Supply Chain Flows of Mcdonald’s Essay
Supply Chain Flows of Mcdonald’s
1. Executive Summary
McDonald’s Corporation is the world’s largest chain of hamburger fast food restaurants. It serves approximately 68 million customers on a daily basis in 119 different countries. In 1955, Ray Kroc joined the company as a franchise agent and subsequently bought over the chain from the McDonald brothers, overseeing its worldwide growth. The supply chain consists of McDonald’s suppliers, distributors, restaurant outlets and its customers. McDonald’s has local and international suppliers. The firm’s distributors have to collaborate with these suppliers to deliver goods to respective McDonald’s restaurant outlets. Cold chain concept is also vital in its supply chain, to preserve quality and freshness of perishable food products. Once the goods arrived at the restaurants, products will be put together for end-products to be sold to customers upon their orders. There are three different cycles in McDonald’s supply chain; “Customer Order Cycle”, “Replenishment Cycle” and “Procurement Cycle”.
The Customer Order cycle that connects the customers and the restaurant outlet is triggered when customers place their orders over the counters in the restaurant. The “Replenishment Cycle” connects the restaurant outlet and McDonald’s distributors when the outlet needs to replenish the number of stocks it has in its restaurant. Lastly, the “Procurement Cycle” connects the distributor and the suppliers, and it takes place when suppliers have to gather materials to meet with the distributor’s order. The push/pull boundary of McDonald’s supply chain lies between the Customer Order cycle and the Replenishment Order cycle. Demand is being “pushed” from the suppliers, to the distributors, and ultimately to the restaurant outlets based on forecasting of demand and sales.
The pull effect will only start to kick in when the customer place their order and demand for the specific product. All parties in the supply chain are interdependent; the ultimate consumer will not be able to receive his or her demanded product if the suppliers could not harvest the right goods in the right quantity in time, or the distributor could not preserve the quality of the products well during delivery or could not deliver specific goods in time, or the restaurant run out of stocks available in their premises. All parties of the supply chain must work effectively and concurrently in order for business to run. This goes on to link how information flow must be efficient among parties and how essential it is to keep communication flowing up and down the supply chain.
Only with effective communication will smooth flow of funds and products flow up and down the supply chain respectively. Despite the highly responsive and successful supply chain McDonald’s already have in place, problems such as uncertain spikes in demand during promotions and complexities in managing with several parties in the supply chain process still make things complex and cumbersome for the global firm. Two recommendations were suggested to help McDonald’s combat the problems.
Firstly, marketing promotions should be scheduled properly before broadcast. This will help McDonald’s prepare for a sudden increase in demand and to cater to customers’ needs responsively. Second, creating a one-stop-shop can help McDonald’s cut down on the number of parties the corporation will have to physically contact with for its supply chain process. To conclude, managing the supply chain of every company is essential and this is particularly so, for a global corporation like McDonald’s. McDonald’s has many opportunities for growth and rooms for improvement in their supply chain in order for business to prosper even further.
2. Company’s Description
McDonald’s Corporation, founded by Ray Kroc in 1955, is the world’s largest foodservice company and has served approximately 68 million customers daily in a span of 119 different countries. It sells mainly hamburgers and fries, chicken, breakfast items, soft drinks and desserts. The company has also expanded its menu, in response to the change in consumers’ tastes and preferences, to add items like fruits, salads, wraps and smoothies. The first ever McDonald’s by Kroc was opened in Des Plaines, Illinois on the 15th of April 1955. By 1965, there were over 700 McDonald’s restaurants in the United States. In the year 1967 was when McDonald’s went international, with restaurants opening in Canada and Puerto Rico. By 1981, more international growth was experienced with first McDonald’s outlets constructed in Spain, Denmark and the Philippines.
There are certain requirements that both McDonald’s and its suppliers will have to adhere to, in order to work with one another. McDonald’s came up with a list of Code of Conduct (Refer to Appendix A) for the suppliers to agree on. In the code of conduct include terms like reserving McDonald’s the right to conduct unannounced inspections of suppliers’ and their business practices, records, facilities, and, where provided by supplier, housing accommodations, as well as private interviews with employees.
