structure of supply chain for making upward and downward activity successful. The demerits of managing chain of supplier at McDonalds is to incur heavy investment of time, money, and also it resources needed to implement and has to overlook the supply chain as well and increase dependency. (Make up your own mind Website; March 2009)

Managing the supply chain:

As the McDonalds UK distributor, it’s the responsibility of keystone to provide the perfect service and product every time they need and also to coordinate the requirement of hundreds of McDonalds around UK. They work along the supply chain pipeline ensuring the quality and reliability is kept while passing delivery to restaurant. In order to achieve this Keystone uses the latest technology and software to work closely with McDonalds marketing and business plan. Keystones ensures managing peak and troughs as they come along for keeping smooth supply chain and ensures there are no out of stocks. On an average Keystone carries five days inventory in their store and delivers three to four times per week inventory in each restaurant. To meet that delivery they have 300 vehicles, tractors and trailers which help them to run these logistic operations within UK and including the Isle of Man and channels Island by delivering around one million cases each week. Their biggest challenge is ensure those vehicles arrive at the restaurants on time and containing everything being ordered and meeting 100 percent quality of product including frozen, chilled or dry. However running those vehicle cause heavy amount of pollution and damage to environment the challenge here is to make sure eco-friendly tool to be used. (Business Review Europe website 10th.July.2010)

Inventory Management:

The process of making sure there is enough stock at all times to meet customer demand whilst minimising expensive waste is known as stock management. High cost is involved in holding too much stock so McDonalds uses lean stock control method to save money. (Refer Appendix A for further explanation of Inventory Control)

Inventory ordering manager work with the new stock control system, Manugistics, to ensure sufficient raw stock is available. This helps restaurant to produce the meals required according to the forecasted demand. Forecast is done on the basis of restaurant historic product-mix data from last year, store-specific and national causal factors such as national promotions and school holidays, information from store managers about factors that might affect demand .e.g. road closure or local events and new promotions. (McDonalds Website: December 2009)

Restaurant manager need to ensure that the data they enter into the system is as accurate possible. Every day restaurant manager record opening and closing stock of key food items. Other items are recorded weekly and monthly basis. The store computers system identifies any stock count deviations from last stock count so it gives opportunity to manager to investigate missing product. For example, the manager may have missed off a box of regular meat while counting them earlier on the shift. (McDonald’s website: December 2009)

Serving Customer:

Competition and increasing consumer preference for variety and healthier food makes McDonalds to expand the range of menu. Customers entering into McDonalds are divided into those who know about menu and those who are new and coming to restaurant first time and are not familiar with menu. Apart from selling food items by itself McDonalds also sell Extra Value meals which consist of a burger, fries and a drink. When customers reaches the front counter and place their order, the till person applies two selling technique. The ‘selling up’ technique where order is changed by asking customer by suggesting larger portion and also by adding extra item such as drink and another one is ‘suggestive selling’ technique where any item extra is being asked to sell each and every customer. For example if customers comes and buys two three adults meal and one two children meal and they are being asked if they wanted to buy two apple pies for £1.50. (Hill; 2005; p.671)

Source: Word Press Website: 09.August 2010

As shown in figure above the service time is 45sec which is quite low in McDonalds. The till person punches the order on to their till. There are some standard food items which are meant to be held in production bin, the counter person pick the food what is being ordered in a specific sequence which involves cold drinks first, and then hot drinks second, then fries and at last burgers. But some time in the availability of food varies like breakfast time they apply food cooked on order nothing is held in production bin. (Hill; 2005; p.671)

If a particular food item is not available in the production bin, then the counter person calls the order to the production person who then calls the food order to the grill area as shown in figure. Certain food products in slack period are cooked to order due to their less demand and to avoid waste. (Hill; 2005; p.672)

When the order in not ready the till person ask the first customer to pay and wait aside if its take away order and if its eat in they ask customer to take a sit and order will be brought to your table, and start dealing with the next person in the line. Every time till person completes the order there is a button ‘served’ which is to be punched in order to let computer know that the order is finished. As if it not done the computer will not allow taking eleventh order. So every time order is done it’s necessary to serve it off. (Hill; 2005; p.672)

Performance Improvement:

Integrating the pipeline of supply chain and choosing the correct suppliers is much more difficult than one can imagine. Not only do companies have to strongly consider price and quality, but they also have to make sure that all the organizations are willing to cooperate to benefit the group. Keystone manages the supply chain to ensure that there is always sufficient stock to fulfill demand when orders are received. Efficient stock management is essential to kind of business. Keystone is working on an initiative that it hopes will further advance the efficiency of the company’s operations.”We’re reviewing the whole of the delivery schedule as well as the entire delivery system in conjunction with McDonald’s to try and find a more cost effective and equally eco-friendly delivery schedule with them,” says Ramsay Assal, the Keystone Distribution’s Logistics Director. (Business Review Europe website 10th.July.2010)