3. Elaboration on Flow Chart
The competitive strategy of McDonald’s as a global fast-food chain would be to build a reputable and established brand image to satisfy consumers’ needs and preferences all over the world. McDonald’s also ensures high customer service quality when customers visit their outlets and are known for its various specialty products in catering to the specific tastes and needs of the locals, bringing out the exclusivity factor, in different countries. In order to achieve a close strategic fit between its strategies, McDonald’s is being nationally responsive by moving from global standardization to “glocalization”.
Glocalization is a business jargon for the adaptation of a product or service specifically to each locality or culture in which it is sold; similar to internationalization. This can be seen with examples like the innovation of McCroissant in restaurants located in France and Rice Burgers in Hong Kong. Apart from just being locally responsive, McDonald’s also responded to global health concerns with including healthier food choices like salads, fruits and lower calorie items into their menu globally. This way, McDonald’s supply chain has to be highly responsive to different countries’ cultures, tastes and preferences in order to achieve strategic fit.
4.1. Stages of Supply Chain Process
There are two different ways to view the processes that are performed in a supply chain;
i. Cycle View
ii. Push/Pull View
McDonald’s supply chain process can be broken down into three different process cycles, each performed at the interfaces between two consecutive stages of a supply chain. These three process cycles are namely “Customer Order”, the “Replenishment Cycle” and the “Procurement Cycle”.
The Customer Order cycle is created when the customer interacts with the employee in the restaurant and places his order, prior to making payment for the meal. Right after his order has been taken, orders from the counter will deliver to back into the kitchen located in the restaurant itself, where the kitchen staff will gather different goods and components (e.g. buns, lettuce, cheese, beef patty) to put together to form the end-product (e.g. cheeseburger). In the Customer Order cycle, demand is external.
The Replenishment Cycle will connect the retailer and the distributor and is usually initiated due to the retailer’s need to replenish lack of goods in the restaurant for future demand. Such a cycle may be triggered at McDonald’s when they are running out of stock of cheese. The Replenishment cycle is similar to the Customer Order except that the retailer is now the customer.
Finally, the Procurement cycle will connect the distributor and the supplier, for the distributor will need to get supplies from the suppliers, to further distribute the goods to the various retail restaurant outlets in the United States. In general, the scale of an order increases whilst the frequency of an order decreases in the supply chain when moving further away from the customer. This can be illustrated by the following example, of how a customer only orders a set of meal daily from the retailer, the retailer orders heaps of lettuce weekly for its hamburgers, the distributors get larger orders from more than one retailer monthly and the supplier gets an even larger scale order to cater to the distributor’s needs every three months.
Other than the cycle-based process view for supply chain operations, the push versus pull view is also another way to view the processes performed in a supply chain. Processes can be divided into two categories based on its timing relative to the timing of a customer’s order. Pull processes are triggered when a customer places his order whilst the push processes are initiated just by the anticipation of a customer’s order. In other words, a pull effect is reactive to a customer’s order whereas a push effect is speculating when a customer will order.
McDonald’s use both pull as well as push process; all processes except for those involved in the Customer Order cycle are push processes. That is, products will be pushed from the suppliers, to the distributors, to the restaurants where customers will then demand for that product, creating a pull effect. This means that the Push/Pull boundary will be situated before the Replenishment cycle takes place and after the Customer Order cycle occurs, just when the customer order arrives.
The supply chain stages include customers, retailers, distributors and suppliers. Retailers will attend to the customers, and put together the goods received from the distributors to prepare the end-product to meet with the customers’ needs. The distributors will transport the required quantity of goods garnered from the suppliers to the retailers, as requested. The suppliers will procure and ensure that certain quantities of raw goods are prepared for delivery once the distributors place their orders for it.
(Refer to Appendix B for Push/Pull view Diagram)
New Zealand –AngusPure
Other than procuring majority of beef from the United States, McDonald’s USA does import a small percentage of beef from suppliers in New Zealand in order to keep up with the firm’s requirements for lean beef. Started in New Zealand since 1998, AngusPure continues to grow as the country’s leading beef brand. AngusPure is also USDA-inspected and provides McDonald’s USA with 100% pure grass-fed beef.
United States of America – Gaviña
Being in business for over 130 years, the Gaviña family grows, roasts and imports their own gourmet coffee. Since 1967, Gaviña has been the US specialty coffee roasters and is the largest privately held minority coffee roaster nationwide, producing more than 30 million pounds of roasted coffee annually. With authentic coffee beans imported from Brazil, 400 million cups of Gaviña coffee can be enjoyed by McDonald’s customers in just a year. McDonald’s has worked with Gaviña for 25 years, with its state of the art facility located in Southern California.
Brazil – Marfrig
Marfrig Alimentos S.A. is a multinational corporation, operating in food service sectors in Brazil and 15 other countries around the world. As Latin America’s second-largest beef producer, Marfrig has agreed to acquire US based Keystone Foods LLC to become McDonald’s main chicken supplier. It will supply chicken nuggets, hamburgers and other meat products to McDonald’s
USA. 4.2.2. Distributors
The concept of Cold Chain that was first incorporated into the distribution of food and dairy products from indirect suppliers all the way to McDonald’s restaurants in India has helped the company meet with its high standards by keeping quality produce good and fresh to the customers. Refrigerated vehicles are largely used for transportation in the Cold Chain. One example will be the “reefer” delivery trucks that deliver food items at temperatures ranging from room temperature to temperatures that can go beyond zero degrees Celsius. Having incorporated the cold chain concept in their supply chain, McDonald’s USA is able to extend and ensure the shelf life of its ordered perishable goods, responsively satisfying to the needs of their consumers. Apart from the cold chain, below are two very established distributors of McDonald’s USA.
Golden State Foods Corp.
Founded in 1947, Golden States core businesses include processing and distribution of different types of food and produce. Currently, it is one of the largest diversified suppliers in the foodservice industry having serviced more than 20,000 restaurants across three continents. Golden State’s maintain 12 production plants and distribution centres in the US, Egypt and Australia. It transports products via trucking and sea freight for local and international distribution respectively. Much of the company’s business comes from McDonald’s as both a supplier and a distributor of food items like beef, sauces, dressings and syrups. This makes McDonald’s Golden State’s largest client. It services about a quarter of McDonald’s businesses in the United States.
The Martin-Brower company is a top supplier of food and materials to McDonald’s and currently operates distribution centres in the United States, Canada, Europe, Central America, South America, and Asia Pacific. It stuck its first relationship with McDonald’s in 1956 and is McDonald’s largest distributor today, having delivered over 500 million cases of product to 17,000 restaurants each year. After acquiring Keystone Foods in April 2012, Martin-Brower has been serving 14,000 McDonald’s stores worldwide. The company has their own global fleets for distribution internationally and uses advanced routing systems for their own trailers for local distribution. Working with Cryo-Trans also enabled 100 per cent of the company’s inbound frozen potato products to be distributed via rail transportation, saving millions in annual transportation costs.
4.2.3. Restaurant Outlets
McDonald’s has more than 33,000 restaurants worldwide and above 14,000 restaurants in the United States alone. It is recognized as a premier franchising company around the world with more than 80% of its restaurants being owned and operated by its franchisees worldwide. There are currently over 3,000 franchisees as of June 2012. Emac Digital is an internet procurement site that is specially designed for McDonald’s franchises. This E-Procurement system is technically the backbone of McDonald’s successful supply chain management, as it provides a platform to connect the firm’s franchisees to its suppliers efficiently.
The site allows franchisees to order and purchase supplies at discounted rates. By helping to improve communication as well as the quality of operations, Emac Digital has ultimately reduced costs for McDonald’s by about 85%. Point of Sales (POS) system is also being utilized to forecast customer traffic in each of McDonald’s restaurant outlets. Information from the system will then flow up the supply chain, triggering the store’s product replenishment process. Apart from replenishing goods in individual restaurants, the POS system also records product sales in order to single out the best selling items. Having such a system in place will only help McDonald’s to be highly responsive to its consumers’ needs and orders.
Despite being well-known for its low prices, McDonald’s biggest consumer group is not the poor; it is actually the middle-class. The poor do not usually frequent McDonald’s but people in the middle class do. A survey conducted by Leigh and DaeHwan Kim found out that as people’s household income increase, more and more people visit the fast-food restaurants more frequently. This is due to the fact the people in the lower-middle income class are more budget-conscious and likes the convenience of highly affordable fast food. (Leigh & Kim, 2011)
4.2. Sequence & Dependency Links
When a customer places his order over the counter in one of McDonald’s restaurant outlets in the United States, his purchase will represent the end of the supply chain’s delivery of food products procured from the company’s various suppliers. To simplify the supply chain, food in McDonald’s first came from the indirect suppliers, passed on to the direct suppliers, and finally reaching the respective restaurants to fulfil customers’ demand. Firstly, farms and ranches will grow food items like lettuce, wheat and other ingredients.
These food items will then be sent for primary processing in various plants and production plants. Once the first round of processing is complete, the food will then be delivered to McDonald’s direct suppliers. Direct suppliers will then conduct the final round of processing to produce finished products like meat patties, buns and beverages. These processed foods will then be sent to the distribution centres, where purchasing and distribution to restaurants will be managed and coordinated. Once that is done, food will finally arrive to McDonald’s restaurants where customers can order and make their purchase. (Refer to Appendix C for diagram)
Having the sequence of the supply chain expressed, it can be seen how the different parties of the supply chain are interdependent. For the indirect suppliers to harvest and process the right type and quantity of food items McDonald’s require, they will have to rely heavily on the direct suppliers’ information; and for the latter to know correctly just how much the restaurants require the restaurants have to place their orders in time. Information must be correctly collated by the direct suppliers. For the restaurants to receive their goods, the direct suppliers have to distribute them on time in full, without error. For the direct suppliers to fulfil the restaurants’ orders, they will have to get the right products from the indirect suppliers first. This shows how interdependent each party is in McDonald’s supply chain.
Simply put, without information from the restaurants, the indirect suppliers would not know how much to harvest to deliver to the direct suppliers. In addition, without produce from the indirect suppliers, McDonald’s restaurants would not receive the right amount of goods to carry out their day-to-day business. This goes on to prove how the flow of information, product and funds between each party is highly vital in the supply chain.
4.3. Flow of Information, Product & Funds
Referring to the supply chain flow chart, the flow of information, product and funds will always start once the customer places his order. Flow of funds will move from the customer to the supplier ultimately. On the other hand, product will be transferred from the supplier to the customer at the end of the supply chain. Unlike the flow of funds and the flow of product, information flows up, as well as down the supply chain. This goes to show how communication of information is critical in any supply chain. A retailer has to provide information to the customer pertaining what it is selling. The customer will then transfer information on what he/she wishes to purchase back to the retailer to place his order. The same will take place between the retailer and the distributor, and the distributor and the supplier.
Once the retailer has provided enough information for the customer to place his order, information from the customer will move to the retailer, where information will be collected and recorded. In response, funds will be transferred from the customer to the retailer and product will be transferred from the retailer to the customer. With the act of placing an order with the distributors, information is moved from the retailer to the distributor whilst product will be moved down the supply chain, from the distributor to the retailer.
Once the order is fulfilled, the retailer will then transfer funds for the product back up the supply chain, to the distributor. Information and funds will also be transmitted from the distributor to the supplier in exchange for goods (product). To summarise, product will move down the supply chain whilst funds will inch up the supply chain, from the customer, to the retailer, to the distributor, and finally the supplier. Information, on the other hand, will move up and down the chain.
Better Marketing Promotions and Demand Forecast
Since customers demand is hardly stable, there is a need for businesses to forecast the expected demand in order to get hold of enough supplies to meet the future needs of the consumers. There have been strong customer demand fluctuations based on promotions in McDonald’s. Fluctuations are growing as more promotions are innovated, causing the bullwhip effect, where a trend of large swings in inventory are present in response to changes in demand in the supply chain. By improving marketing strategies and correctly reacting to customer orders, the bullwhip effect can be combatted. McDonald’s should place more emphasis on when to put up its promotions. The firm could schedule and broadcast its promotions according to festive seasons and holidays to better forecast the expected spike in demand.
The firm will know which periods will require more stocks and more orders can be placed to prevent out-of-stock situations that may result in the uncertain fluctuation of sales. Out-of-stock will cause McDonald’s to lose potential customers as well as a significant amount of sales. Intangibles like credibility and reputation of the fast-food chain might be affected as well. Ultimately, McDonald’s technical forecast system should be strengthened in order to prevent fluctuation in the sales lead-time. By knowing how to prepare for a spike in demand, the corporation can then save time and minimize cost spent on unnecessary losses.
Incorporate a Higher Quality System
With high transportation and handling costs incurred in the process of coordinating orders from different suppliers, things will be made much less complex if only McDonald’s had fewer vendors or rather, a national supplier to work with. Even if it means for the company to pay more for the services, having all of its suppliers’ connection narrowed into fewer or just an individual medium will help make the supply chain less complicated and more responsive. McDonald’s should consider implementing a “one-stop-shop” in its supply chain that can help manage and organize all of its suppliers and vendors.
It can be seen how the global supply chain management plays an integral role for every corporation. This can be seen in the interdependencies among the indirect suppliers, direct suppliers and the restaurants; which, without the corporation of at least one party, the ultimate consumer will not be able to satisfy its needs. With unsatisfied customers, failure in business is more than likely to ensue. In such a competitive and mature market, it is therefore essential that McDonald’s remain highly responsive to its customers’ orders. Fresh and quality produce has to be maintained right from the start, all the way till it reaches the customer, in order for McDonald’s to remain at the cutting edge. In conclusion, it can be foreseen that any successful firm, can only be succeed with a successful supply chain management. Even a successful corporation like McDonald’s with a highly defined supply chain management, has many rooms for improvement.
6. Flow Chart
McDonald’s Code of Conduct for Suppliers
McDonald’s believes that all employees deserve to be treated with dignity and respect. In each and every aspect of the employment relationship, employers need to act towards their employees as they would themselves want to be treated. The 100% satisfaction of our internal customers – our employees – is essential to the 100% satisfaction of our external customers. Moreover, McDonald’s is committed to a policy of complying with the law wherever it does business, and to maintaining high standards of business conduct. As a result, McDonald’s has established a well-respected record and reputation for business honesty and integrity. These principles apply globally, form the basis for McDonald’s own ethical business practices, and are cornerstones to McDonald’s success.
McDonald’s strongly believes that those suppliers who are approved to do business with the McDonald’s System should follow the same philosophy, and, in the best interest of the System, McDonald’s will refuse to approve or do business with those who do not uphold, in action as well as words, the same principles. McDonald’s recognizes that its suppliers are independent businesses. Indeed, it honors that very independence because it provides strength to the relationship. Nonetheless, actions by those with whom McDonald’s does business are sometimes attributed to McDonald’s itself, affecting its reputation and the goodwill it has with its customers and others. It is only natural then that McDonald’s expects its partners in business to act with the same level of honesty and integrity.
For these reasons, McDonald’s has established the following policy. Compliance with this policy is required of all suppliers, and is the responsibility of each individual supplier. Suppliers shall ensure that their Subcontractors comply with this policy for employees working on product supplied to McDonald’s. Failure to comply with this policy will be sufficient cause for McDonald’s to exercise its right to revoke a supplier’s approved status. McDonald’s reserves the right, as a condition of continuation of approval, to conduct (or have its designee conduct) periodic, unannounced inspections of suppliers and their facilities and business practices to verify compliance with these standards.
COMPLIANCE WITH APPLICABLE LAWS AND STANDARDS
All business activities of McDonald’s suppliers must conform to all applicable national and local legal requirements, customs, and published industry standards pertaining to employment and manufacturing. If statutory requirements and published industry standards conflict, suppliers must, at a minimum, be in compliance with the one which, by law, takes precedence.
Prison or Forced Labor: The use of prison or forced labor by a supplier is absolutely forbidden. Likewise, the use of labor under any form of indentured servitude is prohibited, as is the use of physical punishment, confinement, threats of violence or other forms of physical, sexual, psychological or verbal harassment or abuse as a method of discipline or control. Suppliers will not themselves utilize factories or production facilities that force work to be performed by unpaid or indentured laborers or those who must otherwise work against their will, nor shall they contract for the production of products for McDonald’s with Subcontractors that utilize such practices or facilities.
Child Labor: The use of child labor by suppliers is strictly prohibited. Suppliers are prohibited from using workers under the legal age of employment for the type of work in the country where the suppliers performs work for McDonald’s. If the country in which the supplier is doing business does not define “child” for purposes of minimum age of employment, the minimum age of employment shall be 15 years of age, and the employment of any individual in the production of products for McDonald’s below that age shall be strictly prohibited.
If local law allows the minimum age of employment to be 14 years of age or younger, the minimum age of employment shall be 14 years of age, and the employment of any individual in the production of products for McDonald’s below that age shall be strictly prohibited. In either situation, minors between the ages of 14 and 16 may only be employed to work and only be permitted to work during periods of time when they are not required by law to attend school (except as may be permitted under apprenticeship or other similar programs in which the minor is lawfully participating).
Working Hours: Suppliers must ensure that all employees working on products supplied to McDonald’s do so in compliance with all applicable national and local laws and with published industry standards pertaining to the number of hours and days worked. Such employees are to be provided with reasonable daily and weekly work schedules and adequate allowance is to be made for time off. Except in extraordinary business circumstances, employees will not be required to work more than either (a) the limits on regular and overtime hours allowed by local law; or (b) 60 hours per week, inclusive of overtime. Adequate time off shall be at least one day off per week, except in extraordinary business circumstances. In the event of conflict between a statute and a published industry standard pertaining to this issue, compliance must be with the one taking precedence under national law.
Compensation: Supplier employees working on product supplied to McDonald’s must be fairly compensated and provided with wages and benefits that comply with applicable national and local laws. This includes appropriate compensation for overtime work and other premium pay situations required by applicable national and local laws. If local laws do not provide for overtime pay, suppliers will pay at least regular wages for overtime work.
Non-Discrimination: Suppliers shall implement a policy that conforms to local and national law prohibiting discrimination in hiring and employment practices on the ground of race, color, religion, sex, age, physical ability, national origin, or any other applicable prohibited basis.
Workplace Environment: Suppliers shall provide their employees with safe and healthy working and, where provided, living conditions. At a minimum, potable drinking water, adequate, clean restrooms, adequate ventilation, fire exits and essential safety equipment, an emergency aid kit, access to emergency medical care, and appropriately-lit work stations must be provided. In addition, facilities be constructed and maintained in accordance with the standards set by applicable codes and ordinances.
Notification to Employees: Suppliers shall notify employees of the terms of these standards and post the terms, on the supplier’s letterhead and in the local language, in a prominent place accessible to all employees.
By Suppliers: Each supplier shall designate one or more of its management staff to be responsible for monitoring their factories and production facilities, and the production facilities of their Subcontractors used in the production of products for McDonald’s, for compliance with the standards set forth herein. Each supplier must conduct such monitoring no less frequently than on an annual basis.
By McDonald’s: McDonald’s reserves the right to conduct or have its designee conduct unannounced inspections of suppliers’ and their business practices, records, facilities, and, where provided by supplier, housing accommodations, as well as private interviews with employees. Suppliers will keep all information necessary to document compliance with these standards readily accessible. Any supplier who refuses to allow such inspections or interviews, or who does not comply with these standards, is subject to immediate termination of its status as an approved supplier.
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Subject: Supply chain,
University/College: University of Chicago
Type of paper: Thesis/Dissertation Chapter
Date: 30 October 2016
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